07 December 2017 Comparison of the exempt organization provisions in the House and Senate versions of the 'Tax Cuts and Jobs Act' Now that the Senate has passed its version of the "Tax Cuts and Jobs Act," the House and Senate must work to reconcile the differences between the bills passed by the two chambers. This Tax Alert highlights key differences and similarities between the Senate and House versions of the bill that will be of interest to exempt organizations, as well as several potential provisions that were not included in either the House or Senate bill as approved. For a detailed discussion of exempt organizations provisions in the House version of the bill, which passed November 16, see Tax Alert 2017-1844. For a detailed discussion of exempt organizations provisions in the Senate version of the bill, which passed December 2, see Tax Alert 2017-1943. Senate bill: 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. House bill: 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. Income from a research trade or business is exempt from unrelated business income tax (UBIT) if certain conditions are met. House bill: Income from research not made "publicly available" would be treated as unrelated business taxable income (UBTI) and subject to the UBIT rules. Income from the licensing of an organization's name or logo is generally royalty income and exempt from UBIT. Senate bill: Not addressed in the approved bill. However, an earlier Senate proposal included a provision that would treat any sale or licensing by a tax-exempt organization of its name or logo as an unrelated business, and income generated would be subject to UBIT. Under Section 512, an exempt organization that has multiple unrelated trade or businesses aggregates its gross income from all such trades or business and subtracts its aggregate deductions in computing UBTI. Senate bill: Tax-exempt organizations would be required to calculate separately the net unrelated taxable income of each unrelated trade or business.A net operating loss deduction is only allowed with respect to a trade or business from which the loss arose House bill: UBTI would be increased by the amount of certain fringe benefit expenses, such as transportation and on-premises athletic facilities. An entity exempt from tax under Section 501(a) and described in Section 501(c)(3) is prohibited from "participating in, or intervening in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office." House bill: Organizations described in Section 501(c)(3) would be permitted to make statements relating to political campaigns if the statements are made in the ordinary course of activities and they result in de minimis incremental expenses. Disqualified persons who engage in excess benefit transactions with certain tax-exempt organizations (other than private foundations) are subject to an excise tax on the amount of the economic benefit that exceeds the value of the consideration (including the performance of services) received for providing the benefit. Organization managers who approve transactions knowing them to be excess benefit transactions are also subject to tax. Senate bill: Not addressed in approved version. A previous version of the bill would have (1) expanded the tax to apply to Section 501(c)(4), (5) and (6) organizations; (2) added a tax on the organization itself; (3) removed a rebuttable presumption and other protections; and (4) expanded the definition of "disqualified person" to include investment advisors and athletic coaches. House bill: Organizations would be required to disclose annually on their Form 990 whether they have a policy on the frequency and minimum level of distributions of their donor-advised funds (and include a copy of that policy) as well as the average amount of grants made from their donor advised funds. House bill: The bill would repeal advance refunding bonds, as well as qualified private activity bonds and authority for issuing tax credit bonds. House bill: All entities exempt from tax under Section 501(a), notwithstanding the entity's exemption under any other provision of the Code, would be subject to the UBIT rules (including public pension plans). Private foundations are subject to a 2% excise tax on their net investment incomes. However, they may reduce this excise tax rate to 1% by making distributions equal to the averages of their distributions from the previous five years plus 1%. House bill: The current excise tax on net investment income would be unified at a single rate of 1.4%, and the 1% and 2% rates would be repealed. House bill: Private foundations operating art museums would be required to be open to the public for at least 1,000 hours per year to maintain status as a private operating foundation. Senate bill: Private colleges and universities with assets (other than those used directly in carrying out the institution's educational purposes) valued at the close of the preceding tax year of at least $500,000 per full-time student, would be subject to a 1.4% excise tax on net investment income. House bill: Private colleges and universities with assets (other than those used directly in carrying out the institution's educational purposes) valued at the close of the preceding tax year of at least $250,000 per full-time student, would be subject to a 1.4% excise tax on net investment income. Private foundation excess business holdings tax for independently operated philanthropic business holdings House bill: Private foundations that own a for-profit business would be exempt from the excess business holdings tax if certain limiting conditions are met and the business contributes its net operating income after taxes to the private foundation. Senate bill: The estate and gift tax exemption amount would be doubled to $10 million, indexed for inflation. House bill: The estate tax exemption would be increased to $10 million; estate tax and generating-skipping transfer tax would be fully repealed beginning after 2024. Senate bill: A 20% rate would apply beginning in 2019; the 35% rate for certain personal services corporations would be repealed. House bill: A 20% rate would apply beginning 2018. Personal services corporations would be taxed at 25%. The alternative minimum tax would be repealed. Senate bill: The bill would allow immediate write-off of qualified property placed in service after September 27, 2017, and before January 1, 2023, by increasing bonus depreciation percentage to 100%. It would exclude from the definition of "qualified property" certain public utility property (real property excluded by requirement that recovery period be 20 years or less). The provision would be phased out through 2026. House bill: The bill would allow immediate write-off of qualified property placed in service after September 27, 2017, and before January 1, 2023. It would repeal the "original use" requirement. It would exclude from the definition of "qualified property" certain public utility property and property of real property trade or business. Senate bill: In general, the bill would limit the deduction of net interest expense to 30% of the business's adjusted taxable income. House bill: In general, the bill would limit the deduction of net interest expense to 30% of the business's adjusted taxable income. Senate bill: The deduction would be limited to 90% of the taxpayer's taxable income (determined without regard to the NOL deduction), 80% beginning after 2022. NOLs could be carried forward indefinitely. The two-year carryback and the special carryback provisions would be repealed, but a two-year carryback for certain farming losses would be allowed. House bill: The deduction would be limited to 90% of the taxpayer's taxable income (determined without regard to the NOL deduction). NOLs could be carried forward indefinitely. Carrybacks would be repealed (with limited small business/farm exception). Senate bill: The bill would reduce the penalty for individuals' failure to maintain health insurance to zero Several discussed provisions affecting exempt organizations did not make it into either the approved House or Senate version of the bill, including provisions that would: The proposed legislation in both the House and Senate versions of the Tax Cuts and Jobs Act, if consolidated to one bill and enacted into law, would have a significant impact on substantially all tax-exempt organizations' funding and operations. Potential new excise taxes and changes to the UBIT rules would require careful review of current operations, structures and compensation throughout the tax-exempt sector. While some of the proposed changes constitute a simplification of existing tax rules (establishing one rate of excise tax on private foundation investment income), many proposed changes add both complexity and scope to existing rules (e.g., new compensation-related excise taxes, changes to UBTI). Changes to bond rules would reduce tax-exempt organizations' financing options, and could require additional planning to ensure bond-funded projects comply with modifications to existing rules. Finally, while changes to business tax rules could reduce potential income tax for tax-exempt organizations' taxable subsidiaries and alternative investments, these benefits could be somewhat offset by changes to the UBTI rules. Other proposed changes could have non-tax, but significant, effects on tax-exempt organizations. New rules limiting the universe of taxpayers eligible to take the individual charitable income tax deduction may reduce the amount of donated funds to the entire charitable sector. Also, changes to the federal estate, gift and generation skipping transfer taxes may reduce charitable amounts received through planned giving or bequests. — For more information about EY's Exempt Organization Tax Services group, visit us at www.ey.com/ExemptOrg.
Document ID: 2017-2077 | |||||||||||||||||||
