United States

Exempt organization-specific provisions in the House Bill H.R. 1

The Tax Cuts and Jobs Act

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The following are the H.R. 1 provisions impacting tax exempt organizations.

 

Charitable contributions

Tax reform proposals provide for an increase in the AGI limitations for cash contributions made by individuals.  Generally, for certain types of organizations, the AGI limitation for cash contributions has been limited to 50 percent of AGI of the donor.  The provision increases this limitation for cash contributions to these organization to 60 percent of AGI.  In addition, carryovers retain this 60 percent limitation treatment during the 5-year carryover period applicable to charitable contributions carryovers.

The proposal also makes nondeductible in full, a deduction for college athletic event seating rights.  Lastly, the statutory mileage rate for charitable contribution volunteer miles at 14 cents per mile has been removed and replaced with a rate that more clearly reflects the variable operating costs associated with a motor vehicle.

Housing allowances substantially modified

Under current law as provided for in sections 119(a) and/or (d), certain persons that received employer provided housing could exclude the rental value of such property from their taxable compensation if certain tests were passed.  The problem with section 119 was that it was usually misapplied and the government started noticing this some years ago and has finally listened to the pleas of the Internal Revenue Service and has substantially modified the amount that may be excluded in the tax reform bill.

Under the new provision, the maximum amount that may be excluded from income under both section 119(a) and 119(d) tests is limited to only $50,000 ($25,000 for married filing separate returns) and to only one residence of the taxpayer at any given time.  In addition, this amount is reduced for highly compensated individuals at a 50 percen per dollar amount of compensation paid over a defined amount for such persons.  Highly compensated individuals are those persons whose compensation exceeds the section 414(q)(1)(B)(i) amount, which for 2017 has been set at $120,000.  So for example, a person is provided housing that qualifies based on the facts and circumstances under either sections 119(a) or 119(d) for exclusion from income.  This individual is paid $400,000.  Under the provision, for the amount of compensation over the $120,000 limitation, which is $280,000, this excess is multiplied by 50 percent to $140,000 and this $140,000 then is applied against the $50,000 amount excluded to reduce the exclusion amount to zero dollars.  As such, this benefit will all but go by the wayside for highly compensated persons, and will be mostly available to those employees who are not highly compensated but may have staff jobs and required to live on or near the premises of the employer/educational institution.

Unrelated business income, increased by certain fringe benefits provided, which are disallowed

Unrelated business taxable income of an organization will be increased by any amount for which a deduction is not allowable for income tax purposes by reason of section 274 and which is paid or incurred by such organization for any qualified transportation fringe (as defined in section 132(f)), any parking facility used in connection with qualified parking (as defined in section 132(f)(5)(C)), or any on-premises athletic facility (as defined in section 132(j)(4)(B)).

New markets tax credits program changes

The credit limitations for new issues of credits was to be capped off at $3.5 billion through 2019 has been modified to end at the end of 2017 and any new markets tax credit limitation amounts are proposed to not be allowed after 2022, which is a change from after 2024.

Excise taxes on excess tax exempt organization executive compensation

Compensation paid by any tax exempt organization exempt under section 501(a), including farmers’ cooperative organizations, certain governmental units or political organizations may be subject to a new excise tax is excessive in amount.  The amount of excessive compensation is determined to be set at $1 million for the organization’s top five highest paid employees.   In determining the amount of compensation subject to this provision, any set aside to a Roth IRA account is not taken into account.  The excise tax is assessed against the tax exempt organization itself and equals 20 percent of the excess compensation paid over $1 million.

This penalty will also apply to certain separation payments (called parachute payments in the provision) as well if the amount paid is over 3 times a base amount, which is calculated as the annualized compensation for an individual for the 5 previous periods before the year the separation payment is received.

Clarification of unrelated business income tax treatment of entities treated as exempt from taxation under section 501(a)

A new subsection was added to section 511, subsection (d) which provides for the purposes of subsections (a)(2) and (b)(2) of section 511, an organization or trust shall not fail to be treated as exempt from taxation under this subtitle by reason of section 501(a) solely because such organization is also so exempt, or excludes amounts from gross income, by reason of any other provision of this title.

In otherwords, the Act would clarify that all entities exempt from tax under section 501(a), notwithstanding the entity's exemption under any other Code provision, are subject to the UBIT rules. The change would end the uncertainty over whether certain state and local entities (such as public pension plans) that are exempt under section 115(1) as government-sponsored entities, as well as section 501(a), are subject to the UBIT rules.

