How the New Tax Law Impacts Your Nonprofit
In late 2017, Congress passed and President Trump signed into law the Tax Cuts and Jobs Act of 2017. The law makes substantial changes to the Internal Revenue Code. Though the changes are largely confined to the corporate income tax, and related provisions, there are significant changes to taxes on individuals that might impact your nonprofit.
A. Individual Tax Rates
One of the more significant changes involves deductions claimed by individuals. With few exceptions, taxpayers who claim the standard deduction on their tax return cannot claim deductions for specific items such as taxes, mortgage interest, medical costs or charitable contributions. An individual taxpayer may only claim a charitable deduction if they itemize. Currently, about one-third of all taxpayers itemize. However, because of two changes in the law, the percentage of itemizers is expected to decrease to 5% of all taxpayers.
The two changes are, first, the standard deduction will almost double—from $6,350 to $12,000 for single individuals and from $12,700 to $24,000 for married couples. So, for a single individual, it will only make sense to itemize if their deductions exceed $12,000—otherwise, the taxpayer would be better off taking the standard deduction.
In addition, the new tax law caps the amount an individual may deduct for state and local taxes at $10,000. Residents of high tax jurisdictions, such as D.C., may see their deduction limited, further increasing the incentive to claim the standard deduction.
Impact on Nonprofits
Many nonprofits have expressed concern that these changes will have an adverse impact on charitable giving, since donors will not have as great a tax incentive to donate. The good news is that a large majority of taxpayers are not motivated to give by the tax deductibility of their contributions. In fact, when surveyed, over two-thirds of donors stated that they were motivated to give for other reasons—because they were asked to donate by a friend; they were emotionally connected to someone’s story; they wanted to feel they were empowered to help (especially in the case of disaster relief); it made them feel part of their community; it was a family tradition; they made the donation in memory of someone; or it was just the right thing to do.
The change in the law is most likely to impact larger donations. These donors may give less because of the changes in the law. However, since such taxpayers are still likely to itemize their deductions, the impact on nonprofits may not be as significant as feared.
B. Changes to the UBIT Rules
The most significant change directly impacting tax-exempt organizations is a change in the rules governing the tax on unrelated businesses. Under the Internal Revenue Code, a 501(c)(3) organization is taxed on any income it receives from trades or business that are unrelated to the nonprofit’s exempt mission. For example, if a nonprofit publishes a magazine, and sells advertising in the magazine, the advertising income is typically subject to tax as an unrelated business. Under current law, the tax-exempt organization is allowed to aggregate all of the income from unrelated trades or businesses, and deduct all of the expenses it incurs in connection with such business income to determine its taxable income – so that if one unrelated business had a loss for the year, that loss could offset any income it earned from a profitable business. Under the new law, an organization will no longer be able to aggregate its income and expenses, so that each unrelated line of business will be taxed separately, based on whether it earned income on such enterprise.
C. Transportation and Other Benefits Provided to Employees Are Considered Taxable Income to the Tax-Exempt Employer
In addition, if a 501(c)(3) organization provides transportation fringe benefits (parking, public transit passes, and bicycling expenses) free of tax to its employees, it will be considered unrelated business taxable income. This change applies to all qualified transportation benefits, even those funded by the employee's pre-tax contributions. For example, suppose Employee A’s salary is reduced by $100 each paycheck to fund the employee’s pre-tax transportation benefit. This amount is used by the employee to pay his or her parking and public transportation expenses. While the employee will still receive the benefits free of tax, the $100 may generate taxable income to the tax-exempt employer. If your organization provides these benefits, you may want to consult with your tax advisor about whether to continue this fringe benefit now that your organization may have to pay UBIT on the benefits. This change applies to any amounts paid or applied after December 31, 2017.
D. And One Big Non-Change
For much of the fall, Congress had been considering either repealing or significantly changing the so-called Johnson Amendment. The Johnson Amendment is the provision in Section 501(c)(3) which states that a tax-exempt nonprofit cannot “…participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.” This rule is strictly enforced by the IRS and there are a number of instances where a nonprofit has faced the loss of its exempt status for violating the rule.
Over the past several years, the Johnson Amendment has increasingly come under fire. Many pastors have publicly pushed for a repeal of the amendment. The original House bill called for substantial changes to the Johnson Amendment, however, the final law makes no changes to the law.
See our summary of the restrictions on lobbying and political activities.