Tax Cuts and Jobs Act - More Changes
The Tax Cuts and Jobs Act (the “Act”) that went into effect on January 1, 2018 significantly impacts nonprofit organizations. The Act changes how unrelated business income to calculate UBIT must be calculated, requires employer paid excise tax on annual compensation in excess of $1 Million and on excess parachute payments paid to certain employees, and alters the tax treatment of employer paid expenses for transportation, parking expenses and athletic facilities. We have addressed those changes in other articles in our Newsletter. In this article, we will discuss how the Act gives rise to possible changes in charitable giving, establishes new tax withholding tables for employees and assesses an excise tax on certain university endowments. The Act did not, however, repeal the Johnson Amendment, which was on the table for elimination in earlier versions of the Act.
The Act nearly doubled the standard deduction for taxpayers: singe/married filing separately - $12,000 (previously, $6,500); married filing jointly - $ 24,000 (previously, $24,000); and heads of household - $18,000 (previously, $9,350). This increase in standard deductions along with new limits on other deductions such as state and lower taxes, will result in fewer taxpayers itemizing deductions. Multiple sources estimate that less than 10% of taxpayers will continue to itemize (decrease from previously 1/3 of Americans who itemized deductions). A charitable deduction is only available to those taxpayers who itemize, effectively eliminating the tax benefit of charitable giving for most taxpayers.
The significant decrease in the number of taxpayers who may itemize may cause charitable organizations to experience a considerable decrease in charitable giving in the future. This loss of revenue to charities will greatly impact organizations' operations and may result in the elimination of many jobs.
The good news, however, is that the Act increases the limit on cash donations for individual taxpayers who do itemize deductions. Previously, this limit was 50% of the individual's adjusted gross income (AGI). The limit has been increased to 60% of each individual's AGI.
What can charities do to avoid the predicted decline in giving? While it may be difficult to identify specific acts to avoid the predicted decline, charities will need to sharpen fundraising efforts to encourage donors to focus on the furtherance of the organization's mission despite the lack of individual tax incentives for donations.
The Act established new withholding tables for employees. The 2018 withholding tables reflect the Act's new standard deductions, eliminates personal exemptions and includes updated tax rates and brackets. A new updated Withholding Calculator can be found on the IRS.gov website. Employers (including nonprofit organizations) must use the new withholding tables and employees may wish to revise and resubmit their W-4s to their employers.
Nonprofit College and University Endowments
The Act institutes a new excise tax of 1.4% on realized gains on investments of nonprofit colleges and universities with assets of at least $500,000 per full-time student and more than 500 full-time students. According to the National Association of Independent Colleges and Universities, this tax will impact approximately 35 institutions across America. In addition, the Act eliminated the ability of taxpayers to deduct 80% of a donation made for the right to purchase tickets for college events, including athletic events. Going forward, no deductions will be available for individuals purchasing tickets to college events.
There was much speculation as to whether the Act would eliminate the Johnson Amendment. The Johnson Amendment prohibits all 501(c)(3) tax-exempt organization from endorsing or opposing political candidates. However, the repeal of the Johnson Amendment was removed from the Final GOP Tax Bill. As such, the Johnson Amendment remains intact, at least for now. Public charities should continue to ensure that their activities do not endorse/oppose political candidates for public office.