Exclusion of research income limited to publicly available research.

This is a clarification to section 512(b)(9), by adding wording to the statute that such exclusion from unrelated business income tax treatment applies to research which is made readily publicly available.  The prior wording was somewhat flush and allowed for a broad interpretation as to what kinds of research activities were actually excluded.

Simplification of excise tax on private foundation investment income

For private foundations that distributed certain amounts of grants during a tax year, if such amounts, determined using the cash basis of accounting, exceed a 5-year average base year amount, that foundation would only be subject to a one percent excise tax, instead of a two percent excise tax.  As you may surmise, for larger foundations that generate hundreds of millions of dollars of investment income annually, this difference between a one percent rate and a two percent rate could be seven figures.  To even the playing field and remove the onerous burden of managing grant making each tax period, this one percent/two percent tax system is replaced with a flat 1.4 percent tax rate, notwithstanding whether or not enough grants were made during the tax period.

Private operating foundation requirements relating to operation of art museum

Private operating foundations are subject to rules that mirror those that apply to public charities, for example, fair value deductions for non-cash contributions to it plus AGI limitations of 50 percent of an individual’s income for the year.  For those who are art collectors, in order to retain favorable private operating foundation status for tax purposes, such art museum tax exempt must be open during normal business hours to the public for at least 1,000 hours during the tax year, otherwise, such organization would not be treated as a private operating foundation.  Presumably, tax exempt status is not lost, but the more onerous rules as applicable to nonoperating private foundations would then apply.   Non-operating foundations may only accept public traded securities for a donor to get a fair market value deduction for tax purposes, all other kinds of property is only allowed a cost deduction for the donor.  In addition, AGI limitations for cash or noncash contributions are limited to a more confined 30 percent or 20 percent deductibility level, respectively.

Excise tax based on investment income of private colleges and universities

This provision adds a new section, Subchapter H and section 4969, to the Internal Revenue Code.  This new excise tax in the amount of 1.4 percent is assessed on the net investment income of a private college and/or university which has at least 500 students during the preceding tax year, which is not described as a state college or university, and the aggregate fair market value of the assets held by such entity (other than exempt use assets) is at least $100,000 per student of the institution.  The number of students of an institution shall be based on the daily average number of full-time students attending such institution, with part-time students taken into account on a full-time student equivalent basis.

If investment income producing assets held are in excess of the number of students enrolled at the educational institution times $100,000, the value in excess of this amount is taxed at 1.4 percent.

Exception from private foundation excess business holding tax for independently-operated philanthropic business holdings

An exception is added to the Internal Revenue Code to allow certain private foundations who own 100 percent of an independently operated business, which distributes its profits annually to such foundation, to not be subject to the excess business holdings rules for such businesses involved.

Under current law, a private foundation that has any excess business holdings generally is subject to an initial tax equal to 10 percent of those excess holdings. Under the Act, private foundations would be exempt from section 4943(a), excess-business-holdings tax, if they own a for-profit business and:

·         the foundation owns all of the for-profit business' voting stock,

·         the foundation acquired all of its interests in the for-profit business other than by purchasing it,

·         the for-profit business distributes all of its net operating income for any given tax year to the private foundation within 120 days of the close of that tax year, and

·         the for-profit business' directors and executives are not substantial contributors to the private foundation nor make up a majority of the private foundation's board of directors.

Churches permitted to make statements relating to political campaign in ordinary course of religious services and activities

This provision allows only 501(c)(3) churches to partake in some politicking during the course of its ordinary religious services and activities.  In addition, such event in which such communications take place must only be minimal in cost.

Additional reporting requirements for donor advised fund sponsoring organizations

Annual Form 990 disclosure reporting is expanded for sponsoring organization of donor advised funds. 

The additional disclosures require the sponsoring organization to indicate the average amount of grants made from all donor advised funds during the tax year expressed as a percentage of the value of assets held in such funds at the beginning of such taxable year, and to indicate whether the organization has a policy with respect to donor advised funds for frequency and minimum level of distributions.  In the event that the sponsoring organization does have a policy with respect to its donor advised funds for frequency and miminum level of distributions, a copy of that policy is also required to be disclosed on that Form 990.

Education incentives repealed

Some of the simplification in the education arena saw some casualties including the repeal of section 222-tuition deduction, section 135-interest on savings bonds exclusion, section 127-for educational assistance programs and section 117(d) related to qualified tuition reductions (remissions), offered by some educational institutions.

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