Not-for-Profits & the Tax Cuts and Jobs Act of 2017

January 02, 2019

The new federal tax law that went into effect at the beginning of this year, the “Tax Cuts and Jobs Act of 2017” (Tax Act), will affect almost every type of individual and business in the country, and not-for-profit entities are no exception. Although the Tax Act provisions affecting the not-for-profit sector generally did not produce major headlines, these changes are poised to impact not-for-profits in a significant way.

One category of not-for-profit that is certain to feel the influence of the Tax Act is institutions of higher education. The Tax Act imposes a 1.4 percent excise tax on the net investment income of select universities, effective for tax years beginning in 2018. The affected universities are those with more than 500 students (provided that at least half of those students live in the United States), with university assets in excess of $500,000. For these purposes, university assets do not include assets used directly in carrying out the university’s exempt purposes, but do include net investment income and assets of related organizations.

Additionally, the Tax Act imposes an excise tax at the corporate rate (21 percent) on remuneration in excess of one million dollars for the five highest-paid employees at a § 501(c)(3) organization. While all but the largest not-for-profits will skirt this issue—most not-for-profits on Long Island do not have even one employee who is compensated that highly—many colleges and universities will be unable to avoid it. Furthermore, because the period to qualify as a covered employee began in tax years beginning in 2017, affected not-for-profits were unable to plan ahead for this cost.

Reprinted with permission from Nassau Lawyer, Vol. 68, No. 4, A Long Island Business News publication. 

View the PDF