Summary of Key Policy Items in Comprehensive Tax Reform
As of February 6, 2018
Throughout the process of tax reform being debated and now officially signed into law, the League has been tracking a broad range of provisions that can impact the capacity of orchestras and other nonprofit organizations to serve their communities. Please see the list below, which we will continue to update as implementation begins and details become better understood. And, although the tax bill has been signed, there are always new opportunities to address certain provisions, so remember that you can weigh in on any of these policy matters through a customized message to your members of Congress via the League’s online advocacy campaign.
- Giving expected to decline among growing ranks of non-itemizers: While the charitable deduction is preserved for those who itemize their tax returns, the number of itemizers is expected to fall dramatically as the standard deduction is nearly doubled under tax reform. Charitable giving has been projected to decline by up to $13 billion per year if only 5% of taxpayers itemize their returns, prompting advocates to seek a "universal charitable deduction" available to non-itemizers. The House and Senate tax reform bills did not include such a provision to safeguard against potential drops in giving, despite interest in both chambers. Senator James Lankford (R-OK) prepared the Universal Charitable Giving Act for introduction in the Senate, and Rep. Mark Walker (R-NC) introduced the Universal Charitable Giving Act in the U.S. House of Representatives. Senator Debbie Stabenow (D-MI) and Ranking Finance Committee Member Ron Wyden (D-OR) offered an amendment to create a universal charitable deduction as the Senate Finance Committee considered its bill, which was voted down along with all other amendments offered by Minority Committee members. Nonprofit advocates will be looking for opportunities to gain support for a universal charitable deduction beyond the 2017 comprehensive tax reform package.
- For those still itemizing, fewer limits on deductions: For taxpayers who will continue to itemize returns, the limit on the deductible amount of cash contributions is raised from 50% of adjusted gross income to 60%, potentially incentivizing more giving by those who had reached the 50% cap. (Sec. 11023) The new tax laws also repeal the "Pease limitation" through the 2025 tax year, removing certain limits on total itemized deductions for high-income tax payers. (Sec. 11046)
- Estate Tax exemptions doubled: The new law preserves the estate tax, but doubles the amount exempted from taxation from $5 million to $10 million through the 2025 tax year. The $10 million amount will be indexed for inflation occurring after 2011. (Sec 11061)
- Johnson Amendment still protects the non-partisanship of 501(c)(3)s: What started as an effort to allow more political speech by churches was expanded to impact all 501(c)(3) organizations, as the House tax bill would have allowed nonprofits supported by tax-deductible contributions to endorse candidates for office, removing the protection in law (called the Johnson Amendment) that prevents nonprofits from being pressured into partisan activity. The Senate bill did not include such a provision, and the Johnson Amendment is preserved in the tax reform package. Efforts to repeal the Johnson Amendment may re-surface in 2018 in funding or other legislative vehicles.
- UBIT requirements changed: While the tax package does not include previously-considered proposals that would have substantially altered Unrelated Business Income Tax (UBIT) calculations and subjected corporate sponsorships to new UBIT requirements, the new law does make changes in this area. For organizations that operate more than one trade or business, they must calculate net income for each business separately, rather than in aggregate. A loss can only be applied to the tax liability from the business where it occurred. (Sec. 13702) Nonprofits will also be required to pay UBIT on certain transportation fringe benefits to employees, parking, and employee access to on-site gyms and athletic facilities, to be further determined under regulations issued by the IRS. (Sec. 13703)
- Executive compensation subject to excise tax: A 21% excise tax will be applied for compensation exceeding $1,000,000 for any one of an organization's five highest-compensated employees. (Sec. 13602)
- Qualified performing artist tax benefit retained: Performing artists who satisfy three tests are allowed to deduct their expenses “above the line” on their tax returns, which is more advantageous than treating such expenses as itemized deductions. This tax benefit was originally enacted in 1986 and one of the three tests limits their allowable adjusted gross income to no greater than $16,000. While the House bill had suggested eliminating this deduction, the final tax reform package retains it.
- Unreimbursed employee expenses deduction eliminated: Across all occupations, the tax reform package eliminated the opportunity to deduct unreimbursed employee business expenses that exceed 2% of adjusted gross income. For musicians who are employees, this means that the costs of supplies, instruments, professional dues, and other expenses essential to employment are no longer tax-deductible.
- Entertainment expense deduction repealed: Along with the elimination of a number of business-related deductions, no deduction will be allowed for entertainment, amusement, or recreational activities. (Sec. 13304)
- Artists’ low-income housing tax credits preserved: While the House bill did not make changes in this area, a last-minute amendment to the Senate tax reform bill would have removed current access to tax credits for building low-income housing for artists. The tax credit is preserved in the final tax reform package.
- Private activity bonds preserved: Nonprofits have used tax-exempt private activity bonds to obtain lower-cost financing for projects that provide a benefit to the public. While the House bill proposed to eliminate private activity bonds, the final law preserves them.
- Historic preservation tax credit in place: While the House proposed to repeal tax credits that help to support the preservation of historic buildings, the final tax reform package retains the credit and require the credit to be taken over the course of five years. (Sec. 13402)
- Artist Fair Market Deduction omitted: The new tax law does not include a provision long-sought by arts advocates that would allow composers and other artists to take a fair market value deduction when contributing their works to charitable collecting institutions.
- Musical works still treated as capital property: While the House bill originally eliminated a provision in current law that allows a taxpayer to treat the sale or exchange of a musical composition or a copyright for their own musical work as a capital gain or loss, the provision was restored during House committee consideration. The final tax package will not change this provision of tax law.