Tax Reform Series: Implications for Tax Exempt Entities

The Tax Cuts and Jobs Act, H.R.1 was released on November 2, 2017 by the House Committee of Ways and Means. In addition to rate provisions, there are numerous other provisions that, if enacted, will have a direct impact on the tax-exempt sector. It should be noted that all of these provisions are revenue-raisers and are being advanced in the name of simplification and reform. A brief overview of provisions affecting the tax-exempt sector and, in particular, higher education follows:

In the area of education beginning in 2018, an “enhanced” American Opportunity Tax Credit will replace the Hope Scholarship and Lifetime Learning Credits. New contributions to Cloverdell education savings accounts (except rollovers) will be prohibited, and as proposed, Section 529 plans may be used to fund $10,000 of annual elementary and high school expenses.

Numerous education provisions have been repealed, including:

  • Deduction for interest on education loans,
  • Deduction for qualified tuition and related expenses,
  • Exclusion for interest on U.S. Savings Bonds used to pay qualified higher education expenses,
  • Exclusion for qualified tuition reduction programs, and
  • Exclusion for employer-provided education assistance programs.

Debt forgiveness in connection with certain student loan indebtedness will not be taxable, provided the loans are forgiven on account of death or disability. All other student loan forgiveness will remain taxable.

Turning to charitable contributions, the 50% adjusted gross income (“AGI”) limitation for individuals making contributions to public charities and private operating foundations will be increased to 60%. Charitable deductions related to college athletic seating are slated for repeal; however, the value of deductible charitable miles will now be adjusted for inflation.

A benefit traditionally offered to college/university presidents, tax-free employer-provided housing, would be limited to $50,000 in value but also be subject to complete phase-out at $220,000 of AGI.

The following employee fringe benefits would no longer be tax-free:

  • Employee achievement awards,
  • Dependent care assistance programs, and
  • Qualified moving expense reimbursements.

The value of certain fringe benefits provided by tax-exempt employers will be subject to unrelated business taxable income, including:

  • Transportation fringe benefits,
  • On-premises gyms, and
  • Other athletic facilities.

The Employer-Provided Child Care Credit would be repealed as would the Work Opportunity Tax Credit, and no additional new market tax credits would be allocated after 2017. The Credit for Expenditures to Provide Access to Disabled Individuals would also be repealed.

As proposed, certain financing transactions would now give rise to taxable interest income, including:

  • Interest on advance refunding bonds, and
  • Interest on private activity bonds.

Interest on bonds issued to finance a professional sports stadium would also be taxable. A professional sports stadium is defined as any facility used for professional sports training, exhibition, or games five days or more in a calendar year.

To achieve parity with SEC registrant employers, tax-exempt organizations would be subject to a 20% excise tax on compensation in excess of $1 million paid to any of its top five highest-paid employees (defined as “covered persons”). Payments to tax-qualified retirement plans and nontaxable fringe benefits would not be included in the definition of compensation. However, once a covered person, always a covered person.

Unrelated Business Income (“UBI”) tax proposals include the following:

  • Application of UBI to all entities exempt under Section 501(a), and
  • Research income, unless fundamental research, the results of which are readily available to the public, will be subject to tax.

The excise tax on net investment income would be set at 1.4% and will be applicable to private colleges and universities with 500 students and assets (other than those used directly to carry out educational purposes) valued at $100,000 or more per full-time students.

Given the Republican leadership’s goal of enacting legislation by year-end, the tax-exempt community must quickly assess the legislation’s potential impact and react accordingly.

Please return to the Our Thoughts On...Tax Reform blog for more updates as they become available. 

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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

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