Professional Notes

FALL 2018 TAX & ESTATE PLANNING

Impact of Recent Tax

Reform on Charities
The 2017 Tax Cuts and Jobs Act (the Act) included a number of Federal tax
law changes affecting charities and other tax-exempt organizations. This issue
of Professional Notes highlights the new provisions. It also briefly discusses
some proposals that were under consideration and did not make the final
version of the Act but could re-emerge in the future.

Unrelated business income tax

The Act’s reduction of the general corporate tax rate to a flat 21 percent means
that charities formed as nonprofit corporations will pay unrelated business
2018 SERIES income tax (UBIT) at a Federal rate of 21 percent, down from rates that had
previously topped out at 35 percent. Organizations structured as charitable
Spring trusts are subject to a structure keyed to the rates for individuals rather
Summary of the Tax Cuts than for taxable corporations. The top UBIT rate for trusts will decline only
and Jobs Act
slightly, from 39.6 percent to 37 percent. The new rates take effect for tax years
Summer beginning in 2018.
Impact of Recent Tax This was the good UBIT news. Less welcome is a new rule that generally
Reform on Individuals bars the deduction of losses from one line of business subject to UBIT (for
example, a gift shop) against income from another line of business (such
Fall
Impact of Recent Tax as a restaurant). Each activity will now stand on its own, without the cross-
Reform on Charities allocations of income and losses that sometimes allowed organizations to

Written by Jane L. Wilton, General Counsel of The New York Community Trust.
© 2018 The New York Community Trust

