Tax Reform and Nonprofits: The Law Formerly Known as the Tax Cuts and Jobs Act

Today, US President Donald Trump signed H.R. 1, enacting fundamental changes to the US tax law that affect all sectors of the economy, including nonprofits. 

Earlier this week, the US House of Representatives and the US Senate passed the long-awaited conference version of H.R. 1 (the “Act”), which merged, with revisions, the respective House and Senate tax reform bills.[1] Key highlights of the Act, signed into law by President Trump on December 22, 2017, are as follows.

Charitable Giving and Charitable Financing

Executive Compensation

Colleges and Universities

Unrelated Business Income Tax (UBIT) and Other Issues

What Is No Longer in the Act

The Act no longer includes some provisions affecting nonprofits that either the House or Senate bill contained. These provisions included the repeal of estate and generation-skipping taxes, the elimination of private activity bonds, the simplification of the private foundation tax on net investment income, the exception for independently operated philanthropic business holdings from the private foundation tax on excess business holdings, requirements on art museums seeking to qualify as private operating foundations, reporting requirements applicable to the sponsoring organizations of donor-advised funds, the special exception under the “Johnson Amendment” permitting Section 501(c)(3) organizations to make political statements under certain circumstances, the repeal of above-the-line deductions for certain educational expenses and exclusions of certain educational expenses, the inclusion of inflation in the calculation of the charitable mileage rate, the applicability of UBIT to Section 115 government-sponsored entities, the modification to the UBIT exception for fundamental research organizations, and, for a hot second, the ability to deduct tuition paid for religious instruction.

Will We See Technical Corrections Any Time Soon?

A technical corrections bill is highly unlikely for a number of reasons. First, technical corrections legislation is a very special procedure which is not “scored” by the Joint Committee on Taxation. The purpose of technical corrections is to bring the text of the statute into accord with the legislative intent of Congress. The original revenue estimate captured the intent of Congress, so technical corrections cannot, by definition, raise or lose additional revenue.

This has two implications. First, this means that technical corrections cannot be passed under budget reconciliation because provisions that do not affect federal revenues are not germane to the budget under the Byrd rule. As a result, a technical correction would require 60 votes in the Senate regardless. Second, technical corrections require unanimous consent by both the majority and minority staffs of the House Committee on Ways and Means and the Senate Finance Committee. If anyone disagrees about the legislative intent of a provision and whether the statute reflects that intent, then the provision is not a technical correction but, rather, a change in policy. Given the polarized environment, it is unlikely that we’ll see a long list of bona fide technical corrections.

[1] The full title of the Act is “an Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018.” The House and Senate bills had been known by their short titles, the “Tax Cuts and Jobs Act.” The short title of the Act, however, was struck by the Senate Parliamentarian for failure to satisfy the Byrd rule as germane to the budget.

[2] The 2018 top marginal tax rate for individuals with income over $500,000 and married taxpayers filed jointly with income over $600,000 is 37%, a reduction from the 2017 rate of 39.6% applicable to individuals with income over $418,400 and married taxpayers filing jointly with income over $470,700.

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National Law Review, Volumess VII, Number 356