House Tax Reform Proposal-Tax Cuts and Jobs Act

After months of speculation and anticipation, the House has released its version of the comprehensive tax reform bill. The 429-page bill proposes massive changes for tax-exempt organizations. Following is a summary of the key changes. Unless otherwise noted, the changes would be effective for tax years beginning after 2017. The Senate is still working on its own version of a tax reform bill, so the final tax bill that gets passed by Congress and signed by the President could be significantly different from this House bill.
 
Contributions

• Increase the adjusted gross income limitation for cash contributions to public charities from 50% to 60%.
• Eliminate the special rule that provides a charitable deduction of 80% of the amount paid for the right to purchase tickets for athletic events.
• Index the charitable standard mileage rate for inflation.

Unrelated Business Income Tax

• Tax-exempt entities would be taxed on the values of providing their employees with transportation fringe benefits and on-premises gyms and other athletic facilities by increasing unrelated business taxable income by these amounts.
• All entities, including Code Section 115 government-sponsored entities, would be subject to unrelated business income tax rules.
• Organizations will only be able to exclude from unrelated business taxable income fundamental research where the results are freely made available to the public.

Excise Tax

• A tax-exempt organization would be subject to a 20% excise tax on compensation in excess of $1 million paid to any of its five highest paid employees for the tax year.
• For private foundations, the excise tax rate on net investment income would be streamlined to a single rate of 1.4%.
• An art museum claiming private operating foundation status would not be recognized as such unless it is open to the public for at least 1,000 hours per year.
• Certain private colleges and universities would be subject to a 1.4% excise tax on net investment income. This provision would only apply to private colleges and universities that have at least 500 students and assets valued at the close of the preceding tax year of at least $100,000 per full-time student.
• Private foundations would be exempt from the business holdings excise tax under certain conditions.

Bond Reforms

• Interest on newly issued private activity bonds would be included in income and subject to tax.
• Advance refunding bonds (refunding bonds issued more than 90 days before the redemption of the refunded bonds) would be taxable.  Interest on current refunding bonds would continue to be tax-exempt.

Miscellaneous

• Churches, after the date of enactment, would be permitted to make statements relating to political campaigns as long as the speech is in the ordinary course of the organization’s business and its expenses are de minimis.
• 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.