New Tax Law Affects Nonprofits
The new tax law is quite lengthy and will require some time to review and analyze.
However, the following provisions have been identified as having an effect on public charities.
Increased standard deduction.
The standard deduction is increased to $24,000 for married individuals filing jointly, $18,000 for head-of-household, and $12,000 for individuals. These amounts are indexed for inflation.
However, these increases will expire at the end of 2025 and then revert to the current levels unless other action is taken.
A possible consequence could be a reduction in charitable donations since many taxpayers may no longer feel the need to itemize their deductions. One possible solution is “bunching” donations in 2-year cycles. In one year, make no charitable contributions and take the standard deduction.
Next year, make two years’ worth of contributions and itemize your deductions. Another possible solution is creating a donor advised fund with a community foundation or financial services company. Internal Revenue Code (IRC)§63.
Increased limit on cash contributions.
Current law limits the annual deductibility of cash contributions to charities to 50% of the taxpayer’s adjusted gross income. The tax bill increases that limit to 60%. IRC§170(b)(1)(A).
Seating at college athletic events.
A charitable deduction will no longer be allowed for amounts paid to an institution of higher education in exchange for the right to purchase tickets or seating at an athletic event. IRC§170(l).
Some nonprofits engage in activities or have affiliates that are considered to be unrelated businesses. Taxes are payable on the profits of such businesses. Previously, the profits or losses of all such businesses could be aggregated so that no tax would be payable if the net result was having no profit. This is now changed.
The new law provides that each unrelated trade or business must be treated separately. Those that are profitable must pay taxes. There can be no offset from those that are not profitable. This provision takes effect with the 2018 tax year, but there is a transition rule for operating losses that arose in 2017 or before. IRC§512(b)(12).
College investment income.
Private colleges and universities have generally been exempt from taxation on their investment income. A tax is now assessed on qualifying private educational institutions. The tax is 1.4% of the net investment income of the institution for the taxable year. State colleges and universities are exempt. Other educational institutions are subject to the tax if (i) they have at least 500 tuition paying students, (ii) more than 50% of such tuition paying students are located in the United States, and (iii) the aggregate fair market value of their qualified assets at the end of the preceding taxable year is more than $500,000 per student. Qualified assets are defined essentially to describe investments rather than school buildings and equipment and the like.
There are additional rules for institutions that have multiple related organizations. IRC§4968 (new).