Major tax legislation is expected to be enacted following the House and Senate votes to approve the conference bill. Because many provisions have been included in various versions of the House and Senate bills, we want to let you know what is and isn't in the final bill with regard to tax-exempt organizations. (Of course, the provisions changing tax rates, the standard deduction, the estate tax, and more may also have wide-ranging consequences for the nonprofit sector as they change tax incentives for charitable donations and bequests. Also, the reduction in tax revenues could add to pressure to cut federal funding for social programs. However, the results of those changes remain to be seen.)
The attached chart describes key provisions specifically affecting tax-exempt organizations. Of particular note are the following:
- Tax on high compensation for nonprofit employees – The conference bill would impose a 21% excise tax on compensation over $1 million for nonprofit executives, and also on substantial severance payments. Notably, the bill does not "grandfather" pre-existing contractual compensation arrangements.
- UBIT – The Senate bill would prohibit combining various activities subject to Unrelated Business Income Tax (UBIT), so organizations could no longer offset gains from one line of business with losses from another line of business. On the positive side, the decrease in corporate income tax rates from 35% to 21% would also apply to UBIT.
- Higher education – A new tax would be levied on the large endowments of private colleges and universities, as detailed further in the attachment. Smaller endowments and endowments of public colleges and universities would not be taxed.
A number of high-profile provisions that were in either the House bill or the Senate Finance Committee bill have been dropped. The controversial partial repeal of the so-called "Johnson Amendment" prohibiting 501(c)(3) organizations from engaging in political activity was eliminated in conference committee. The termination of tax-exempt private activity bond financing, including "qualified 501(c)(3) bonds," was also dropped by the conference committee. The taxation of royalty income for licensing of a nonprofit organization's name and logo, the changes to the "intermediate sanctions" safe harbor for nonprofits setting compensation for their executives, and the loss of tax-exemption for professional sports leagues, which was drafted broadly enough to have arguably swept in organizations engaged in sports in communities, were all eliminated earlier in the process. Other provisions that were eliminated at various points include changes to the private foundation excise tax, new disclosure requirements for donor-advised funds, and the long-sought-after increase in the volunteer mileage rate. Overall, the changes specifically for tax-exempt organizations are not as significant as originally expected.