Thursday, November 16, 2017
The Tax Reform Moving Target: The Shrinking Charitable Contribution Deduction (+ Slamming Rich (Private) Universities)
Given the uncertainty regarding whether Congress will enact tax reform, much less what will be in it, trying to analyze how it could affect charities and other tax-exempt nonprofits is probably a lost cause. But there are at least two aspects of the current proposals that are worth consideration, if only because they likely will resurface even if Congress does not enact them this time around.
Overall Changes Will Shrink the Charitable Contribution Deduction: Despite all the uncertainty, certain overall changes have remained constant: sharply increasing the standard deduction, lowering tax rates for at least some taxpayers, and reducing or repealing the estate tax. All of these changes will reduce or eliminate the importance of the charitable contribution deduction for many taxpayers and so reduce the incentives for charitable giving. How much? No one knows for sure, although the Indiana University Lilly Family School of Philanthropy made some estimates last May and the Tax Policy Center of the Urban Institute and Brookings Institution has made a more recent reduced giving estimate of between $12 billion and $20 billion in 2018 giving based on the House bill).
Today's Bad Guys: Rich (Private) Universities: Several provisions that provide modest revenues are targeted at wealthy colleges and universities, including a small investment income tax on large (relative to student population) endowments. In addition, several more general provisions would hit colleges and universities particularly hard, including the elimination of tax-exempt bonds as a source of financing for tax-exempt charities, an excise tax on compensation over $1 million paid by tax-exempt entities, and the repeal of many education-related tax benefits. It appears, however, that some of these provisions do not reach public colleges and universities, specifically the endowment investment income tax and the tax-exempt bond financing provisions. If not rectified, these differences would give public colleges and universities an advantage over their private counterparts, although how significant and advantage is unclear. For more, see the National Association of College and University Business Officers (NACUBO)'s website summarizing and raising concerns about these and other education-related tax reform provisions.