By: Bonnie Harris Hayden, Esq. and Wendy Santana, CFRE:
Last week, thanks to The Nonprofit Partnership in Long Beach, we had a chance to hear Brian Yacker, JD/CPA of YH Advisors talk about some of the ways the new tax laws will, directly and indirectly, affect non-profit organizations (NPO’s).
During the two-hour session, we gleaned three core acknowledgments, six key lessons, and four imperative actions every NPO in California needs to ensure it is taking.
Three core acknowledgments:
First, the new laws are not so much about tax reform as they are a “redistribution of taxes” away from for-profit corporations and certain flow-through entities, carried on the backs of NPO’s.
Second, the IRS administers the laws that Congress enacts. So, if we don’t like the new laws, we (NPO’s) should vocalize it with our Congress members rather than the IRS.
Third, the new tax laws have generated a whirlwind of confusion and uncertainty (especially in the near term) for both NPO’s and the IRS.
Six key things we learned:
First, of the four ways that revenue is reported (contributions, programs, unrelated income subject to tax and unrelated income not subject to tax), NPO’s need to further scrutinize how they are recording their unrelated income not subject to tax. More than ever before, this will be a high priority for the IRS and one of the first areas they will review for closer examination and/or audit.
Second, a seemingly beneficial element of the new law for NPO’s is the lowering of the rate of tax on unrelated income from 35% to 21%. However, the 21% is a flat rate. Previously there was a graduated bracket that started at 15% for up to $50,000 of unrelated business income. So now, most of the smaller NPO’s that were liable for the unrelated business income tax at a tax rate of 15% will see such increased to 21% (in effect, a significant tax hike).
Third, due to the enactment of a new provision in the Internal Revenue Code [Section 512(a)(6)], losses from an unrelated business will now be solely “siloed” with the income from the very same activity. This means that rather than combining the unrelated business income and losses from different unrelated activities (as was permitted through December 31, 2017), NPO’s will now need to separately track their income and expense for each separate unrelated activity which they are conducting. Not only will this create an additional administrative burden for NPO’s, it will ultimately result in more taxes being paid by NPO’s conducting more than one separate unrelated activity.
Fourth, another new provision of the Internal Revenue Code [Section 512(a)(7)] imposes an unrelated business tax on many NPO’s for expenditures for their employees that are considered “fringe benefits.” For instance, if an NPO provides paid parking or transportation/commuter passes to their employees, this will now be taxed as unrelated business income. Yes, we wrote that right. CERTAIN FRINGE BENEFITS PROVIDED BY NPO’s TO ITS EMPLOYEES WILL NOW BE TAXED AS UNRELATED BUSINESS INCOME – so an expense, and not income, will now be subject to the unrelated business income tax.
Fifth, an estimated $20 billion less will be contributed to NPO’s by individuals annually because of changes to the itemized deduction threshold. This is the predicted result of the individual standard deduction being almost doubled and thus reducing the number of individuals annually itemizing their deductions from 30% to 6% in 2018.
Other personal deductions that may affect charitable giving are:
- Starting in 2018, individual deductions for property tax, state and local income tax and sales tax cannot exceed $10,000 in aggregate.
- No increase in annual adjusted gross income limitations (30%) when highly appreciated assets subject to capital gains tax are contributed.
- Some planning advice to pass along to donors who are close to, but do not reach the new standardized deduction amount is for them to save up (“bunch”) and make their charitable donations every other year so that they are large enough (possibly doubled) to help the individual exceed the increased standardized deduction amount.
Sixth, the estate tax exemption amount was increased from $5.6 million (per individual) to $11.2 million (per individual). It is estimated that this will result in an annual decrease of $5 billion being donated to NPO’s. This is because many individuals with large estates will now not need to incorporate charitable giving into their estate tax planning because of the increased exemption amount.
Four imperative actions every NPO in California needs to ensure it is taking:
First, raffles – make sure to register such with the CA Attorney General before conducting – and report results afterward.
Second, if gross receipts exceed $2 million in a year, a charitable organization likely will need to have their financials audited (within nine months of year-end) by an independent CPA.
Third, once every two years, a “Statement of Information” Form SI 100 needs to be filed with the CA Secretary of State. This costs $20.
Fourth, make sure staff and Board members submit receipts for any expenses over $75. If they do not have receipts for these transactions, certain expenditures could be considered an excess benefit transaction – and this could cause the NPO’s nonprofit status to be revoked.
For More Information Contact…
Brian Yacker, Managing Partner
YH Advisors, Inc.
310-982-2803 (direct) ∙ 310-266-7196 (cell) ∙ firstname.lastname@example.org
One Pacific Plaza ∙7755 Center Avenue, #1225 ∙ Huntington Beach, CA 92647