Nonprofit organizations are still unsure what impact the Tax Cuts and Jobs Act (TCJA) may have on them in the short and long-term. Some key provisions of the law which apply to nonprofits include the following:
- A 21% excise tax on compensation over $1 million dollars paid to any “covered employee” (i.e. the top five highest paid employees) —though there are some exclusions.
- A 1.4% excise tax is now imposed on net investment income of certain private colleges and universities considered to be “applicable educational institutions” (institutions which have at least 500 students, and half of its students are located in the United States).
- Unrelated business taxable income (UBTI) is now taxed at flat rate of 21%. Although UBTI is taxed at a lower rate now, there are additional changes which may adversely affect nonprofits with UBTI.
- Organizations with more than one unrelated business or trade activity must now calculate UBTI for each unrelated activity individually. Each of the unrelated business or trade activities “stands alone” with regards to profits or losses. This means that profits generated from an unrelated business activity cannot be offset by losses from another unrelated business activity.
- Any net operating losses (NOL) generated after January 1, 2018 can only be carried forward—carrybacks are not allowed. NOL’s can now be carried forward indefinitely until the activity which originally generated these losses begins generating net income. Once taxable income is generated, the carryforward can only be used against 80% of that income. This means that even with a carryforward NOL, nonprofits may still be subject to a tax on at least 20% of their UBTI.
- Expenses paid by some nonprofits for qualified transportation fringe benefits (QTF) are now treated as UBTI—which may be subject to unrelated business income taxes.
Potentially one of the biggest impacts on nonprofits are the decreases in the individual tax rate brackets and increases in the standard deduction. The standard deduction for individual taxpayers has nearly doubled across all filing types. In order to claim charitable contribution deductions individuals must file an itemized return. As the standard deduction has increased there are fewer taxpayers who will itemize their tax returns. Prior to the TCJA as many as 30% of individual taxpayers filed itemized tax returns—many of these individuals claimed the charitable contribution deduction. With the enactment of the TCJA the number of individuals itemizing is expected to drop to under 10%.
When an individual uses the standard deduction, they don’t receive a benefit for their donation so there is less of a tax incentive for individuals to support nonprofits. It has been speculated that even individuals who itemize their deductions may donate less as tax rates have decreased. Until the actual impact of the TCJA on charitable donations to nonprofits has a filing season behind it, we won’t know the full story.