Most news coverage regarding tax reform has focused on its impact on tax-paying entities. However, the reform will also have a significant impact on exempt organizations. This summary reviews the key areas of the bill affecting 501(c)(3) entities and notes prior proposals that were abandoned in the final bill.

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TopicNEW LAWPRIOR LAW
Charitable Giving
Charitable Deduction Increases limitation for cash donations to public charities and like organizations to 60% of donor’s contribution base, with five-year carryover. Section 11023(a). All charitable donations to public charities are subject to a limitation of 50% of donor’s contribution base.
Substantiation Repeals exception to requirement that taxpayer substantiate charitable deduction of $250 or more with contemporaneous written acknowledgment if recipient organization files return with such information with the IRS. Section 13705. If IRS were to issue regulations, taxpayers would not be required to issue substantiation.
All 501(c)(3) Entities
Unrelated Business Income Tax

Unrelated Business Income Tax UBIT computed separately for each unrelated trade or business (i.e., deductions limited to business from which loss arose). Section 13702(a).

UBIT is increased by the amount of certain fringe benefit expenses for which a deduction is disallowed. Section 13703(a).

UBIT is calculated on an aggregate basis across all unrelated businesses.

No provision on fringe benefits.

Excise Tax on Executive Compensation Imposes a 21% excise tax on compensation in excess of $1 million paid to an organization’s five highest-paid employees and to any parachute payments exceeding the portion of the base amount that is allocated to the base payment. Section 13602. Not addressed.
Public Charities
Net Investment Excise Tax of Private Colleges and Universities Net Investment Excise Tax of Private Colleges and Universities Imposes new 1.4% tax on private colleges and universities with more than 500 students, more than 50% of their tuition-paying students located in the United States and endowments with aggregate value exceeding $500,000/student (including assets of related organizations). Section 13701. Not addressed.

 

While the changes made in the reform are significant, many of the previously proposed reforms that has generated conversation in the Exempt Organization community were not adopted.  For clarity, below is a list of proposals that had been made and were not passed, as well as a description of current law on these topics, which continues unchanged.

 

TopicPROPOSALCONTINUING LAW
All 501(c)(3) Entities
Unrelated Business Income Tax The Senate bill would have categorized royalties from licensing of an exempt organization’s name as UBIT. Royalties of this type are excluded from UBIT.
Political Activities

The House bill would have permitted political statements which were: (i) made during the organization’s regular and customary activities, and (ii) involved de minimis incremental expense.

Prohibits political involvement by 501(c)(3) organizations.
Public Charities
DAF Sponsors

The House bill would have required donor advised fund sponsors to provide an annual report of: (i) the average amount of grants made from funds and (ii) whether the organization has a policy with respect to inactive funds.

Not addressed.

Private Foundations
Net Investment Income Excise Tax The House bill would have reduced net investment income excise tax to 1.4% and eliminated the reduction for private foundations that satisfy qualifying distribution requirements. Net investment income tax is imposed at 2% and may be reduced to 1% for private foundations that satisfy qualifying distribution requirements.
Private Art Museums The House bill would have required that private art museums be open to the public for at least 1,000 hours per year to qualify as private operating foundations. Not addressed.
Excess Business Holdings Tax Both bills would have provided an exception to the excess business holdings tax for certain independently-owned philanthropic businesses. Private foundations generally may not own more than 20% of a business enterprise.

 

In sum, while the original House and Senate bills each would have created major waves for exempt organizations, the final bill that President Trump is expected to sign is much more of a ripple.  

Donor Advised Funds

In an unrelated development, the IRS in early December issued a notice (Notice 2017-73) that it is considering regulations that would affect distributions from donor advised funds. The regulations would:

  • Limit the ability of donor advised funds to pay for tickets to charity events for the donor advisor and related persons.
  • Loosen certain rules regarding crediting donor advised fund distributions against donor pledges.
  • Treat distributions made from a donor advised fund as coming directly from the donor for the purpose of determining whether the donee organization is a public charity, and treat all anonymous donations through donor advised funds as coming from the same donor for this purpose.

Proposed regulations have not been issued at this time, but the IRS is requesting comments and may opt to issue proposed regulations after the comment period has expired.

This publication is provided as a service to clients and friends of Harter Secrest & Emery LLP. It is intended for general information purposes only and should not be considered as legal advice. The contents are neither an exhaustive discussion nor do they purport to cover all developments in the area. The reader should consult with legal counsel to determine how applicable laws relate to specific situations. © 2017 Harter Secrest & Emery LLP

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