What's in the Federal Tax Bill?
Reprinted with permission from the National Council of Nonprofits.
Tax Cuts and Jobs Act
What’s In the Tax Bill
The 503-page tax bill provides significant, permanent tax cuts for corporations and other businesses, and temporarily lowers taxes and repeals many deductions for most individuals, all at a cost of at least $1.5 trillion over the next decade. Numerous popular provisions expire after 2025, making their renewal likely, and thus deepening the federal deficit even more. The legislation generates more than $300 billion in revenue by effectively repealing the Affordable Care Act’s individual mandate to purchase health insurance, which will cause 13 million Americans to lose insurance and hike health insurance premiums for many. The tax bill coming before Congress this week does not include language repealing or weakening the Johnson Amendment (see article, below). The following summarizes the provisions in the Tax Cuts and Jobs Act that relate most directly to the sustainability and work of charitable nonprofits.
- Charitable Giving: The bill would increase the standard deduction for individuals (to $12,000), couples (to $24,000), and heads of households (to $18,000), resulting in a decline in the number of those who itemize from 30% of taxpayers to less than 10% of taxpayers. Experts estimate the change will shrink giving to the work of charitable nonprofits by $13 billion or more each year, costing 220,000 to 264,000 nonprofit jobs. Charitable and philanthropic organizations did not oppose doubling the standard deductions, but instead offered a solution to avoid the devastating consequences. To hold the work of charitable nonprofits harmless under the proposed changes, they proposed including a universal charitable deduction to create a giving incentive for all taxpayers. Those efforts were not successful. The increase in the standard deduction would expire after 2025.
- Estate Tax: The measure would maintain the estate tax, but double the exemption to about $11 million for individuals and about $22 million for couples, effective through 2025. In addition to reducing federal revenues by nearly $100 billion over ten years, the estate tax is an important source of revenue for the work of charitable nonprofits and creation of foundations as it encourages donors to address future needs in their communities through estate planning.
- State and Local Taxes (SALT): The legislation seeks to cap at $10,000 the deductibility of state and local income taxes and property taxes, in the aggregate. Many nonprofits are concerned that the provision will pressure state and local governments to enact tax and spending cuts, leading to elimination of programs serving people in need and increasing burdens on charitable nonprofits and foundations to fill the gaps.
- Taxing Tax-Exempts: To pay for other federal tax cuts, the bill would create a new 1.4 percent excise tax on net investment income of nonprofit colleges and universities with assets of at least $500,000 per full-time student and more than 500 full-time students. This provision should be of concern to all charitable nonprofits because it represents an invasion of nonprofit independence, replacing the political will of elected officials with the fiduciary judgment of nonprofit board members. The bill would also increase unrelated business income taxes (UBIT) by requiring that nonprofits calculate their taxes on each trade or business separately, and not aggregate profits and losses of all entities, as under current law. As a result, a deduction from one trade or business for a taxable year may not be used to offset income from a different unrelated trade or business for the same taxable year. Further, the legislation would levy a new 21 percent excise tax on nonprofits that pay compensation of $1 million or more to any of their five highest-paid employees.
- Ticking Fiscal Time Bomb: In order to limit the apparent cost of the bill and make the math add up to no more than $1.5 trillion in cuts, the bill drafters made numerous compromises and employed budget gimmicks that will undoubtedly raise the costs by many hundreds of billion dollars in the coming years. Prime among these is setting the tax cuts for individuals to expire after 2025, a year after the next presidential election. In 2026, Congress will be seen as either raising taxes (if it does nothing), or continuing the tax cuts at great cost to the deficit, which will force either spending cuts, or once again target certain subsectors by raising their taxes. Since the Tax Cuts and Jobs Act violates the barrier of taxing tax-exempt organizations to expand tax cuts for more favored interests (see above), there is every reason to be concerned that the fiscal crises created by the expiration of the individual tax cuts will include attacks on America’s nonprofit institutions.
Many issues raised during the tax reform process were left on the cutting room floor. As discussed below, the legislation does not weaken the Johnson Amendment, despite aggressive support from an extremely well-funded minority. The final bill does not include numerous troubling provisions that had been passed in the House version, including repeal of private activity bonds, raising taxes on private foundations in the name of tax simplification, increasing reporting requirements for donor advised funds, and a measure to deny operating foundation status to some art museums. The final bill ultimately makes no changes to the volunteer mileage rate or the law on intermediate sanctions, although significant, harmful reforms were included in an earlier Senate draft that may be seen again in the future.
One Bright Spot
Nonprofit Nonpartisanship Preserved
The final version of the tax bill does not include language to repeal or weaken the Johnson Amendment, the longstanding tax-law protection that prevents candidates for public office and their donors from hounding charitable nonprofits, houses of worship, or foundations for endorsements and other political campaign engagement. But this is not for lack of trying. The Senate Parliamentarian scratched the House provision from the tax bill because the measure violated the “Byrd Rule,” a budget rule that prevents the majority from slipping in policy changes on filibuster-free reconciliation legislation reserved only for revenue, spending, and deficit reduction provisions. One Senator personally argued with the Parliamentarian and sought to modify the provision at the last minute to get around the protection of the Byrd Rule, but to no avail.
The House-passed version of the tax bill would have politicized the 501(c)(3) community by allowing charitable, religious, and philanthropic organizations to engage in partisan electioneering for or against candidates if such action 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” incremental expenses in doing so. The result of the proposal, according to the Joint Committee on Taxation, would be the diversion of billions of non-deductible dollars from political organizations, like candidate and party campaign committees, to newly politicized churches and charitable entities because donors would for the first time be able to take charitable tax deductions.
The very well-funded advocacy groups seeking to politicize charitable nonprofits are promising to continue their fight to repeal the Johnson Amendment. They and their supporters in Congress continue to ignore the more than 5,600 organizations nationwide, along with thousands of religious leaders, faith organizations, law enforcement, and the vast majority of the general public who oppose weakening the Johnson Amendment. Charitable nonprofits, houses of worship, and foundations must keep up their vocal opposition to any change to nonprofit nonpartisanship.
- Conference Report on the Tax Cuts and Jobs Act, legislative text and legislative description, December 15, 2017.
- Joint Explanatory Statement of the Committee on Conference, legislative description, December 15, 2017.
- Charitable Nonprofits to Congress: The Final Tax Bill Would Sabotage Our Work in Communities. Kill the Bill and Start Over, statement of the National Council of Nonprofits, December 15, 2017.
- Nonprofit Analysis of the Final Tax Bill Proposal, National Council of Nonprofits, updated December 17, 2017.
- Comparison of House and Senate Tax Bills and Their Effects on Nonprofits, National Council of Nonprofits, updated December 15, 2017.
- Nonprofits and Foundations Stand United in Opposition to the Tax Bill, joint statement of the National Council of Nonprofits, the Council on Foundation, and Independent Sector, December 15, 2017.
On nonprofit nonpartisanship
- Johnson Amendment Saved, For Now, Statement of the National Council of Nonprofits, December 15, 2017.
- BJC responds to removal of language that would have undermined the protections of the Johnson Amendment, news release of the Baptist Joint Committee on Religious Liberty, December 15, 2017.
- Attempt to Undermine Johnson Amendment Removed from Tax Bill, news release of Americans United for Separation of Church and State, December 15, 2017.
- Johnson Amendment Repeal Axed, Averting Nonprofit Crisis – For Now, news release of Public Citizen, December 15, 2017.