Following the release of the "Tax Cuts and Jobs Act," Cadwalader attorneys summarized provisions that could potentially affect not-for-profit, tax-exempt organizations. Previous Cadwalader memorandums identified significant (i) business provisions and (ii) provisions that affect securitization vehicles and investment funds.

The attorneys analyzed the following provisions and their potential effects, which are explained more fully in the memorandum:

Changes to the Excise Tax Regime

  • A simplified 1.4% private foundation excise tax on investment income. Currently, private foundations are subject to a 2% excise tax on net investment income (lowered to 1% in certain circumstances).
  • A 1.4% excise tax on net investment income of certain private colleges and universities. Currently, public charities are not subject to an excise tax on net investment income.
  • An exception from the private foundation excess business holding tax (10% tax on the value of interests in a for-profit business that exceed 20%) for private foundations that meet certain criteria.
  • A requirement that art museums be open to the public for at least 1,000 hours during the tax year to qualify for exemption from the 30% excise tax for failing to meet minimum income distribution requirements.

Compensation-Related Changes

  • A 20% excise tax on tax-exempt organizations that pay in excess of $1 million to any of their five highest-paid employees.

Unrelated Business Income Tax

  • The Bill would subject tax-exempt organizations to an unrelated business income tax on the value of certain fringe benefits, and would clarify that all entities exempt from tax under IRC Section 501(a) are subject to the unrelated business income tax rules.
  • A limitation to the exclusion from the unrelated business income tax for research income.

Changes to Tax-Exempt Bonds

  • A repeal of the tax exemption for interest paid on private activity bonds and advance refundings.
  • The repeal of rules related to tax credit bonds.
  • A ban on using tax-exempt bonds to finance professional sports stadiums.

Other Changes

  • An increase of the adjusted gross income limitation on charitable contributions from 50% to 60%.
  • Approximately double the standard deduction and double the estate tax exemption (with a total repeal of the estate tax beginning after 2023).
  • An allowance for Section 501(c)(3) organizations to make political statements.

The memorandum was authored by Jean Bertrand, Pamela Landman, Brian McGovern, Paul Mourning, Sejin Park and Linda Swartz.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.