nycommunitytrust.org The material is published for informational purposes only. The publisher is not rendering legal,
accounting, or other professional advice.
Professional Notes
reduce (or even zero-out) the aggregate net income
subject to UBIT. The Joint Committee on Taxation
estimated that in the 10-year period 2018-2027 this
The incursion provision would raise $3.5 billion in tax revenue.
of UBIT into This “silo” rule creates a number of issues for
transportation organizations, such as the proper way to define
benefits has each discrete trade or business, whether passive
investments subject to UBIT are to be treated
been criticized
as a single business, and how to handle unused
not only for its
losses. IRS Notice 2018-67, published in August,
cost to charities, provided interim guidance and solicited comments
but also because on the “silo” rule. The Notice invites comments
it may force on, among other things, the scope of activities that
thousands of should be treated as investment activities. The
organizations to Notice indicates that “as a matter of administrative
convenience,” Treasury and the IRS intend to
start filing IRS
propose regulations treating “certain activities
Form 990-T.
in the nature of an investment” as a single trade
or business, while at the same time saying that
activities of a partnership generally are considered
activities of the partners (and may therefore be
treated as the conduct of a trade or business).
Many investments are made through partnerships,
and whether a given holding will be deemed an
investment remains to be seen.
The Act eliminates a taxable employer’s
deduction for providing qualified transportation
fringe benefits to employees, such as transit passes
and qualified parking. Evidently aiming to create
a level playing field for taxable and tax-exempt
employers (which derive no tax benefit from a
deduction since they are already tax-exempt), the
Act imposes UBIT on qualified transportation
fringe benefits (and on-premises athletic facilities)
provided by charities and other tax-exempt
employers. Covered transportation benefits, such
as transit checks or passes provided as a nontaxable
fringe benefit to an organization’s employees,
including those paid for by the employee out of pre-
tax dollars, are deemed to generate income subject
to UBIT for the organization. For charities in New
York and other large cities that require employers to
2
provide commuter benefits like these, it is a source
of consternation that such programs are now a
source of UBIT, and cannot, by law, be eliminated.
The incursion of UBIT into transportation
benefits has been criticized not only for its
cost to charities, but also because it may force
thousands of organizations to start filing IRS
Form 990-T—the form for reporting unrelated
business taxable income—for the first time. A bill
has been introduced in Congress to repeal this
controversial provision.
New excise taxes
The Act imposes a 21 percent excise tax on a
tax-exempt organization to the extent it pays
compensation (including certain severance
payments) in excess of $1 million to an employee
who is one of its five highest-compensated
employees (“covered employees”). The $1 million
threshold amount is not indexed for inflation. Once
a covered employee, an employee continues to be a
covered employee in subsequent years, so that over
time, a charity could have more than five covered
employees. Compensation covered under this rule
includes amounts as to which there is no substantial
risk of forfeiture, and includes remuneration paid
by a related organization. However, payments
to licensed medical professionals for providing
medical or veterinary services specifically are
excluded. This provision is separate from the
“intermediate sanctions” tax (also known as the tax
on “excess benefit transactions”) imposed under
Section 4958 of the Internal Revenue Code (the
Code), and it applies even if the compensation is
reasonable for Section 4958 purposes. In 2015,
more than 2,700 nonprofit employees (including
those at health care systems) earned more than
$1 million.
This provision apparently was intended to
increase parity between for-profits and nonprofits
in light of the Act’s modification of Code Section
162(m)—a modification that eliminated the ability
Professional Notes
of publicly traded companies to deduct any
compensation in excess of $1 million. (Prior law had
permitted such a deduction, but only if the excess
compensation was performance-based.)
The Act imposes a 1.4 percent excise tax on
net investment income—a so-called endowment
tax—of private colleges and universities with at least
500 full-time, tuition-paying students and at least
$500,000 in investment assets per student. The
assets and net investment income of certain “related
organizations” are also taken into account for the
purposes of this rule, but assets used in carrying
out the institution’s educational purposes (e.g.,
classroom buildings and dormitories) are excluded.
The endowment tax applies only to schools with
more than 50 percent of their students in the
United States. IRS Notice 2018-55, also published
in August, outlined proposed regulations dealing
with such topics as the manner of determining the
basis used to calculate gains, the treatment of loss
carryforwards, and the allocation of losses across
multiple related organizations. Some commentators
have suggested that the endowment tax may reflect
Congressional hostility toward endowments in
general and toward large endowed colleges and
universities in particular. Many are concerned
that the provision is a first step toward taxing
investment income of all charities.
Charitable contribution
deductions
Despite a number of new deduction limitations
under the Act, the income tax charitable
deduction remains intact. It even allows charitable
contributions of cash to a public charity to be
deducted up to 60 percent of the donor’s adjusted
gross income (AGI), instead of the prior 50 percent
threshold. Even so, this modification is unlikely
to change an enduring fact of charitable giving:
that gifts of appreciated stock are often the most
tax-efficient choice, despite a lower deductibility
threshold (up to 30 percent of AGI). This is because
nycommunitytrust.org
these gifts can be deducted at fair market value
without requiring the donor to recognize the
inherent gain. In calculating the charitable income
tax deduction, gifts of cash are applied first, so a
donor who gives charity 60 percent of his or her
AGI in cash, and another 10 percent in stock, will
be able to deduct only the cash contribution in the
current year; the deduction for the stock gift will be
carried forward.
The IRA “charitable rollover” also remains
intact. This provision permits a donor who is at
least 701/2 years old to contribute up to $100,000
to qualified charities from an IRA. Instead of a
charitable deduction for the gift, the individual
excludes the amount of the rollover from his or her
taxable income.
The Act repeals a rule that allowed taxpayers Some
to deduct 80 percent of a contribution made for the
commentators
right to purchase tickets for college and university
have suggested
athletic events; the actual purchase of tickets was
that the
never treated as a charitable contribution. This
“safe harbor,” which had been in the law since the endowment
1980s, simplified charitable giving for college and tax may reflect
university donors. Taking it away means that a Congressional
donor will be unable to deduct any portion of a gift hostility toward
