Tax-exempt proposals not included in the final version of the TCJA
TAX ALERT |
In November 2017 the House and Senate issued their respective versions of the Tax Cuts and Jobs Act (TCJA) for the public’s first view of what may be coming in the new tax reform legislation.Then, when the Senate plan was released, although many of the House provisions were not present, other different, punitive provisions were included. Both versions of the proposed legislation were cause for concern, each in different ways, for tax-exempt organizations.
As these two laws were passed by their respective chambers of Congress, the Conference Committee met to iron out differences, and what Representative Brady stated may occur was to, “meld the two versions into one.” For the tax-exempt industry, if both of these very different versions were melded together into one, the provisions that could have impacted the industry were staggering. As it turned out, the two versions were not melded together. The Senate version was adopted and modified for only a certain number of provisions and many others were not included as a part of the final version of the TCJA, as signed by the president into law.
There is still some confusion in the marketplace related to which provisions did and did not make it into the final law. This mainly stems from the abundance of information published around the punitive provisions proposed during the legislative process. At this time, we take a step back to remind everyone of all those provisions that were initially presented in the proposed TCJA rollouts that are not in the final law or were existing laws that were not abolished and remain applicable as in prior tax years.
Proposed changes to the housing exclusion
Housing allowance exclusions under section 119 will remain the same as they are today with no change. As you may recall, there was a proposed substantial change in what would be the allowable amount to be excluded from income, which was to be limited to only a $50,000 exclusion, which would have been phased out to zero for highly compensated individuals over a range of income. This would have substantially changed the landscape for many tax-exempt organizations that offer housing benefits. Since this law was not adopted, current law remains the same and the section 119(a) test and the 119(d) test for educational institutions remains intact.
Proposed changes to the new markets tax credit program
New markets tax credits will continue until its normal date of expiration at the end of 2019. The proposal had accelerated the expiration of the entire program after Dec. 31, 2017. Therefore, the new markets tax credit program remains intact until its current scheduled expiration at the end of the 2019 calendar year.
Proposed repeal of private activity bond issues
Private activity bond financing remains a viable financing alternative for tax-exempt organizations as the proposed provision to strike this financing opportunity out of the Internal Revenue Code was, at the last minute, removed in Conference Committee. However, the 501(c)(3) bond qualifiers should remain aware that it is rumored that the repeal of private activity bond financing may very well be back on the chopping block in 2018.
Proposed expansion of the unrelated business income tax to governmental entities
This proposal was to expand unrelated business income (UBI) to all section 115(1) governmental entities. This did not pass and is stricken from the final law and inapplicable. This provision was an attempt to take out of the argument that all governmental entities are not the subject to the income tax system due to the rule as set forth in section 115(1). This rule would have made governmental pension funds subject to the unrelated business income tax regime. This entire provision was removed from the final version of TCJA.
Proposed changes to the research income tax exclusion
This was a highly restrictive research UBI income exclusion which required research to be made mostly available to the general public before it could be treated as excludible income not considered unrelated business income subject to tax. This rule was not implemented and as such, the current rules related to research income continue under its prior favorable regime.
Proposed changes to private foundation excise tax on net investment income
Private foundation excise tax on investment income smoothing to 1.4 percent is not in the final law. The 1 percent / 2 percent regime remains intact.
Proposed standard mileage rate deduction for charitable mileage
This proposal stated it would be a better idea to provide for a deduction that was more in line with automobile operating costs instead of the statutory cents per mile deductible amount in current law. However, this proposal did not go anywhere and is not in the final version of the law, therefore, the $0.14 per mile for charity mileage deduction will stay the same as in prior years for now.
Proposal for private operating foundations as art museums
This proposal was viewed as a penalty provision aimed at art museums classified as private operating foundations. Private operating foundations are afforded favorable 50 percent charity status as far as the charitable deduction rules are concerned. However, the government was concerned that private collectors actually may not be providing the general public with opportunities to enjoy the art in a museum (personal collection). This rule was punitive in that such a foundation could not avail itself of this favorable 50 percent charity status if it was not open during normal business hours for public access to the museum’s collection for at least 1,000 hours annually. If this time requirement was not met under the provision, the foundation would be automatically classified as a private nonoperating foundation, which would be subject to restrictive charitable contribution rules for contributions to it of most types of property. This provision is not in the final law.
Proposal to waive the private foundation excess business holdings excise tax in certain cases
This proposal was intended to waive the excise tax penalties for certain 100 percent owned business enterprises by private foundations where management of that business concern was unrelated in full to the governing structure of the private foundation and 100 percent of that business enterprise’s net income after taxes were distributed as dividends to the private foundation parent. This provision did not apply so the rules that cause the excess business holdings excise tax to apply for certain business enterprise interests owned by a private foundation still apply as they have in under prior law.
Proposal to relax the restrictions for certain religious organization for political activities
This was a confusing provision in that it relaxed the general prohibition for section 501(c)(3) organizations that were churches only to partake in political campaign speech at church-sanctioned events if such a communication was only de minimus in cost and occurred as a part of regular activities. The provision was a reversal, for only churches, of the general statutory prohibition for section 501(c)(3) organizations to intervene in a political campaign activity. The confusion was caused by a number of false news reports and articles that afforded this proposal to all section 501(c)(3) organizations, which was not the case. As it turns out, it did not matter since the provision is not in the final version of TCJA as signed by the president.
Donor advised fund expanded Form 990 reporting proposal
This proposal suggested an expansion to current disclosures required to be made on Form 990 by sponsoring organizations of donor advised fund or other similar accounts. This proposal did not make it into the new law and past reporting requirements related to disclosures on Schedule D, Part I, Form 990 remain as before the legislative process began.
Expansion of the excess benefit transaction excise taxes to other tax-exempts other than just 501(c)(3), (c)(4) and (c)(29) organizations
This change, although we first observed it in writing as a part of the 2014 Camp proposed tax reform changes, did not make it to the final version of the TCJA. Some of the most punitive aspects of this proposal contained a rule where certain investment advisors and athletic coaches were to be automatically considered disqualified persons subject to these rules. This provision did not pass. However, this may be one provision to keep an eye on in the future as it now has been raised more than once in tax reform proposals.
Proposal to strike out certain benefits
Educational assistance (section 127) plans (with its $5,250 exclusion from gross income) and tuition reduction/remission (section 117(d) exclusions from gross income) and section 129 child care assistance programs remain law and all three are benefit programs that may continue to be offered to employees. Proposals suggested complete removal of all three of these provisions without exceptions. This proposal elicited quite a bit of discussion and concern, but rest assured, all of these benefits remain intact.
We hope that this article has cleared up some confusion that may have existed related to the changes in the tax law which were proposed during the legislative process, but did not make it into the final version of the TCJA.