How the Tax Reform LawCould Affect Your Institution

Melanie Dean Supervisor, CPA

04 April 2018

On December 22, 2017, President Trump signed the TaxCuts and Jobs Act into law. Tax law changes for individuals and corporations are the focus of much of the law, but there are changes that could affect your institution, regardless of whether it is a for-profit or not-for-profit entity. It will be important for administration to be aware of the new laws to properly plan for changes. Generally, the new laws will go into effect for tax years beginning after December 31, 2017. Areas of significant change are highlighted below.

Laws Potentially Affecting Charitable Giving
The new tax laws make a number of changes that could affect charitable giving by individuals.

The changes include:

  • Increasing the standard deduction. It is estimated that after increasing the standard deduction, one-third of people who can currently deduct charitable contributions as part of their itemized deductions may no longer benefit from doing so.
  • Doubling the threshold for filing an estate tax return.  Prior to 2018, a person’s estate was taxed upon death if it were valued above $5.49 million. Going forward, that amount will approximately double.
  • Increasing in limitations for cash gifts. For individuals still itemizing under the new tax laws, they will now be able to deduct up to 60{dbc2a7977897ed6bb279211f092ba1f542e4cbaf62b292c7a918387c014c548c} of their adjusted gross income in contributions which is up from 50{dbc2a7977897ed6bb279211f092ba1f542e4cbaf62b292c7a918387c014c548c}.
  • Repealing of deduction for college athletic event seating rights. Under previous law, 80{dbc2a7977897ed6bb279211f092ba1f542e4cbaf62b292c7a918387c014c548c} of the amount paid for the right to purchase tickets could be taken as a charitable deduction. This is no longer the case.

Changes to Unrelated Business Income Tax (“UBIT”) Calculation
For tax years beginning after December 31, 2017, losses from one unrelated trade or business can no longer be used to offset income from other unrelated trades or businesses. Also, net operating losses can no longer be carried back, and the net operating loss deduction is limited to 80{dbc2a7977897ed6bb279211f092ba1f542e4cbaf62b292c7a918387c014c548c} of taxable income for losses. Additionally, exempt organizations are now required to include disallowed fringe benefit costs, including nondeductible entertainment expenses and costs incurred for qualified transportation fringe in their UBIT calculation, if it is not directly connected to unrelated trade or business activities regularly performed by the organization.  Lastly, exempt entities under Section 501(a) are now subject to UBIT rules.

Excise Tax on Investment Income and Excess Executive Compensation
Previously, private colleges and universities were not subject to excise tax placed on private foundations because they were considered to be public charities. Under the new laws, private colleges and universities will pay excise tax of 1.4{dbc2a7977897ed6bb279211f092ba1f542e4cbaf62b292c7a918387c014c548c} of their net investment income if the institution has at least 500 students; 50{dbc2a7977897ed6bb279211f092ba1f542e4cbaf62b292c7a918387c014c548c} or more of those students are located in the United States of America; and the institution has assets of at least $500,000 per student that are not used to carry out the institution’s exempt purpose.  For tax years beginning after December 31, 2017, tax-exempt organizations are also subject to excise tax of 21{dbc2a7977897ed6bb279211f092ba1f542e4cbaf62b292c7a918387c014c548c} (the corporate rate) on remuneration above $1 million paid to covered employees, or for excess parachute payments paid to covered employees. The five highest compensated employees of the organization are considered covered employees, as well as individuals who were considered covered employees for any preceding tax year beginning after December 31, 2016. Remuneration paid to medical professionals for medical services is not included in determining a covered employee.

Bond Reform
The Tax Cuts and Jobs Act changes the way interest income is handled on advanced bond re-fundings. Interest income on a bond issue to advance re-fundings are no longer excluded from gross income.

In addition, organizations no longer have the authority to issue tax-credit bonds and direct-pay bonds after December 31, 2017.

Tax Changes Affecting Students
The following items may affect students at your institution:

  • Student loan debt forgiveness is excludable from income if forgiven due to death or total disability of the student before December 31, 2025.
  • Section 529 savings plans can now be used for public, private, or religious elementary or secondary schooling costs up to $10,000 per beneficiary a year. Previously, Section 529 plans were used only for post-secondary education costs. Tax laws are complicated and the Tax Cuts and Jobs Act is no exception. The information given above is intended to be an overview of the many new laws that could affect your institution. It does not include all specific details related to each change.



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