1. Impact of Tax Reform on Non-Profits

2. Presenter Non-profits Governmental and HUD Entities
Kristen T. Hoyle, CPA
Audit Partner Raleigh Office
Non-profits
Governmental and HUD Entities
Real Estate and Construction
Employee benefit plans
Business Planning
Litigation support

3. Overview – Tax Cuts and Jobs Act
Largest tax bill in 31 years
Most changes are effective starting January 1, 2018
Does very little to simplify the tax code
Most beneficial to lower and middle-income families
Many changes may have an indirect effect on charitable giving
Widespread donor confusion

4. What didn’t make it?
Repeal of the exclusion for qualified tuition reduction plans
Reduced tuition for children of employees remains a tax-free benefit
“Universal” above the line deduction for charitable contributions
Repeal of provisions relating to Education Assistance
Employers may still provide up to $5,250 per year of educational assistance to employees
Elimination of clergy housing allowance
Adjustment to the charitable mileage rate
Unchanged at 14 cents per mile
Inclusion of unborn children for Section 529 college savings accounts and allowance of funds to be used for homeschool expenses
Elimination of tax exempt bonds

5. Sweeping Reform – Overview of Major Changes for Individuals
The standard deduction for individuals doubled (24K – MFJ, 18K – HOH and 12K – all other filers)
Tax Rates decreased while the range in each bracket increased
Maximum rate of 37% effective for MFJ filers with AGI over $600,000 vs prior year maximum rate of 39.6% with AGI over $470,700
Kiddie tax – no longer taxed at parents rates, taxed using trust and estate tax rates
Elimination of personal exemptions
Child tax credit increased from $1,000 to $2,000 per child
Addition of $500 credit for qualifying dependents other than qualifying children

6. Overview of Major Changes for Individuals (Cont’d)
New deduction for Qualified Business Income (Section 199A) – 20% deduction for income from Sole Proprietorship (Sch C), Schedule E Rental, and Pass-through income from partnership or S-Corporation
Business losses are limited to business income and the excess is carried forward as a net operating loss (NOL)
NOL Carryback eliminated for NOL’s generated after 12/31/2017
Starting 1/1/18, income can only be offset by NOL’s up to 80%
Elimination of the phase-out of itemized deductions
Limitation on deduction for home mortgage interest – limited to home acquisition indebtedness of $750,000 for debt incurred after 12/15/2017 (Debt incurred prior to this date grandfathered into old limit of $1 million)

7. Overview of Major Changes for Individuals (Cont’d)
Interest deduction on schedule A for home equity indebtedness is suspended after 12/31/2017 (may be allowable if used for improvements)
Itemized deduction for taxes paid (state income, real estate, property, etc.) now limited to $10K (MFJ)
Elimination of miscellaneous itemized deductions subject to the 2% AGI Floor
Deduction for medical expenses subject to 7.5% limitation
Repeal of deduction for alimony payments and corresponding inclusion in gross income (for agreements after 12/31/2018)
Repeal of the deduction for moving expenses except for military

8. Overview of Major Changes for Individuals (Cont’d)
Income-based percentage limit for certain charitable contributions increased from 50% to 60% - unused portion still may be carried forward
529 Plans can now be used for private school tuition
Disallowance of charitable deduction for college athletic event tickets or seating rights. (Formerly eligible for 80% deduction)
Elimination of shared responsibility payment(penalty) for failing to maintain minimum essential health coverage – after 12/31/2018

9. Major Changes Affecting Businesses
Corporate tax rate reduced to 21%
100% bonus depreciation effective after 9/27/2017, revised to include both new and used property
Section 179 depreciation expanded to increase the maximum allowable of $1 million, phased out with purchases in excess of $2.5 Million
Deduction for business interest is limited to 30% of adjusted taxable income of the taxpayer – disallowed amount carried forward indefinitely
Entertainment expenses no longer deductible – meals are still 50% deductible

