“ASAE opposes any increased or additional federal income tax burden on associations. ASAE supports the “relatedness test” — continuation of the present system for determining areas of tax-exempt organization activity that are taxable because they are not related to the purposes for which exempt status was granted. Association activities, which benefit not only association members but also the entire United States economy and society, include education, publications, government affairs, conventions, trade shows, standards-setting, credentialing, research, joint marketing, charitable and community service, and other products and services. Any new tax for associations would threaten those activities and might require replacement of the programs by tax-supported government programs.” – ASAE Board Approved Position Statement #5a
In December 2017, congressional Republicans passed, and President Trump signed into law, the most sweeping overhaul of the tax code since 1986. Most changes take effect for the 2018 tax year.
Throughout the legislative process, ASAE and many other associations opposed a number of provisions that were stripped from the final bill. And, as expected with any issue as complex as tax reform, the law includes a few provisions that associations and other tax-exempt organizations need to be aware of.
Provisions Stripped from Final Bill
Taxation of royalty income. This provision was in the original Senate bill but was removed after opposition from ASAE and hundreds of other associations. ASAE and others contended that royalties should not be taxed when the organization has entered into a licensing arrangement for use of its name or logo but is not actively involved in the marketing or administration of the product or service connected with the arrangement.
Royalties are a significant source of nondues revenue or noncontributed revenue that can be reinvested in education, skills training, standard setting, research, and other activities critical to the mission of a tax-exempt entity. Thanks to our community’s collective advocacy work, passive income from royalties will not be subject to unrelated business income tax (UBIT).
Nonqualified deferred-compensation plans. This provision, originally included in both the House and Senate bills, would have eliminated so-called 457 plans for associations and other nonprofit employers. ASAE and others made the case that these deferred-compensation arrangements are offered to many employees of tax-exempt organizations as a means of supplementing their retirement income. Since nonprofit employers can’t offer performance stock options to key employees, 457 plans are an important benefit that assists in attracting top talent.
Intermediate sanctions. This provision was originally in the Senate bill. It would have applied intermediate sanction rules to 501(c)(6) groups and eliminated the “presumption of reasonableness” for nonprofit organizations that practice due diligence in setting compensation arrangements. ASAE and others argued that this proposal would have given the IRS the power to determine what constitutes an excess benefit transaction and would have removed the safe harbor for nonprofit organizations that follow reasonable, responsible processes for determining compensation—including review by a governing body or committee, use of appropriate comparability data, and adequate documentation supporting the decision on compensation at the time it was made.
Noteworthy Provisions Included in the Final Bill
Excise tax on executive compensation. Associations and other tax-exempt organizations will be subject to a 21 percent excise tax on executive compensation over $1 million paid to the five top-earning executives. Compensation includes salary and the cash value of most benefits, including those that have vested but haven’t been received yet by the executive. Compensation also includes payments contingent on the executive’s separation that are at least three times the executive’s base compensation—also known as “parachute payments.” ASAE will continue to press for a grandfather clause on existing contracts and employment agreements for tax-exempt entities, as was given to for-profit corporations in the bill. Alternatively, ASAE will pursue a phase-in period for the excise tax.
Separate computation of UBIT. This provision requires that unrelated business taxable income be separately computed for each business activity. In other words, associations are prevented from offsetting income from one business with losses from another business. ASAE believes a sensible work-around on this provision is to route UBIT activity through a for-profit subsidiary that can net the profits and losses of each business. ASAE will provide additional guidance in this area for organizations that do not have a for-profit subsidiary.
Fringe expenses. The bill subjects tax-exempt organizations to UBIT on the value of certain employee fringe benefits, including transportation, parking, and on-premises athletic facilities. The bill also stipulates that no deduction is allowed for activities generally considered to be entertainment, amusement, or recreation. ASAE is seeking clarifying language on a provision that eliminates the deductibility of membership dues paid to clubs that are exempt from tax under Internal Revenue Code Section 501(c)(7) or are for-profit entities. We believe this provision is aimed at membership to country clubs or other private clubs and is not intended to affect the deduction of membership dues paid to a trade or professional association, but we prefer to see the language clarified and not left to interpretation by the IRS.
Charitable contributions. The tax bill increases the adjusted gross income (AGI) limit on the charitable contributions deduction from 50 percent to 60 percent for cash gifts. However, the final bill roughly doubles the standard deduction to $12,000 for individuals and $24,000 for couples. With a higher standard deduction, fewer taxpayers will itemize their deductions on their tax returns and therefore won’t receive a benefit for giving to charity, which some charities fear could reduce giving.
Local lobbying expenses. The bill eliminates the deduction for lobbying expenses regarding legislation before local government bodies. As a result, these expenses will need to be included in the calculation of nondeductible membership dues or proxy tax liability.
Johnson Amendment. A provision in the House bill would have effectively repealed the Johnson Amendment, which prohibits churches and other 501(c)(3) groups from participating or intervening in political campaigns. The provision was removed from the final bill because it conflicted with the Senate’s Byrd rule, which prevents reconciliation bills from containing provisions that aren’t fiscal in nature. Efforts to repeal the Johnson Amendment to allow church leaders and others to engage in political speech are expected to continue.
Excise tax on investment income of private colleges and universities. The tax bill imposes a 1.4 percent excise tax on the net investment income of private colleges and universities that have more than 500 full-time-equivalent students and assets of at least $500,000 per full-time-equivalent student.