The Tax Cuts and Jobs Act enacted in December 2017 marks the most dramatic overhaul to the U.S. income tax code in decades. A number of provisions will have serious operational and tax reporting impacts on nonprofit entities, creating significant challenges for executives serving those organizations.

One of the most highly publicized provisions in the new law is the increased standard deduction for individual taxpayers. While beneficial to donors, the increase in the standard deduction means that filers will have less incentive to contribute, as many will no longer need to itemize their deductions.

Another significant change involves Unrelated Business Income Tax (UBIT) and the calculation of Unrelated Business Taxable Income (UBTI). Prior to tax reform, nonprofits were allowed to offset UBTI gains and losses generated from multiple businesses or investments. This netting process would lower UBTI. The new law disallows the deduction of losses against income from a different business line. This will change both income tax calculations and investment strategies. On the other hand, for organizations subject to UBIT, the corporate income tax rate has decreased from 35% to 21%.

The new law provides that tax-exempt entities will be taxed on the value of certain fringe benefits provided to their employees by treating the funds used to pay for such benefits as UBTI. The benefits include qualified transportation fringe benefits, parking facilities, and onsite athletic facilities.

A new excise tax will be imposed on certain executive compensation. The law creates a class of “covered employees,” consisting of the five highest compensated employees, which includes certain former employees. The tax is imposed at 21% of compensation in excess of $1 million, as well as on “excess parachute payments” paid to these covered employees. The compensation taken into account includes compensation from related organizations. Certain medical professionals are excluded from the definition of a covered employee.

These are some of the major provisions of the new law affecting nonprofits; other provisions may have an impact as well. Our team has extensive experience in providing audit, accounting and tax professional services to the nonprofit industry. For more information on how tax reform may affect your organization, please contact our office at 401-331-0500 and ask to speak to one of our Not-for-Profit specialists.