10. Changes specific to Nonprofits
Doubling of standard deductions
Expansion of the 529 Plan
Repeal of substantiation exemption for certain contributions required by the donee organization
Unrelated Business Taxable Income (UBTI) activities are now required to be calculated separately with respect to each trade or business and without regard to the specific deduction
21% excise tax on excess tax-exempt organization executive compensation
Disallowed fringe benefits will be treated as additions to unrelated business income
Change to the excise tax imposed on investment income of private foundations fixed at 1.4%
Local lobbying activities now disallowed
Increase of estate tax exclusion

11. Doubling of the Standard Deduction
Estimates vary wildly, but upwards of 94% of taxpayers will no longer claim itemized deductions
No longer a tax benefit for charitable contributions for those claiming the standard deduction
Estimates project a reduction in charitable deductions; however, ranges vary greatly. Some experts claim only 5% of taxpayers will now make a charitable contribution (vs 24% now)
50% AGI limit raised to 60%, which could offset some of the items above
TIP: Emphasize your mission statement, not tax deductibility

12. Expansion of the 529 Plan
Historically, funds from these plans could only be applied to higher education expenses
Expanded to allow up to $10,000 of expenses for K-12 tuition
Includes public, private, and religious schools
Families currently saving with a Coverdell ESA can do a rollover with no tax consequences
529 plans have fewer limitations than Coverdell plans
Although distributions will be tax-free at the federal level, it is currently unknown if these funds will be taxable at the state level
TIP: Update financial aid limits to specifically include or exclude 529 assets

13. Substantiation Exemption
The IRS requires you to have documents and records backing up your claims of charitable donations
Substantiation is considered a contemporaneous written acknowledgement
Obtained by the donor no later than the date the donor files the return for the year the contribution is made
Written acknowledgement must include a description of the goods or services received
The new law eliminates alternative gift substantiation for operating charities
As an alternative to contemporaneous written acknowledgement, the Internal Revenue Code had permitted the charitable organizations to file a document with the IRS containing detailed info about the donor and the gift – this is no longer an option
Charities are already set up to provide substantiation, unlikely to have much effect
TIP: Review current donor acknowledgement procedures and letters to insure you are following the rules

14. UBTI Activities Calculated Separately
UBTI must now be determined separately for each unrelated trade or business for tax years after so that losses of one UBI activity cannot be used to offset income of another
No guidance or criteria in new law determining what is a separate trade or business. What about different investment funds generating UBI or a golf course that has non-member golf and dining?
The change in corporate income tax rates to a flat 21% will impact the UBTI of organizations that are set up as corporations
Organizations with UBTI under $90,385 will pay a higher tax with the flat rate, 15% bracket under prior law.
UBTI rate applicable to trusts is now 37%, a decrease from 39.6%
NOLs may still be carried forward, but only against the activity that generated the loss
NOLs incurred after 2017 may no longer be carried back
A carryforward of any NOL incurred after 2017 may only be used against 80% of taxable income but the 20 year limit on carryforward on NOLs no longer applies
TIP: Review UBTI activity to determine if different lines of business exist – revise general ledger reporting to assist with keeping track of the activity

15. Excise Tax on Excess Executive Compensation
Section of the 2017 Tax Act creates a new excise tax payable by tax-exempt organizations on excess employee compensation
Most non-profits, including churches, are subject to this provision
Tax Calculated as follows:
21% x amount of “remuneration” received by a “covered employee” in any year in excess of $1 million PLUS. This will probably include remuneration from all related entities.
21% x the amount of any “excess parachute payments” received by a covered employee

16. Excise Tax on Excess Executive Compensation (Cont’d)
Covered Employees
Employee or former employee who is one of the 5 highest compensated employees of the organization for the taxable year; or
Was a covered employee for any preceding taxable year (beginning and going forward)
Key Issues:
Employee vs. Executive
Compensation
Renumeration
All wages under Code Section 3401 – income tax withholding rules
Exclusions:
Roth contributions
Compensation paid to medical professionals (doctors, nurses, etc.) for medical/veterinary services.
Inclusions:
Amounts under Code Section 457(f)(3)(B) due to lapse of substantial risk

