The Outlook for Charitable Donations Under the New Tax Reform Law
Tax Cut and Jobs Act, which was signed into law on December 22, 2017, includes a slew of provisions affecting individuals and businesses. It repeals some tax breaks, creates some and modifies others.
Although the new law generally preserves the tax deduction for charitable donations, the impact on the not-for-profit sector will be significant when other provisions are factored in. Here's an overview of all the portions of the law that could affect your not-for-profit organization in 2018 and beyond.
Generally, the provisions for individuals are temporary and are scheduled to “sunset” after 2025, unless they are renewed. But as they will remain on the books for at least eight years, consider these key points.
What the Law Changes
Individual deductions. Many itemized deductions are repealed. At the same time, the law effectively doubles the standard deduction to $12,000 for single filers and $24,000 for joint filers, while eliminating personal exemptions. It also lowers tax rates and increases bracket amounts for high-income taxpayers.
The net result is that millions of additional taxpayers will be claiming the standard deduction in 2018 rather than itemizing, even though the deduction for charitable donations has been preserved. Donors who typically fall into the “sweet spot” of tax benefits by itemizing charitable donations now have little or no tax incentive to continue to do so. This is expected to have a chilling effect on charitable giving.
Some estimates suggest that donations will decline between $4.9 billion and $13.1 billion as a result of the increase in the standard deduction and cutbacks in itemized deductions. That amounts to 1.7% to 4.6% of the amount donated in 2017.
60% of AGI limit. Certain percentage limits based on adjusted gross income (AGI) apply to different types of charitable donations. For instance, under the previous law, 50% was the applicable percentage for cash contributions made to public charities and private foundations. Therefore, taxpayers couldn't deduct contributions totaling more than 50% of their AGI in a given year.
Effective for 2018, the percentage for these charitable contributions rises to 60% of AGI.
Donee requirements. To claim charitable deductions for monetary gifts of $250 or more, a donor must obtain a contemporaneous written acknowledgment from the not-for-profit organization. The IRS could have authorized regs that would relax reporting if the organization provided the information. But it never did so. And now, the new law repeals the exemptions starting in 2018.
College athletic seating. Under prior law, a special rule applied to deductions for payments to colleges in exchange for the right to purchase tickets or seating at an athletic event. Generally, donors could deduct 80% of the amount paid to booster clubs or similar organizations for this purpose, as long as certain requirements were met.
The reform law eliminates this deduction starting in 2018.
College endowments. A new provision affects private not-for-profit colleges and universities with large endowments. It generally imposes a 1.4% excise tax on the net investment income of a private not-for-profit university that has at least 500 full-time, tuition-paying students and endowment assets exceeding $500,000 per student. For example, the new excise tax would be triggered if a school has 1,000 full-time students paying tuition and endowments totaling more than $500 million.
Executive compensation. In another new provision, the law imposes a 21% tax on excessive salaries paid to executives of not-for-profit entities. The tax is applied when one of the five highest-paid employees receives compensation exceeding $1 million.
The organization, not the employee, is liable for paying the tax. All related organizations are aggregated for purposes of determining if compensation exceeds the threshold.
UBIT calculation. The unrelated business income tax (UBIT) has long been a thorn in the side of not-for-profits. An organization is liable for UBIT when its activities generate income that isn't related to its charitable function.
Under the new law, UBIT will be calculated against each unrelated business that a not-for-profit operates. Therefore, this type of entity can no longer use a loss from an unprofitable business activity to avoid tax liability on a profitable business activity. But it still can use a loss from the same business activity in the prior year to offset a current loss.
Federal estate tax. Finally, the federal estate tax exemption is doubled from $5 million to $10 million, subject to inflation adjustments. Accordingly, the exemption for 2018 is $11.2 million. Although this provision doesn't directly affect charities, it could discourage charitable-giving wealthy individuals, including the use of charitable remainder trusts (CRTs) as a means for avoiding or minimizing estate tax.
What the Law Doesn't Change
Various proposals that were discussed during the legislative process were eliminated from the final conference version. Among other parts, the final version retains:
- The Johnson Amendment restricting political activities of qualified charitable organizations.
- The excise tax on foundations' net investment income remains two-tiered. It can be 1% or 2% depending on how much they distribute in grants.
- Rules relating to donor-advised funds remain the same.
In addition, the law doesn't contain provisions that would have treated as taxable income interest from private activity bonds used to finance private projects.
It will take some time before the full impact of the new law changes is realized by not-for-profits. In the meantime, it's important to have a firm grasp of the changing tax landscape so you can guide your organization. And charitable advocates have already started to lobby for an above-the-line charitable deduction that would benefit those who don't itemize.