1. 2017 Tax Changes Affecting Donors
And The Effect of Those Changes on Charitable Giving
May 15, 2018
Ramsay H. Slugg

2. Disclosure
IMPORTANT: This presentation is designed to provide general information about ideas and strategies. It is for discussion purposes only since the availability and effectiveness of any strategy are dependent upon your individual facts and circumstances. Always consult with your independent attorney, tax advisor, investment manager, and insurance agent for final recommendations and before changing or implementing any financial, tax, or estate planning strategy.
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3. Introduction: the 2017 tax act
The Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law by President Trump on December 22nd, 2017
At the beginning of the legislative process, a number of changes affecting both donors and charities were proposed
While there were a number of critical changes in the final bill, several proposed items were left out in the final legislation

4. KEY CHANGES FOR TAX EXEMPT ORGANIZATIONS
A new 1.4% excise tax on the investment income of endowments of private colleges and universities with at least 500 tuition-paying students (more than 50% of whom are located in the United States) during the preceding taxable year, where the endowment equals or exceeds $500,000 per student
The “endowment” subject to the tax includes all assets of the school, other than assets used in carrying out its exempt purpose, not just assets formally designated as “endowment”
Anticipated to affect 30 – 35 schools
House version would have imposed the tax on endowments at $250,000 per student
A new excise tax paid by the employer on the compensation of the 5 most highly compensated employees of tax-exempt organizations, including both public and private charities.
Equal to 21 % of compensation paid to such employees in excess of $1 million
Yes, includes football coaches!

5. Key changes for tax exempt organizations
Tax-exempt organizations that carry on more than one unrelated trade or business must now compute unrelated business taxable income “UBTI” with respect to each trade or business
Deductions or net operating losses from one business may no longer be used to offset income from another
Anticipated that this will increase UBTI for universities and large charities in particular
The Tax Act changes certain items that will be included in UBTI, mainly including employee fringe benefits
This includes transportation, parking, and on-premises athletic facilities
Both the new inclusions in UBTI and the executive compensation provision are attempts to provide parity between tax-exempt organizations and public corporations
Due to changes in corporate income tax rates, UBTI incurred by non-profit trusts will be taxed at significantly higher rates than non-profit corporations

6. Key changes for donors
The adjusted gross income limitation on cash contributions to public charities, including donor advised funds, was increased from 50 to 60 percent
This may be significant for individuals who choose to “bunch” charitable contributions from several years into one to avoid a potential loss of deductions in years in which the higher standard deduction is used by the taxpayer
It appears that the higher limitation will only apply if ALL charitable contributions for the tax year are made in cash
College sports boosters will no longer be allowed to deduct 80% of the cost of certain college sports booster club payments which allowed them access to purchase preferred season tickets to sporting events
Pease limitations were repealed

7. Key change for certain trusts
For trust that have made an Electing Small Business Trust (“ESBT”) election, the portion of the ESBT consisting of stock in 1 or more S corporations is treated as a separate trust
Under prior law, in certain circumstances, the amount of the separate trust’s deduction for charitable contributions was, for practical purposes, unlimited
Now, the percentage limitations on charitable contribution deductions that apply to individuals (based on adjusted gross income) will also apply to portion of the ESBT treated as a separate trust

8. Provisions not adopted in the final legislation
A proposal to permit Section 501(c)(3) organizations to make political statements, which would have modified the so-called “Johnson Amendment,” which itself prohibits 501(c)(3) organizations from participating or intervening in political campaigns, was not adopted
A proposal that would have clarified that 501(a) entities are subject to UBTI rules, notwithstanding their exemption from income taxes under any other provision of the Internal Revenue Code, was not adopted
A proposal to simplify and adopt a single 1.4% private foundation excise tax on net investment income was not adopted
An exception from the private foundation excess business holdings excise tax for certain 100% owned businesses that distribute all of their operating income to the foundation was not adopted (the “Newman’s Own provision”)

9. Provisions not adopted in the final legislation
A provision that would have required private art museums to be open to the public for a specified number of hours in order to qualify as an operating foundation was not adopted
The Tax Act does not modify the existing research income exclusion from UBTI
The Tax Act does not include additional reporting requirements for donor advised funds

