Over the past few months, the Republican Party’s tax overhaul bill has made its way through Congress, moving into a reconciliation process as groups advocating for nonprofit organizations, not to mention economic justice, lobbied to ensure legislators understood the consequences of their decisions. Doing so wasn’t easy, as for much of the time the bill was discussed, the exact nature of what was and wasn’t in it remained under wraps.
Then, finally, late Friday, the House-Senate conference committee working on the GOP tax bill (H.R. 1) issued its report. The 1,100-page conference report includes the actual revised bill, with its 503 pages, plus explanations of each provision that run to almost 600 pages themselves. The explanations outline current law, what the House and Senate bills each proposed to change, and to what the conference committee (or at least its Republican members) ultimately agreed. The House is expected to vote on the conference report on Tuesday, with action to follow by the Senate shortly thereafter. If the bill passes both houses, it will then go to the president for his expected signature.
Although passage is anticipated, it is not a sure thing, especially in the Senate. Republicans enjoy only a two-seat majority, and there is always the potential for another last-minute holdout like that of Sen. Marco Rubio (R-FL), who insisted that conferees increase the child care tax credit as a condition of his support. More dramatically, the poor health of two Senate Republicans, John McCain and Thad Cochran, make it uncertain that all 52 Republicans will be present in the Senate chamber to vote on the tax bill. (Alabama Democrat Doug Jones, who will replace Republican Luther Strange, is not expected to be seated until early January.) On Sunday, McCain’s office announced that he had returned to Arizona for treatment related to a form of brain cancer. He is expected to return in January, and it is unclear whether he will return to Washington to cast his vote on the bill. Vice President Mike Pence has delayed a planned Mideast trip and will preside over the Senate vote, casting the deciding vote if necessary for the bill’s passage.
There are several aspects of the bill that affect nonprofit organizations, including:
- deductibility of charitable contributions,
- new excise taxes on selected nonprofits,
- treatment of unrelated business income generated by charities, and
- changes in the tax-exempt treatment of interest income from certain bonds issued by nonprofits.
The repeal of the Johnson Amendment, which was widely opposed by nonprofits and religious groups, did not make it into the final bill as it now stands.
Deductibility of Charitable Contributions
Under the bill as reported by the conference committee, donors who itemize deductions on their tax returns may claim a deduction for gifts totaling up to 60 percent of their adjusted gross income (AGI), an increase from the current 50 percent. This is an incentive for wealthier donors to give more and to satisfy multiyear pledges more quickly.
However, the percentage of taxpayers who will elect to itemize is expected to fall substantially under the new law. Currently, about 30 percent of individual federal tax returns are itemized; under the new law, if passed, that number may be as few as five percent. Official estimates say this change will result in a $13 billion annual reduction in gifts to charity, with some private estimates going as high as $20 billion.
One deductibility change will affect university athletics. The “80/20” rule would be repealed. This means that donors who pay to receive a license (“seat license”) to purchase tickets or seating for athletic events at nonprofit colleges and universities may no longer deduct 80 percent of the payment as a charitable gift.
New Excise Taxes on High Salaries and Large Endowments
There is a proposed change affecting private nonprofit colleges and universities with large endowments. The bill includes a new 1.4 percent excise tax on the net investment income of any private nonprofit university that meets certain criteria, including at least 500 tuition-paying full-time or full-time equivalent students and endowment assets exceeding $500,000 per student. For example, at minimum, if the university has 500 tuition-paying full-time students or FTE equivalent, the tax would be applied if the university’s endowment exceeds $250 million. For a university with 40,000 full-time students or FTE equivalent, the tax would be applied if the university’s endowment exceeds $20 billion.
The excise tax paid by nonprofit employers on high nonprofit executive salaries is set at 21 percent (the corporate tax rate) in the conference report rather than the House bill’s proposed 20 percent, but compensation for medical services provided by doctors, nurses, and veterinarians is not included. This change would bring nonprofit salary taxation in line with longstanding tax policy governing for-profit corporations.
Changes in Treatment of Unrelated Business Income
Unrelated business income tax (UBIT) would be calculated against each unrelated business a nonprofit operates. A charity would no longer be able to use losses from an unprofitable unrelated business to avoid tax liability on another profitable unrelated business it operates. It would, however, be able to use one year’s losses on the same unrelated business to reduce taxes on another year’s operation of the same unrelated business.
Changes in the Tax-Exempt Treatment of Interest Income from Certain Bonds Issued by Nonprofits
501c3 groups use tax-exempt “advance repayment bonds” to refinance bonds used for construction and other capital activities. Investors currently benefit from the interest on those advance repayment bonds being tax exempt. Nonprofits benefit because bond investors are willing to accept lower interest rates for tax-exempt bonds than they would for typical bond investments. This lowers the interest payments the nonprofits must make, thereby reducing their cost of borrowing.
Under the change proposed in the conference report, if, for example, a nonprofit hospital were to issue tax-exempt bonds at 4 percent interest and later found it could refinance those bonds at 3 percent interest, the interest payments on the 3 percent advance repayment bonds would not be tax-exempt to investors as they are now. Interest paid to advance replacement bond investors would now be taxable, so the hospital would have to pay more interest to compensate for the investors’ tax liability.
The change to the tax treatment of interest paid on advance repayment bonds is estimated to increase federal tax revenues by $17.8 billion over ten years.
What Wasn’t Included
- The conference report does not include several provisions affecting nonprofits and charities that were included in the original House bill.
- The conference report does not include additional reporting requirements for donor-advised fund sponsoring organizations. The House bill would have required community foundations and other DAF sponsors to add information to their IRS Form 990 filings detailing the average amount of grants made during the year (in terms of percentage of assets) and whether the organization has a policy with respect to donor advised funds relating to the frequency and minimum level of distributions from their funds.
- The conference bill does not include the House language that would have made interest on “private activity bonds” taxable. Some experts believed would have increased nonprofits’ cost of borrowing for capital projects by “as much as 25 to 35 percent.”
- The conference report does not include the proposed change in the House bill that became known as the “Newman’s Own” issue. Some experts reported on the language that would allow foundations like that established by the late actor Paul Newman to finance philanthropic giving using profits from business operations of companies they own. Using the same “Byrd Rule” that kept Johnson Amendment repeal out of the conference report, the Senate parliamentarian ruled that the House’s provision was not germane to the tax bill. Unless current tax law is changed, the IRS will begin imposing a 200 percent excise tax on the foundation in November 2018, effectively forcing the foundation to sell its food company and dismantle the foundation.
But what is and is not in this bill may still change to some extent in the next week. Even with the work done by the conference committee, the tax bill has been rushed through Congress and is sure to have many provisions that will need to be clarified—assuming the bill passes and is signed before President Trump’s Christmas deadline. House Ways and Means Committee Chair Kevin Brady (R-PA) has already promised a “technical corrections bill“ that will be drafted in 2018 if the tax bill passes.