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Tax Reform Legislation

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Nov 10, 2017

On Nov. 16, the House approved H.R.1, The Tax Cuts and Jobs Act by a vote of 227-205. Colorado's Republican Representatives voted for the bill and Democrats voted against it. The Senate Finance Committee also approved the Senate version of the bill that day on a party-line vote. The Senate will vote on this bill as a substitute amendment for H.R. 1, the Tax Cuts and Jobs Act.

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 Changes for Nonprofits

  • For both bills, increasing the standard deduction means reducing the number of itemizers from 1 in 3 to 1 in 20
  • Neither bill allows non-itemizers to deduct charitable contributions
  • The Senate bill makes no changes to the Johnson Amendment. The House bill allows nonprofits to make political communications with minimal expenditures
  • The Senate bill doubles the estate tax exemption. The House doubles it for six years and repeals the estate tax
  • The Senate zeroes out the penalty for individuals who lack health insurance coverage
  • Both bills allow donors to deduct charitable giving up to 60 percent of Adjusted Gross Income (AGI) rather than 50 percent currently
  • The Senate bill has new taxes and due diligence requirements for excess benefit transactions. Both bills tax nonprofits for executives receiving $1 million or more
  • The Senate bill applies Unrelated Business Income Taxes to each trade or business of a nonprofit, name or logo licensing, and research that is not publicly available. The House bill only taxes the latter
  • The Senate bill does not tax interest on Private Activity Bonds; the House bill does
  • The House bill allows adjustment of the volunteer mileage rate for inflation; the Senate bill does not
  • The House bill sets a 1.4% investment tax rate on private foundations and college endowment The Senate bill only taxes the latter
  • The House bill no longer allows charities to acknowledge gifts of $250 or more on their tax returns in lieu of an acknowledgement letter 

Key Provisions of the Senate Bill

  • Individual Tax rates:
    • Retains seven tax brackets with rates of 10, 12, 22.5, 25, 32.5, 35, and 38.5. These rates expire in 2026
    • The House bill has four brackets (12, 25, 35, and 39.6 percent). Top rate is 1 million for joint filers rather than $480,050 currently
  • 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- repealed, House bill replaces SALT with property tax deduction up to $10,000
  • Charitable Deduction- available only to the 5 percent of taxpayers who continue to itemize (30 percent itemize currently)
    • Donation limit: Taxpayers can deduct giving up to 60 percent of their AGI (50 percent currently)
    • Volunteer Mileage Rate: No change. Note: House bill indexes Volunteer Mileage Rate to adjust for inflation.
  • Estate Tax- doubles the exemption amount to $10 million and adjusts for inflation
    • House bill increases it to $11 million for individuals for the next six years and then repeals the estate tax
  • 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 million per year ($1,000 refundable indexed for inflation rounded up to nearest $100)
      • House bill increases it to $1,600 per child 17 years and younger for families making up to $110,000 per year ($1,000 refundable)
    • Provides a $500 nonrefundable credit for non-child dependent. Note: $300 nonrefundable credit in House Bill 
  • Individual Mandate
    • Zeroes out the individual shared responsbillity payment starting in 2019
    • The House bill does not include this provision
  • Business Tax Provisions:
    • ​Corporate tax rate- reduced from 35 percent to 20 percent starting in 2019 rather than 2018 in the House bill
    • Pass-through entities (partnerships, LLCs, S Corporations)- allows a 17.4% deduction of pass-through income 
      • The House bill reduces this rate to 25 percent rate
    • Paid Family and Medical Leave Employer Credit
      • 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​​​​​​
      • The House does not include this provision

Other Nonprofit Provisions

  • Nonpartisanship (Johnson Amendment): does not change the Johnson Amendment
    • The House bill allows partisan political communications by nonprofits if the expenses are minimal and communications are made in the ordinary course of their regular and customary activities. 
  • Taxes on Excess Benefit Transactions (Intermediate Sanctions)- The House bill makes no changes to this
    • Excess benefit transaction-  new 10 percent excise tax on nonprofits when a disqualified person (board member or executive) receives an excess benefit transaction.
      • Currently, this only applies to the disqualified person and board members who approved the transaction
    • Rebuttable Presumption of Reasonableness- following current standards would meet minimum standards of "due diligence" but reasonableness is no longer presumed
      • IRS standard for presumption includes approval by the board without conflicts of interest, reliance on appropriate comparability data, and concurrent documentation of the basis for determination  
    •  Special rule for professional advice- eliminated
      • Currently, an organization manager that relies on professional advice is deemed not to have knowingly approved an excess benefit transaction
      • Seeking professional advice is still a relevant consideration in determinig whether a manager knowingly participated in an excess benefit transaction
    • Disqualified Persons- includes investment advisors and athletic coaches
  • Executive Compensation- imposes a 20 percent excise tax on tax-exempt organizations that pay any of their top five employees more than $1 million annually (raises $3.6 billion)
  • Unrelated Business Income Tax (UBIT)- The House only changes the research exemption
    • Business Activity- each unrelated trade or business would be treated separately for calculation of UBIT. Net operating loss deduction allowed only from that trade or business
    • Licensing an organization's name or logo-royalty income is subject to UBIT
    • Research exemption- only applies to income from research that is freely available to the public (raises $0.7 billion)
    • Taxes on fringe benefits for employees- such as transportation fringe benefits, on-site athletic facilities
  • Investment Income
    • Private colleges and universities- new 1.4 percent excise tax on net investment income of nonprofit colleges and universities with assets valued at $250,000 or more per student 
    • Private Foundations- makes no change. House bill sets a 1.4 percent rather than variable 1 and 2 percent rates (raises $0.5 billion)
    • Private Activity Bonds: no changes. The House bill taxes interest on bonds newly issued after 2017 (raises $38.9 billion) 
  • Written Acknowledgment of Donations of $250 or more- repeals provision allowing nonprofits to report these gifts on their tax filings in lieu of the donor having an acknowledgment letter.  
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