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Tax Reform Legislation

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Dec 4, 2017

The House approved H.R.1, The Tax Cuts and Jobs Act, on Nov. 16 by a vote of 227-205. On December 2, the Senate approved revisions to the Tax Cuts and Jobs Act by a 51-49 vote. Voting by Colorado's Representatives split among party lines.

Along with the Colorado Association of Funders, we hosted a Dec, 6 webinar, presented by the National Council of Nonprofits, with the latest update on tax reform legislation. 

This bill reforms the tax code by lowering tax rates for many individuals and businesses, repealing tax credits and deductions, and reducing federal revenues by $1.5 trillion over the next decade. 

Our View     House/Senate Bill Comparison

Key Provisions Affecting Nonprofits

Charitable giving and Volunteerism

  • Charitable Deduction- reduces the percentage of taxpayers who itemize and can claim the charitable deduction to 5 percent
    • Currently, 30 percent of taxpayers itemize
    • Neither bill allows non-itemizers to deduct charitable contributions
    • Both bills allow donors to deduct charitable giving up to 60 percent of Adjusted Gross Income (AGI) rather than 50 percent currently 
  • Estate Tax- both bills double the estate tax exemption to $11 million individuals/$22 million couples. The House bill doubles the exemption for six years and then repeals it entirely
    • The estate tax provides an incentive for families to make major gifts or bequests to reduce their estate tax liability 
  • Donor Acknowledgment- both bills repeal a provision allowing charities to file an IRS form in lieu of providing an acknowledgement letter to donors 

Nonprofit Nonpartisanship- allows nonprofits to make political communications in the ordinary course of their business if their expenditures are minimal (House bill only)

Taxes on Nonprofits' Activities and Investments

  • Unrelated Business Income Taxes (UBIT) apply to:
    • Research that is not made freely available to the public
    • Transportation fringe benefits for employees and employee access to on-site gyms
    • Each separate trade or business (Senate bill only)
    • Licensing a nonprofit's name or logo (deleted from Senate bill)
  • Investment income tax on nonprofit colleges and universities
    • ​​​​​​The ​House bill tax is $250,000 per full time student; the Senate bill is $500,000 per full time student
  • Taxation of Private Activity Bonds (House bill only)

Executive Compensation and Excess Benefit Transactions (Intermediate Sanctions)

  • Highly Compensated Employees-  excise tax on those earning $1 million or more per year
  • Excess Benefit Transactionsnew due diligence requirements and taxes (deleted from Senate bill)
    • New 10 percent excise tax on nonprofits when a disqualified person receives an excess benefit transaction
    • Following the IRS "rebuttable presumption of reasonableness" standard would constitute the minimum level of due diligence rather than a safe harbor
    • Relying on professional advice would no longer shield an organizational manager from liability regarding an excess benefit transaction
    • Disqualified persons include investment advisors and athletic coaches

Foundations and Grantmaking

  • Private Foundation Investments- 1.4% excise tax rate on net investment income (House bill only)
    • Currently, this rate varies between 1 and 2 percent
  • Donor Advised Funds (DAFs)- annual disclosure of average grant amounts and policies on inactive DAFs (House bill only)

Individual Tax Provisions

  • Individual Tax rates:
    • Senate bill- seven tax brackets with rates of 10, 12, 22.5, 25, 32.5, 35, and 38.5. These rates expire in 2026
    • House bill - four brackets (12, 25, 35, and 39.6 percent).
      • The top rate applies to income of $500,000 individuals ($418,000 individuals in House bill)
  • Personal Exemption: eliminated and incorporated into the larger standard deduction
  • Standard Deduction: increased to $12,000 for individuals and $24,000 for joint filers
  • Itemized Deductions: eliminates most itemized deductions and makes changes to the following:
    • Mortgage interest- Retains existing $1 million cap for home mortgages. House bill lowers the cap to $500,000
    • Sales and Local Tax (SALT) Deduction- Replaces SALT with property tax deduction up to $10,000
  • Child Tax Credit:
    • Increases to $2,000 for children up to age 18 and makes it available to joint filers earning up to $500,000 per year ($1,000 refundable)
      • House bill increases it to $1,600 per child 17 years and younger for families making up to $110,000 per year 
    • Provides a $500 nonrefundable credit for non-child dependent ($300 nonrefundable credit in House Bill) 
  • Individual Mandate
    • Zeroes out the individual shared responsbillity payment starting in 2019 (Senate bill only)

Business Tax Provisions

  • ​Corporate income tax rate- reduced from 35 percent to 20 percent starting in 2019 (2018 in the House bill)
  • Corporate Alternative Minimum Tax (AMT) - reduced to 20 percent (repealed in House vote)
  • Pass-through entities (partnerships, LLCs, S Corporations)- allows a 23% deduction of pass-through income 
    • The House bill reduces the maximum tax rate for pass through entities to 25 percent
  • Paid Family and Medical Leave Employer Credit (Senate bill only)
    • 12.5 percent of wages paid to employees on Family and Medical Leave (FMLA) if the employer pays at least 50 percent of the employee's wages. 
    • Increases the credit by 0.25 percent (up to 25 percent) for each percentage point over 50 percent of wages​​​​​​