What Does the House Tax Bill Mean for NJ Non-Profits?

Numerous provisions raise concern

Posted November 3, 2017

On Thursday, November 2, the Speaker of the U.S. House of Representatives and the Chairman of the House Ways and Means Committee released their tax overhaul legislation, the “Tax Cuts & Jobs Act.”  

According to the National Council of Nonprofits, the Ways and Means Committee is expected to begin its review of the bill on Monday, November 6, and the bill is expected to go to the House floor the week of November 13.  The Senate is expected to release its tax bill in mid-November, and Republican leaders have stated that their goal is to send a final bill to the President by New Year’s Day.

The National Council of Nonprofits has issued a full summary including information about key changes in corporate and individual tax rates and other major provisions, online at www.councilofnonprofits.org/trends-policy-issues/tax-cuts-jobs-act-hr-1-house-tax-reform-bill

The following summary outlines some of the bill’s provisions of particular interest to New Jersey charities, and highlights a number of areas of major concern. It is based on analyses by the National Council of Nonprofits and other organizations, various media outlets, and our own assessments.

Non-Profit Nonpartisanship Threatened
  The legislation includes language that would significantly weaken the Johnson Amendment, the tax-law protection from partisan politics that has for decades enabled charitable non-profits, houses of worship, and foundations to remain focused on their missions and problem-solving in their communities. The new provision would allow houses of worship and their auxiliaries (but no other non-profits) to endorse candidates and engage in partisan political speech as long as such speech is “in the ordinary course of the organization’s regular and customary activities in carrying out its exempt purpose,” and it incurs no more than “de minimis” expenses in doing so.

Comment:  The Center continues to vigorously oppose efforts to weaken the existing laws which have for 60+ years allowed charities and houses of worship to work in communities free from partisan pressures, divisions and interference. Over 5,500 organizations nationwide, along with thousands of religious leaders, faith organizations, charity regulators and the vast majority of the general public, strongly oppose weakening the Johnson Amendment.

Charitable Giving Incentives Reduced
Although technically the charitable giving deduction itself remains unchanged, the bill would have a significant negative impact on charitable giving.  The deduction is only available for households that itemize on their tax returns. People who take the standard deduction cannot deduct their charitable gifts, and because the standard deduction would double under the bill, it would make the charitable deduction unavailable to approximately 95% of taxpayers.  Studies from the Lilly School of Philanthropy and others suggest that this change could cost charities $13 billion or more each year in lost giving. Provisions sought by a broad coalition of non-profit advocates to extend a charitable giving incentive to non-itemizers were not included in the bill. 
  Comment: Charities are already straining under the weight of skyrocketing demand for services and funding that has not kept pace.  The reductions in giving that would result from this bill would be devastating to the charities and the people, communities and causes that depend on them for critical programs and services.

Estate Tax Phaseout
The bill would immediately double the estate tax threshold from its current level of $11 million per couple ($5.5 million per individual) to $22 million ($11 million per individual), and would phase out the estate tax completely in six years.  The Committee for a Responsible Federal Budget reports that the estate tax changes alone would cost the Treasury an estimated $200 billion.
  Comment:  It should be remembered that even under current law, only the wealthiest 0.2% of estates are subject to the estate tax. With federal budget proposals already threatening to decimate funding for vital programs and services, this cut is especially costly on numerous levels. There is also concern that estate tax repeal, and the accompanying charitable giving incentive, would adversely affect bequests made to charities.

State and Local Tax (SALT) Deductions Reduced
  In a provision that is especially harmful to New Jersey, the proposal would end the deductibility of state and local income taxes and would cap property tax deductions at $10,000.  As is the case with the charitable deduction, these deductions would only be available to itemizers, and with the increase in standard deduction, fewer taxpayers would be able to take this deduction than do now.     
  Comment – As New Jersey Policy Perspective reports, this change would hurt thousands of New Jersey families across a wide range of income levels.  The Center on Budget and Policy Priorities has identified a number of ways in which state and local governments nationwide, and disproportionately in states like New Jersey, would be negatively affected.

Other Exempt Organization Changes – The bill would make a variety of changes affecting segments of the exempt organization community, many of which would result in higher taxes owed by organizations. The National Council of Nonprofits describes some of these as follows:

  • Endowments: The bill would impose a new excise tax of 1.4 percent on net investment income of non-profit colleges and universities with assets (not counting those used directly in carrying out the institution’s educational purposes) valued at the close of the preceding tax year of at least $100,000 per full-time student. (Estimated to raise $3 billion.) The legislation comes after several major universities reported endowment investment returns in the double digits.