that qualifies him or her to purchase athletic tickets. endowments.
This, in turn, means that colleges and universities
will be examining the system under which donors’
charitable gifts are taken into account in order to
create ticket-buying eligibility.
Previously, the basis limitation rule of Code
Section 704(d) did not limit a partner’s deduction
of his or her share of the partnership’s charitable
contribution; under the Act, the basis limitations
of Section 704(d) now limit a partner’s ability to
deduct the partner’s pro rata share of partnership
contributions. With respect to charitable
contributions of property by partnerships, the
Act provides that where the fair market value of
property contributed to charity by the partnership
exceeds the partnership’s adjusted tax basis in
the asset, the partner only needs to reduce his or
3
Professional Notes
her basis for purposes of calculating the amount
of loss allowed under Code Section 704(d) by the
partnership’s basis in the contributed property (and
not its full fair market value). The amendment of
Section 704(d) may discourage charitable gifts by
entities taxed as partnerships.
Estate and gift taxes
The basic exclusion amount for the estate and gift
tax unified credit and for the generation-skipping
transfer tax exemption has been doubled to
$10 million for individuals who are U.S. citizens,
indexed for inflation. In 2018, this equates to
$11.18 million for an individual and $22.36 million
for a married couple. The exclusion is scheduled
to revert back to $5 million, indexed for inflation,
after 2025. Under the Act, the maximum estate and
gift tax rate remains at 40 percent. Researchers
estimate that less than 0.1 percent of estates will be
subject to estate tax this year.
The Act authorized the Treasury to issue
regulations to address any difference between
the basic exclusion amount at the time of an
individual’s death and the basic exclusion amount
in effect at the time gifts were made. It is generally
understood that this is intended to address
situations where a gift within the exclusion amount
is made before the end of 2025, but the donor dies
after 2025, when the estate tax exclusion amount
has decreased.
The annual exclusion amount for gifts increased
to $15,000 in 2018, and this amount will continue
to be indexed for inflation.
It remains to be seen whether and to what
extent the increased floor for taxable estates will
impact bequests to charity, but in the past such
changes have produced a shift in giving patterns. In
2010, when the estate tax was temporarily repealed,
charitable bequests reportedly decreased 37 percent
from the prior year.
Items not included in the Act
A number of provisions under consideration in
2017 were not included in the final bill. There had
It remains to be
been much discussion of repealing the Johnson
seen whether
Amendment, which prohibits charities, including
churches, from political campaign activity—e.g.,
and to what
supporting or opposing a candidate for political extent the
office. The Act did not address this provision, increased floor
leaving the prohibition intact. Many commentators for taxable
believe the prohibition serves to protect charities estates will
from taking positions at the behest of or influenced impact bequests
by substantial contributors.
to charity, but
A much-discussed proposal to change the excise
in the past such
tax on private foundations to a flat 1.4 percent tax
of net investment income, instead of the current
changes have
scheme of either a 2 percent or 1 percent tax, also produced a
was not included in the Act. The 1.4 percent rate shift in giving
was adopted in connection with the endowment tax patterns.
on colleges and universities, discussed earlier.
Also not making it into the Act was a
proposed repeal of the “rebuttable presumption
of reasonableness” with respect to Section 4958
“excess benefit transactions”—that is, the ability
of charities and social welfare organizations
to claim that a compensation arrangement
is presumptively reasonable because of the
procedure followed by the organization in
connection with approving the arrangement.
Conclusion
According to the Chronicle of Higher Education,
58 presidents of private colleges and universities
earned more than $1 million in 2015, and the
number has only increased since then. The loss of
the 80-20 deduction rule for payments that give
the donor the right to buy college athletic tickets
will have an adverse impact only on colleges and
universities, and the same is true for the new excise
tax on the endowment income of some colleges and
universities. Taken together, these changes mean
that higher education is probably the charitable
sector’s biggest loser under the Act.
Fall 2018 4
Professional Notes
Yet colleges and universities are not alone. The
Act seems likely to negatively impact charities of all
types and sizes—whether due to reduced charitable
giving (resulting from the increased standard
deduction and the increased amount of the
exclusion from gift and estate tax) or as employers
taxed on qualified transportation fringe benefits and
certain compensation over the $1 million threshold.
The reduced UBIT rate may provide offsetting relief
for some organizations, but for many charities, the
bulk (or all) of their unrelated income otherwise
is not taxable anyway—either because they don’t
have net UBIT or because the income is passive
investment income.
The Act may be seen as one of many recent
developments that have increased the strain on
the nation’s charitable resources. It also may be a
harbinger of more challenges to come. Fortunately,
some of the most important philanthropic tools—
such as the IRA charitable rollover and the ability
to donate appreciated assets without triggering
realization of taxable capital gain—remain intact.
Philanthropy still has tax advantages for the savvy
giver—and the need for philanthropy may be greater
than ever.
5
For further reference, see:
IRC Section 132(f). Qualified transportation fringe
benefits.
IRC Section 199A. Qualified business income
deduction.
IRC Section 512(a)(6). Calculation of UBIT on
separate basis.
IRC Section 512(a)(7). UBTI increased by certain
fringe benefit expenses.
IRC Section 704(d). Deduction of partnership
charitable contributions.
IRC Section 2010(c)(3). Basic estate, gift, and
generation-skipping tax exclusion amount.
IRC Section 4960. Excise tax on excess
compensation.
IRS Notice 2018-55, www.irs.gov/pub/irs-
drop/n-18-55.pdf.
IRS Notice 2018-67, www.irs.gov/pub/irs-
drop/n-18-67.pdf.
NYC Affordable Transit Act, NYC Administrative
Code § 20-926.
NYS Assembly bill A9658 and NYS Senate bill
S7820. Proposal to increase NYS basic exclusion
amount to $11.2 million.
H.R. 6037, the Nonprofits Support Act. Proposal
to eliminate the new requirements for treating
certain fringe benefits as activities subject to
UBIT.
S. Kapur, GOP Plan to Kill Estate Tax Sets Up
Charitable Giving Conflict, www.bloomberg.
com/news/articles/2017-08-25/gop-plan-to-kill-
estate-tax-sets-up-charitable-giving-conflict.
 If you think a colleague would like to receive complimentary copies of Professional Notes, or
if you’d like past issues, e-mail us at aja@nyct-cfi.org. For a list of past issues of Professional Notes,
published by The New York Community Trust, see nycommunitytrust.org.

2018 SERIES
Summary of the Tax Cuts and Jobs Act (Spring)
Impact of Recent Tax Reform on Individuals (Summer)
Impact of Recent Tax Reform on Charities (Fall)
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