House Tax Bill: Summary of Provisions Impacting Tax-Exempt Organizations

On May 22, the House passed a reconciliation package that is heavily focused on tax. The bill will now go to the Senate, and any changes made there must also be agreed to by the House. Based on the Rules Committee update and the manager’s amendment to the bill, there are multiple provisions that impact various types of tax-exempt organizations, which are summarized below.

Provisions that Impact Most Tax-Exempt Entities

Changes to Unrelated Business Taxable Income (“UBTI”)

The bill reinstates the “parking tax,” i.e., the tax on expenses for qualified transportation fringe benefits, which are included in UBTI under the bill. Please see this link for additional information.

In addition, income from scientific research is exempt from tax only if the research is publicly available.

Executive Compensation

The group of individuals covered by the excise tax on compensation above $1 million paid by certain tax-exempt organizations would be expanded to include all employees and former employees of the organization, and not just the top five most highly compensated employees of the organization in the current year and prior years. Please see this link for additional information.

Provisions that Impact Private Foundations

Excise Tax on Net Investment Income

Currently, private foundations are subject to a 1.39 percent excise tax on net investment income. The bill would create a tiered excise tax system based on the foundation’s assets:

Excess Business Holdings

Under current law, private foundations are subject to a tax if the foundation has “excess business holdings.” Under this rule, a foundation may own interest in a business enterprise, but only up to 20 percent of voting stock, or in certain situations, private foundations and disqualified persons may hold a maximum of 35 percent of a company’s voting stock. The foundation is subject to tax for its ownership interest that exceeds these thresholds. Currently, if a company repurchases its voting stock, thereby increasing the percentage of stock owned by the remaining shareholders, a foundation may have excess business holdings as a result, even if the foundation did not acquire any additional stock.

The tax bill allows certain voting stock repurchased by a business enterprise to be considered as outstanding stock when calculating a private foundation’s present and permitted holdings in the business enterprise under the excess business holdings rule. This change would be an exception to the current rule.

Provisions that Impact Charitable Contributions

The bill creates a 1 percent floor for deductions made by corporations, meaning that corporations would have to contribute at least 1 percent, and no more than 10 percent, of their taxable income to charities in order to qualify for a charitable tax deduction. The bill also allows such corporations to carry forward the tax benefit of such contributions, if the deductions are disallowed under this rule, for 5 years.

At the individual level, nonitemizers are currently not eligible for a charitable contribution deduction. However, the tax bill creates a nonitemizer tax deduction up to $150 for individuals and $300 for married couples, regardless of whether the tax filers claim an itemized deduction, not including contributions to donor-advised funds.

In addition, the bill provides a nonrefundable tax credit that will not exceed the greater of $5,000 or 10 percent of the taxpayer’s adjusted gross income for contributions made to organizations granting scholarships to private or religious elementary and secondary schools, regardless of whether the taxpayer itemizes.

Provisions that Impact Colleges and Universities

Instead of the existing flat 1.4 percent excise tax rate that applies to colleges’ and universities’ endowment income, the bill establishes a four-tiered rate structure based on a school’s “student adjusted endowment” (a new term that effectively equals the school’s investment assets per eligible student), with larger per-student endowments subject to a higher rate of tax.

Next Steps

The next steps are as follows:

• The bill will head to the Senate where it will undergo a similar markup process as it underwent in the House, likely during the month of June.
• Once the Senate passes its own version of the budget reconciliation bill (including the tax provisions), the House and Senate will need to reconcile their differences.
• The House and Senate will separately vote on and pass the reconciled version.
• Congress will send the bill to President Trump for signature. The Administration is urging Congress to send the bill before its Independence Day recess, which is scheduled to begin on June 27. Congress will return for just three weeks of session before its month-long summer recess begins on July 24.

If you have any questions concerning the material discussed in this client alert, please contact the members of our Tax practice.