  • Executive Compensation: The legislation would impose a 20-percent excise tax on tax-exempt organizations for compensation in excess of $1 million paid to any of its five highest paid employees for the tax year. (Estimated to raise $3.6 billion.)

  • Unrelated Business Income Tax (UBIT): The bill proposes several changes to UBIT liability. The current research exemption would be narrowed to only apply to income derived from research that is made freely available to the public. (Estimated to raise $0.7 billion.) Tax-exempt entities would be required to pay taxes on the values of providing their employees with transportation fringe benefits, and on-premises gyms and other athletic facilities, by treating the funds used to pay for such benefits as unrelated business taxable income.

  • Foundation Excise Tax: The bill streamlines the excise tax on foundation investment income by setting a single rate of 1.4 percent instead of the current two rates of 1 percent and 2 percent. (Estimated to raise $0.5 billion.)

  • Private Operating Foundation (Art Museum/Collector): the bill would require that an art museum claiming the status of a private operating foundation must be open to the public for at least 1,000 hours every year to be recognized as such.

  • Private Foundation Excess Business-Holdings Tax: The bill would exempt private foundations from the tax if they own a for-profit business under these four conditions: (1) the foundation owns all of the for-profit business' voting stock, (2) the private foundation acquired all of its interests in the for-profit business other than by purchasing it, (3) the for-profit business distributes all of its net operating income for any given tax year to the private foundation within 120 days of the close of that tax year, and (4) the for-profit business' directors and executives are not substantial contributors to the private foundation nor make up a majority of the private foundation's board of directors. Donor Advised Funds (DAFs) are explicitly excluded from this provision.

  • Donor Advised Funds: Under the legislation, donor advised funds would be required to disclose annually their policies on inactive donor advised funds as well as the average amount of grants made from their donor advised funds.  

Other Key Provisions

Tax Rates (§ 1001)

The tax bill would reduce the current seven tax brackets into four brackets of 12%, 25%, 35%, and 39.6%. The top rate is the same level as current law, but the bill would raise the threshold from $480,050 for couples as set in current law for 2018 up to $1 million.

Deductions (§§ 1002, 1301-1312)

  • Personal Exemption: Under current law, each member of a family is entitled to a $4,050 personal exemption that reduces the family’s tax burden. The legislation repeals personal exemptions for the taxpayer, spouse, and dependents. The taxpayer and spouse exemptions, according to the tax reform framework released in September, are incorporated into the larger standard deduction; the repealed dependent deductions, the framework asserts, are made up in expanded child tax credits (both discussed below).

  • Standard Deduction: The bill would nearly double the standard deduction to $12,000/individual and $24,000/couple. Single filers with at least one qualifying child could claim a standard deduction of $18,000. These amounts would be adjusted for inflation. Experts predict that after this change only five percent of taxpayers will itemize their deductions, meaning that 95 percent of taxpayers would receive no tax benefit for donating to the work of charitable non-profits, and also would not have access to other itemized deductions.

  • Itemized Deductions: The bill would retain the itemized deductions for:

    • Charitable Giving. As currently written, the bill raises the amount of cash donations individuals can donate each year; increasing the limit from 50 percent of adjusted gross income (AGI) to 60 percent of AGI. The measure also fixes the deductible limit on volunteer mileage by switching from a fixed statutory amount ($0.14/mile) to a rate that would be adjusted for inflation. The bill does not include a new deduction sought by the non-profit community, a universal or non-itemizer deduction that would enable individuals who take the standard deduction to also receive a tax incentive for giving back to their communities through charitable donations. Language that many non-profit advocates are promoting is found in the Universal Charitable Giving Act (H.R. 3988), which would provide a deduction with a cap of up to one-third of the standard deduction ($4,000/individual; $8,000/couple) for taxpayers who do not itemize.

    • Mortgage Interest for existing mortgages, but the bill would limit the home mortgage interest deduction for newly purchased homes valued $500,000 or less, a reduction in the cap from $1 million today. This change will have a disproportionate impact in high cost-of-of-living states like New Jersey.

    • Property Taxes up to a cap of $10,000 – another change which would adversely affect many taxpayers in high cost-of-living states such as New Jersey.

A number of other itemized deductions would be curtailed or repealed entirely. These include medical expenses, moving expenses, student loan interest, property damage, and adoption.  

More information

Next steps

Given the complexity of the legislation and the swift pace at which it is moving, charities are urged to assess quickly which portions of the bill matter most to them in the pursuit of their missions, and to weigh in quickly with their Congressional Representatives.

The Center will be sharing regular updates about the bill’s progress as well as our own activity and any additional calls to action, on our website, in social media (Twitter, Facebook, LinkedIn or Instagram), and/or through email.

If you have questions or comments in the meantime, contact Linda Czipo at the Center.