Implications for Tax-Exempt Organizations of the Tax Cuts and Jobs Act

The Tax Cuts and Jobs Act (the Act), introduced by House Republicans on November 2, 2017, proposes significant changes to the federal tax system, including several provisions affecting or of interest to public charities, private foundations, and other tax-exempt organizations. Among other things, the new Act proposes the following, most to be effective for tax years beginning after December 31, 2017:

• Increasing the deduction limitation for charitable contributions of cash from 50% to 60% of a taxpayer’s adjusted gross income;
• Increasing a tax-exempt organization’s unrelated business taxable income by the amount of certain fringe benefit expenses for which a deduction is disallowed;
• Imposing a 20% excise tax on compensation in excess of $1 million paid to each of certain employees by a tax-exempt organization;
• In what would be a win for the private foundation community, setting the excise tax on private foundation net investment income at a flat 1.4%;
• Imposing a tax on certain private colleges and universities equal to 1.4% of the net investment income of the institution for the taxable year (an amendment already has been introduced which would limit the scope of colleges—currently estimated at 140—impacted by this legislation);
• Creating an exception from the private foundation excess business holdings tax for independently operated, philanthropic business holdings (likely responding to the concerns of the Newman’s Own Foundation, among others);
• Permitting churches and their integrated auxiliaries to make statements relating to political campaigns during the ordinary course of religious services and activities without jeopardizing the organization’s tax-exempt status;
• Imposing additional reporting obligations for sponsoring organizations of donor advised funds;
• Repealing certain tax credits and tax-exempt bond categories; and
• Subjecting a governmental organization described in Section 115 of the Code to unrelated business income tax if the organization also is described in Section 501(a).

The Act contains many other provisions with implications for tax-exempt organizations, including changes in tax rates and the standard deduction and repeal of the estate tax, and it is unlikely that the Act will pass in its current form (and already has been changed). The attorneys in the Tax-Exempt Organizations Group at Quarles & Brady will continue to monitor these developments closely. For more information about the Act’s potential applicability to your organization, contact Janice Rodgers at janice.rodgers@quarles.com/(312) 715-5034, Norah Jones at norah.jones@quarles.com/(312) 715-5052, Jodi Pellettiere at jodi.pellettiere@quarles.com/(312) 715-5063, or your Quarles & Brady attorney.