Nonprofit Impact of the Tax Cuts and Jobs Act: An Overview

In December 2017, President Trump signed into law the Tax Cuts and Jobs Act of 2017, the most comprehensive tax reform bill passed by Congress since 1986. Our nonprofit accounting professionals have fielded many questions from organizations concerned about how the law might affect their funding and operations as they struggle to navigate the new tax landscape. There are still many unknowns about how the law will play out, but we hope to alleviate some of the confusion surrounding the act, and help keep the organizations we serve on solid financial footing.

Below are some of the key provisions of the Tax Cuts and Jobs Act that affect not-for-profit organizations.


Increased Standard Deduction for Individuals

In 2018, taxpayers will have an increased standard deduction of $24,000 for married filing joint, and $12,000 for single taxpayers (and those who are married and file separately). We believe this is likely to de-incentive charitable giving, since a taxpayer would otherwise have to significantly increase charitable contributions in order to receive any tax benefit. As a result, donors may choose to consolidate their giving into larger, less frequent donations in order to take advantage of the tax deduction periodically, rather than annually. This could create challenges for charities struggling to maintain a consistent cash flow. It is important that nonprofit organizations stay in communication with their donors and plan their budgets carefully to survive during periods of “feast or famine.”

Increased Federal Estate/Gift Tax Exclusions

Another disincentive to charitable giving, the new law doubles the exemption amount against federal gift, estate, or generation-skipping transfer taxes to approximately $10.98 million per person beginning with gifts or deaths on or after January 1, 2018. The increased exemption concludes at the end of 2025, unless Congress chooses to extend. Charities are again concerned that the increased estate tax exemption will reduce the tax incentive for the wealthy to leave charitable bequests.

Increased Limit on Charitable Contributions

One positive aspect of the new law is the increased limit on charitable contributions. Previously, a donor could only take a charitable tax contribution for a donation to a public charity up to 50% of the donor’s adjusted gross income (AGI). The new law increases this to 60% of the donor’s AGI. The idea here would seem to incentive charitable giving; however, the increased standard deduction and the increased estate/gift tax exclusion noted above will likely negate this incentive for most taxpayers.

Imposing UBIT on Certain Fringe Benefits

Under prior law, certain fringe benefits offered by NPOs to their employees - such as employer-paid expenses for transportation and parking benefits - was not taxed. The new law states that the UBIT (Unrelated Business Income Tax) of a nonprofit organization will be increased by the amount expensed on certain fringe benefits, such as parking facilities or onsite gyms. In other words, the organization will now incur a tax liability for offering these employee benefits. The stated reason for this change in the law is to equalize the tax treatment of these fringe benefits with for-profit companies. Since for-profits cannot deduct these employee benefits, nonprofits must pay an additional tax on them. Clarification on the application of this new excise tax is still pending as interpretation by the IRS is in process.

Lower Corporate Tax Rate on UBTI

On a brighter note, UBTI (Unrelated Business Taxable Income - the income generated by a tax-exempt organization through activities unrelated to their exempt purpose) is now taxed at the flat corporate rate of 21%. This cuts the highest tax rate from 35% to 21%, which may lower overall tax for many nonprofits with UBTI.

Other Uncommon Changes

  • Tax on High Compensation - The new law imposes a 21% employer-paid excise tax on compensation. The excise tax is on any amount over $1 million paid to an employee in a year. This additional tax is an attempt by Congress to, again, equalize nonprofits with for-profits, which are not allowed to take tax deductions on salaries over $1 million.

  • Higher Education Endowment Tax - Previous laws did not impose a tax on the investment income of colleges and universities. The new law imposes a 1.4% excise tax on the net investment income of private colleges and universities with substantial investment income from their endowments. The good news with this new provision is that it is only affecting the wealthiest of private colleges and universities, such as Harvard and Princeton. Smaller and less affluent institutions should not see an impact.

  • Tax on Political Activities - For 501(c)(4), (5), and (6) organizations - social welfare organizations, labor organizations, and trade associations - the new tax rate on political activity is lowered from 35% to 21%. This reflects the new corporate tax rate. 501(c)(3) organizations (including churches) are still prohibited from engaging in political activity.

The Tax Cuts and Jobs Acts of 2017 contains many complex provisions, the interpretation of which is still being debated and clarified. We encourage all nonprofit organizations to stay educated and alert to the potential fallout of the new law. For more resources, visit the National Council of Nonprofits or contact an accounting professional specializing in nonprofit organizations today.