7 Changes in the Tax Law That All Associations Should Be Aware Of

On December 22, 2017, H.R. 1  (opens in a new tab), also known as the Tax Cuts and Jobs Act, was signed into law. This new tax law provides sweeping changes that potentially impact all U.S. taxpayers, including associations and other tax-exempt organizations. For the most part, these changes are effective for tax years beginning after December 31, 2017. Here are the top seven changes that impact associations:

1. Decrease in maximum corporation tax rate. The new law decreases the maximum tax rate for corporations, and on unrelated business taxable income (UBTI) for exempt organizations, from 35 percent to 21 percent. This new 21 percent rate is a flat rate.

The decreased tax rate applies to the proxy tax on exempt organizations, for lobbying and political expenditures incurred, and also for Form 1120-POL  (opens in a new tab). This change in the tax rate structure may affect your organization’s estimated tax calculations. Your overall tax liability may decrease, or it may increase, based on your organization’s pre-2018 incremental tax rate.

Additionally, for financial statement purposes, organizations should consider this new rate in valuing their deferred tax assets and liabilities for tax years beginning after December 31, 2017.

2. Siloed unrelated business losses. The new law requires exempt organizations conducting more than one unrelated trade or business to calculate UBTI separately for each trade or business. This practice effectively prohibits using losses arising from one trade or business to offset income from another trade or business. Also, exempt organization net operating losses (NOL) incurred after the effective date may only offset future income from the same trade or business. (See point 5, below, regarding changes to the NOL rules.)

As a result, many organizations may be required to report and pay tax on UBTI for the first time, as they will no longer be allowed to net together income and losses from multiple unrelated business activities. Additional guidance is needed, and is presumably forthcoming, regarding the definition of a separate unrelated trade or business for this purpose.

3. Nondeductible fringe benefits. The new law requires tax-exempt organizations to include employer-paid amounts for certain fringe benefits in UBTI. The fringe benefits included in this provision are qualified transportation fringe benefits, parking facilities, and certain on-site gyms. This provision is intended to achieve parity with taxable corporations, as the new law now disallows tax deductions for these types of expenses.

Many of these provisions require additional clarification and guidance, and still others may require technical correction.

Associations paying these expenses for any employees will need to determine the taxable impact of this arrangement beginning in 2018. In some cases, organizations will need to file Form 990-T  (opens in a new tab) for the first time to report these amounts and pay the required tax.

Note that amounts paid by employees through elective salary deferral using pretax dollars, via a qualified transportation and parking fringe benefit plan, are also included in UBTI under the new law.

4. Executive compensation. The new law imposes a 21 percent excise tax on compensation over $1 million for executives of nonprofit organizations. The new excise tax applies to the top five highest paid employees (or former employees) with reportable compensation of over $1 million. The excise tax also applies to certain severance payments, known as “excess parachute payments.” The excise tax is imposed on the organization and not on the employee.

The compensation of licensed medical professionals is excluded from this new tax. In addition, compensation under preexisting contractual arrangements is not exempt from the tax. It is not yet known how organizations are to report and pay this excise tax. Additional guidance regarding required forms, withholding requirements, payment deadlines, and the like, is needed in this area.

5. Net operating losses. Under the new law, NOLs arising after the effective date may not be carried back to previous tax years, and they may be carried forward indefinitely. Exempt organization NOLs incurred after the effective date may only offset future income from the same trade or business.

Also, the NOL deduction is now limited to 80 percent of a taxpayer’s taxable income. Even though the new law repeals the corporation alternative minimum tax (AMT), this new limitation on the use of NOL carryforwards essentially keeps one of the most common applications of the AMT intact and makes it stricter than before.

NOLs arising before the effective date may be used to offset income in future tax years without consideration to the specific trade or business. In addition, NOLs arising before the effective date may be carried forward to future tax years without a percentage limitation.

6. Local lobbying expenses. The new law eliminates the deduction for lobbying expenses regarding legislation before local government bodies, including Indian tribal governments. As a result, these expenses are now to be included in the calculation of nondeductible membership dues and also in the calculation for proxy tax liability.

7. Increase in standard deduction. The new law almost doubles the standard deduction amount for individuals, regardless of filing status. In addition, many individual tax deductions have now been either eliminated (such as unreimbursed job expenses) or significantly reduced (such as state and local taxes). As a result, it is believed that many more taxpayers will take the standard deduction instead of itemizing on their individual tax returns.

Many organizations are concerned that this development will result in fewer donations to charity, since the tax incentive to give will be diminished. Whether this new tax structure results in a decrease in future charitable giving remains to be seen.

Many of these provisions require additional clarification and guidance, and still others may require technical correction. We will provide additional information in the coming weeks as more guidance becomes available.