17. Excise Tax on Excess Executive Compensation (Cont’d)
Excess Parachute Payments:
Excise tax triggered if total amount of “parachute payments” received by a covered employee equals or exceeds 3x the individuals “base amount”
Parachute Payments: All compensatory payments paid to a covered employee due to their separation from employment
Base Amount: Generally = average aggregate compensation paid over the 5 year prior to the year in which the separation occurs
Exclusions:
Qualified retirement plans
403(b) plans
457(b) plans of state or local governments
Amounts paid to non-highly compensated employees
Amounts paid to medical professionals related to their medical/veterinary services.
TIP: Convert salary to qualified pension payments

18. Disallowed Fringe Benefits Taxable
New law requires tax-exempt employers to pay UBTI on the value of certain fringe benefits, the value of which are not deductible under IRC section 274
Includes:
Qualified transportation fringe benefits – generally commuter costs
Any parking facility used in connection with qualified parking
On-premises athletic facilities to the extent a deduction is disallowed
Applies to amounts paid or incurred after 2017
Purpose is to achieve parity between taxable and tax-exempt employers
TIP: Increase salary of employees to cover costs formerly paid by organization

19. Excise Tax on Investment Income
1.4% excise tax imposed on net investment income of certain private colleges and universities (not public institutions)
Net investment income is defined under private foundation rules of IRC section 4940
Applies to colleges or universities
With at least 500 students and 50% or more are located in the US
FMV of investment assets and those of related entities is at least $500,000 per full-time student
Applies for tax years beginning after 2017 and is expected to affect about 30 educational institutions
TIP: Spend down the endowment as much as possible

20. Advance Refunding of Private Activity Bonds
Subjects the interest on advance refunding of bonds to tax
Advance refunding bonds are those issued more than 90 days before the redemption of the refunded bonds
Estimates this will increase revenues by approximately $17.4 billion over 10 years
TIP: Look at refinancing sooner than later if the interest rates change dramatically

21. Local Lobbying Activities
New law disallows the deduction for lobbying expenses with respect to legislation before local government bodies paid or incurred on or after 12/22/17
The new law makes local lobbying similar to rules for lobbying at other levels of government
Must report local lobbying expenditures to members or pay a proxy tax
Primarily impacts 501c(4), (5), and (6)
TIP: Move efforts to volunteers whenever possible and keep track of ED/employee time in these types of efforts

22. Increase in estate tax deduction
Federal estate tax exemption amounts will increase to $11,200,000 for individuals and $22,400,000 for married couples, from $5,490,00 and $10,980,00 respectively
These amounts are scheduled in increase with inflation each year until when they will revert back to the 2017 levels
Annual gift tax exemptions will increase to $15,000 in 2018, from $14,000
These changes will allow taxpayers to transfer greater amounts of wealth to descendants without paying tax or needing a charitable tax deduction
TIP: Emphasize the mission versus tax deduction to large donors

23. Summary
There are multiple aspects of the tax reform that are currently unclear
We are awaiting further guidance on many issues, to aid in the implementation and application of these changes
How quickly will guidance be issued?
What are the priorities? (likely not tax-exempt organizations)
How to implement changes?

24. Action Items Begin to communicate with donors now
Widespread confusion
Likely no longer 12/31 deadline to spur giving for non-itemizers
Emphasize need and effectiveness over tax benefits
Surveys indicate that tax benefit is not a large influence over donor giving
Use all means, especially Form 990 to communicate to donors and market the organization
Reevaluate fundraising efforts moving forward
Expected that many donors pre-paid in 2017
Decrease of 2018 withholdings will increase after-tax funds for taxpayers

25. Questions?