Tax Reform and its Impact on Nonprofit Organizations

The Tax Cuts and Jobs Act of 2017 (the “Act”) has well publicized changes impacting corporate and business taxation and individual taxpayers, including the significant increase in the standard deduction for individuals that could dramatically impact donations received by nonprofit organizations. In addition, the Act also has provisions specific to nonprofit organizations for tax years beginning after December 31, 2017.

Prior to the Act, a nonprofit organization that operates multiple unrelated businesses (UBs) aggregated income from all such activities and subtracted the aggregate of all deductions. So, a loss from one UB could offset the income from another UB.

UBIT Changes From Tax Reform

The Act provides that a nonprofit organization’s unrelated business income for a tax year is the sum of the amounts (can not be less than zero) for each separate UB, less the specific deduction under IRC Sec. 512 (b) (12) (which is $1,000). Consequently, a loss from one UB for a tax year cannot be used to offset the income of another UB for the same tax year.

A loss from a UB can be carried forward and used to offset income from the same UB in a subsequent tax year.  A special transition rule exempts net operating losses incurred in a tax year beginning before January 1, 2018, from the separate UB rule.

Organizations will have to track income and expenses by each UB rather than in total for all UBs.

A new 21% excise tax on nonprofit organizations that pay excessive compensation to top executives is also included in the Act. The excise tax is imposed on organizations that pay compensation of $1 million or more to any of their five highest paid employees.

If you have any questions on the Act and how it may impact your organization, please contact Gary Dubas, Partner with McKonly & Asbury at gdubas@macpas.com.