Today, both houses of the United States Congress voted for and passed the Tax Cuts and Jobs Act (H.R. 1), and it is expected the President will sign it into law. In the weeks and months leading up to finalization of the tax bill, there were many iterations with meaningful implications to the nonprofit world. While some of what was proposed in the early iterations was removed or changed in the final bill, there are some meaningful implications for endowments and foundations. The Joint Congressional Committee on Taxation estimated that charitable contributions deducted in 2018 would decrease by nearly 40 percent from $241.1 billion to $146.3 billion.
The bill slashed corporate tax rates from 35 to 21 percent. And, on the individual side, the seven individual tax brackets were adjusted, and rates lowered. Please click here to read our early assessment of these changes on investment portfolios including U.S. stocks, bonds, and the housing market.
One of the major objectives of this legislation was to simplify the tax code. This was largely accomplished by increasing the standard deduction. It is anticipated that this will lead to a material reduction in the number of taxpayers who itemize deductions when filing. Since charitable contributions are an itemized deduction, we anticipate this will create less incentive for taxpayers to give to nonprofits. There is some good news, however. For those taxpayers who do itemize deductions, the adjusted gross income (AGI) limitations were slightly increased. Many nonprofits are advocating donors accelerate planned charitable donations to 2017 to take advantage of the tax benefits under the current tax rules.
The new legislation also nearly doubles the estate tax threshold, and many nonprofits anticipate a reduction in charitable donations by bequest as a result.
Early iterations also included very punitive provisions for higher education institutions. The positive news is that employer-provided education benefits—lifetime learning credits and student loan interest deductions—were largely unaffected in the final legislation. Unfortunately, Congress elected to apply a 1.4 percent excise tax on nonprofit college and university endowments with assets of at least $500,000 per full-time student and more than 500 full-time students (with some additional stipulations). Early provisions had the asset threshold much lower. While the final bill will only create a tax for larger endowments, they send a clear signal that nonprofit colleges and universities are concerned about.
There are a few additional provisions in the bill that create complexity in administering Unrelated Business Income Tax (UBIT) as well as excise taxes applied to compensation of certain executives that will have implications for nonprofits.
While we have summarized some of the major provisions included in this legislation, there are many more nuanced implications for the nonprofit world. We have included a few links below that provide a more detailed look at the various provisions of the final legislation:
We will continue to monitor developments out of Washington and let you know if our thinking on the impact of the Tax Cuts and Jobs Act changes. As always, please let us know if you have any questions.