The 2017 tax reform legislation is the biggest change to the tax law since 1986. While many of the changes affect individuals and for profit entities, there are some important changes that affect nonprofits.
With more than 1.5 million nonprofits in the United States and over 10% of the workforce being employed by nonprofits, the changes will affect the nonprofit community.
How donations will be affected
It seems like the most common question nonprofits have been asking about the tax reform is how their donations will be affected. The Tax Policy Center has estimated that due to the changes increasing standard deductions, charitable giving will drop between 12 and 20 billion dollars per year, but only time will tell what the actual effect may be.
Even though less of your donors will be itemizing deductions on their individual tax returns, the gift substantiation rules have not changed. While the donor is ultimately responsible for requesting written acknowledgment, nonprofits should continue sending written acknowledgment to donors for any single contribution of $250 or more. Many nonprofits acknowledge all contributions at least annually, which is a good way to thank the donors and build long-term support.
Nonprofits and their governance should consider their fundraising strategies and how they can sell their mission to donors and the general public in a way that transcends tax planning related giving. Every dollar counts and donor relationships may be more important than ever. If your nonprofit relies heavily upon donor funding, management should consider the nonprofit’s operating reserves and how it may be able to weather the storm through tough times. Generally speaking, an operating reserve of at least 3-6 months is considered to be a best practice.
Changes to UBIT and IRS Form 990-T
There are also significant changes to the rules surrounding unrelated business income taxes (UBIT) and IRS Form 990-T. Unrelated taxable income (UTI) will now be taxed at the corporate rate of 21%, which represents a change from the previous graduated tax table. Nonprofits with less than $90,385 in UTI will see an effective tax increase and nonprofits with more than that amount of UTI will see tax savings compared to the previous rate structure.
Nonprofits can no longer carryback net operating losses (NOL) to the previous two years, but they can continue to carry forward NOLs indefinitely. The NOL carryforward deduction will be limited to 80% of the nonprofit’s UTI.
Nonprofits that have multiple lines of UTI will no longer be able to offset the loss on one line of UTI with the profits of another. Separate net operating loss calculations will need to be maintained for each line of UTI. Also note that the nonprofit will still only receive one $1,000 specific deduction, each line of UTI does not get its own specific deduction.
Consider commuter benefits
Nonprofits will want to consider the commuter benefits they pay for on behalf of employees. Employers will now have to pay a 21% UBIT penalty on commuter benefits including parking and transit cards. Nonprofits will still be able to offer commuting benefits through qualified pretax plans which allow for up to $260 per month in pretax income to be used for parking and other commuting expenses. Employers may be able to work around this change by bundling parking spaces into the total cost of office leases with any new leases or renewals.
Learn more in this important update regarding qualified transportation benefits and unrelated business income.
Employee achievement awards
While the tax law didn’t change the treatment of employee achievement awards, it clarified the types of awards that are not allowed. They include cash, cash equivalents, gift cards, gift coupons, gift certificates (other than arrangements conferring only the right to select and receive tangible personal property from a limited array of such items pre-selected or pre-approved by the employer), vacations, meals, lodging, tickets to theater or sporting events, stocks, bonds, other securities, and other similar items. Any gifts given in the form of the items listed above will need to be taxed like cash bonuses.
This is article is merely a summary of some of the key provisions that affect nonprofits from the nearly 500 page document. There are certainly many aspects of the tax law that will be relevant to the employees of nonprofits as well as areas that may be relevant to your nonprofit that were not covered in this article. For more information please contact us.
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About the Author
Kyle Ager, CPA, CFE is a manager in Wegner CPAs’ assurance department. Kyle has experience working with a number of not-for-profit organizations in different niches as well as employee benefit plans. These engagements have allowed him to gain a wide variety of knowledge and experience to bring to your engagement.