10. One Provision subsequently adopted in the budget legislation
Private foundations cannot own more than 20% of the voting control of a business entity
20% rises to 35% if shown they are not in control
2% de minimus exception
Strict attribution rules apply
5 year period to divest
Subject to 2 tiers of penalty taxes if in violation
An exception to this rule has been sought by Newman’s Own Foundation, which owns 100% of Newman’s Own food products.
Subsequent to the 2017 Tax Act, this provision was enacted as part of the subsequent budget legislation, which may give rise to selected planning opportunities for similar fact patterns

11. HOW WILL THIS AFFECT CHARITABLE GIVING?
Conventional wisdom says:
A decrease in income tax rates reduces the value of the federal income tax charitable deduction
A cap on the income tax charitable deduction (as previously proposed) would reduce the value of the federal income tax charitable deduction
An increase in the standard deduction means fewer people will itemize deductions, meaning fewer people will be able to take the federal income tax charitable deduction
A repeal of the estate tax and/or an increase in the estate tax exemption will reduce or eliminate the benefit of the federal estate tax charitable deduction
All of those statements are true

12. HOW WILL THIS AFFECT CHARITABLE GIVING?
Based on the above statements, the Congressional Budget Office and a number of prominent tax and charitable commentators believe that any or all of the above will reduce charitable giving
Estimates range from $10 Billion to as high as $30 Billion!
However, there is a disconnect between the above statements, and the assumed outcome

13. HOW WILL THIS AFFECT CHARITABLE GIVING?
Charitable Giving NEVER makes economic sense
Assume a charitable gift of $100, made by a taxpayer in a 40% income tax bracket (this works in any tax bracket)
No charitable gift means $40 of income tax would be paid, and $60 would be retained by taxpayer (charity receives nothing)
$100 charitable gift means charity has $100, which was effectively paid $40 by Uncle Sam (because no income tax was paid) and $60 by taxpayer. (taxpayer has nothing)
So, taxpayer is never better off economically speaking by making a charitable gift
The particular economics may change by using different assets, such as appreciated securities, but the taxpayer is NEVER better off economically by making a charitable gift

14. HOW WILL THIS AFFECT CHARITABLE GIVING?
Charitable Giving NEVER makes economic sense
Even so:
According to Giving USA, approximately 65% of households in America make charitable gifts every year
That is more than itemize deductions
That is more than pay income taxes

15. HOW WILL THIS AFFECT CHARITABLE GIVING?
Charitable Giving NEVER makes economic sense
Even so:
According to the U.S. Trust of High Net Worth Philanthropy, conducted bi-annually since 2006, high net worth households (defined in that Study as over $1 MM net worth and/or $200,000 of income)
95 – 98% make charitable gifts every year
Most, but not all, itemize deductions
Most, but not all, pay taxes
However, most, but not all, pay taxes at a lower marginal rate because a higher proportion of their income is from capital gains and dividends, taxed at a lower rate, reducing the value of the income tax charitable deduction

16. HOW WILL THIS AFFECT CHARITABLE GIVING?
Charitable Giving NEVER makes economic sense
Furthermore, according to the U.S. Trust Study of High Net Worth Philanthropy, HNW individuals reported:
Approximately 90% said their charitable giving would stay the same or only slightly decrease if the income tax charitable deduction were eliminated
Approximately 90% said their charitable giving would stay the same or increase if the estate tax were eliminated (meaning no estate tax charitable deduction)
This sample represents a population who make over 50% of all charitable gifts, including gifts by estates, foundations and corporations.

17. HOW WILL THIS AFFECT CHARITABLE GIVING?
Charitable Giving NEVER makes economic sense
So why do people make charitable gifts?
Answer: Because they are charitable!

18. HOW WILL THIS AFFECT CHARITABLE GIVING?
Charitable Giving NEVER makes economic sense
Do people care about the income tax deduction?
Yes, but don’t confuse a desire for tax efficiency with tax motivation
Americans have been making charitable gifts since before there was even a tax code
The better gauge of changes in charitable giving is the S&P 500….not the Internal Revenue Code!