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Senate Passes Tax Reform Bill

On November 16, the House of Representatives passed an amended version of H.R. 1, the “Tax Cuts and Jobs Act,” by a vote of 227-205 (the “House Bill”). On November 20, 2017, the Senate Finance Committee released the Senate’s proposal for its own version of the bill (the “Senate Proposal”). Our previous alert discussed the impact on tax-exempt organizations of certain provisions of the House Bill and Senate Proposal.

In the early morning of December 2, 2017, the Senate passed an amended version of H.R. 1 by a vote of 51-49 (the “Senate Bill”). The Senate Bill includes several new provisions, and discards other provisions found in the Senate Proposal. Congress will now need to reconcile the House Bill and the Senate Bill in order to create final legislation.

The following is a discussion of the provisions requiring reconciliation (i.e., those provisions that are found in one bill but not in the other, or that appear in different forms in both bills), as well as the provisions found in both the House and Senate Bills. Additionally, we have noted below those provisions that were included in the Senate Proposal but removed from the Senate Bill. All of the below provisions would be effective for taxable years beginning after December 31, 2017, unless otherwise noted.

Provisions Requiring Reconciliation

  1. UBTI Separately Computed for Each Trade or Business (Senate Bill Section 13702; Senate Proposal Section 13703)

As discussed in our prior alert, the Senate Bill would require an exempt organization with more than one unrelated trade or business to compute UBTI separately with respect to each trade or business without regard to the specific deduction allowed under Section 512(b)(12) of the Internal Revenue Code (the “Code”), and the organization’s UBTI for that taxable year would be the sum of the amounts computed separately, less any specific deduction allowed under Code Section 512(b)(12). A net operating loss deduction would be allowed only with respect to the trade or business from which the loss arose (though this restriction would not apply to net operating losses carried over from taxable years beginning before January 1, 2018). Accordingly, it would generally not be possible to use a deduction for one unrelated trade or business to offset income from another unrelated trade or business for the same taxable year. This provision is consistent with the Senate Proposal.

The House Bill does not include a similar provision.

  1. Increase in Standard Deduction (Senate Bill Section 11021; Senate Proposal 11021; House Bill Section 1002) 

The Senate Bill would increase the amount of the standard deduction for individuals for a seven year period (taxable years 2018-2025) to $24,000 for married individuals filing jointly, $18,000 for head of household filers, and $12,000 for all other taxpayers. This is consistent with the Senate Proposal.

The House Bill would increase these amounts as well. Note, however, that the House Bill amounts would be slightly higher than the amounts proposed in the Senate Bill ($24,400 for married individuals filing jointly, $18,300 for head of household filers, and $12,200 for all other taxpayers), and this provision would not sunset.

  1. Political Campaign Intervention by Section 501(c) Organizations (House Bill Section 5201)

The House Bill would permit all Section 501(c)(3) organizations to participate or intervene in political campaigns in a limited manner through “statements” (we assume this term will be broadly construed) that are made in the ordinary course of an organization’s regular and customary activities in carrying out its exempt purpose and that result in the organization incurring not more than de minimis incremental expenses. This provision would be effective for tax years beginning after December 31, 2018, but it would be revoked for tax years beginning after December 31, 2023.

The Senate Bill does not include a similar provision.

  1. Excise Tax on Private Foundations (House Bill Section 5101)

The House Bill would replace the current private foundation net investment income excise tax structure with a flat 1.4% excise tax on private foundations’ annual net investment income (regardless of their charitable expenditures during the year), and the current rules providing for the reduction in the excise tax rate from 2% to 1% would be repealed.

The Senate Bill does not include a similar provision.

  1. Excise Tax on Private Colleges and Universities (Senate Bill Section 13701; Senate Proposal Section 13701; House Bill Section 5103)

The Senate Bill would impose an annual net investment income excise tax of 1.4% (similar to the excise tax currently applicable to private foundations) on applicable educational institutions (generally, private colleges and universities with more than 500 tuition-paying students per taxable year with at least $500,000 in assets per student, other than those assets which are used directly in carrying out the institution’s exempt purpose). This differs from the Senate Proposal, which used an asset floor of $250,000 in assets per student to define applicable educational institutions. Additionally, the Senate Bill would only apply the excise tax to those colleges and universities that participated in and received federal student financial aid funding through a program under Title IV of the Higher Education Act of 1965 during the preceding taxable year. This limitation was not in the Senate Proposal.

As discussed in our previous alert, the Senate Proposal would treat the assets and net investment income of any related organization as the assets and net investment income of the applicable educational institution. This is unchanged in the Senate Bill.

The House Bill contains a similar excise tax provision, but uses a lower asset floor for defining applicable educational institutions ($250,000 in assets per student), and does not require that educational institutions must receive federal financial aid funds to be subject to the excise tax.

  1. Elimination of Education/Tuition Assistance Provisions (House Bill Section 1204)

The House Bill would eliminate two forms of tax-free employer-provided education/tuition assistance under current law: (a) employer-provided educational assistance programs (under Code Section 127) of up to $5,250 per year per employee, and (b) qualified tuition reductions (under Code Section 117(d)) provided by educational institutions (i.e., schools and universities) to their employees and employee dependents to pay for primary, secondary, high school, or undergraduate education at eligible educational institutions.

The Senate Bill does not include a similar provision.

  1. Repeal of Alternative Gift Substantiation Exception (Senate Bill Section 13704)

The Senate Bill would repeal Code Section 170(f)(8)(D), which provides a substantiation exception in the case of charitable contributions reported by donee organizations. Under current law, in order for a donor to claim a deduction for a charitable contribution of $250 or more, the donor must substantiate his or her contribution with a contemporaneous written acknowledgement from the donee organization, except where the organization files a return with the Internal Revenue Service that substantiates the deduction. This exception would be repealed for taxable years beginning after December 31, 2016.

Neither the Senate Proposal nor the House Bill includes a similar provision, although a similar provision was included as Section 1306 of the initially proposed version of the House Bill (see our prior alert for more information).

  1. Addition of Excess Business Holdings Tax Exception for Private Foundations (Senate Proposal Section 13706; House Bill Section 5104)

As discussed in our prior alert, both the House Bill and the Senate Proposal included a provision excluding from the definition of excess business holdings a private foundation’s ownership of certain “independently operated philanthropic businesses.” A business would qualify as such if (1) the foundation owns 100% of the voting stock of the business at all times during the taxable year, and acquired such stock other than by purchase, (2) the business distributes all of its net operating income to the foundation within 120 days of the end of the taxable year, and (3) the business demonstrates that it is independently operated.

The Senate Bill does not include this provision.

Provisions Found in Both the House and Senate Bills

  1. Excise Tax on Excess Executive Compensation (Senate Bill Section 13602; House Bill Section 3802)

As discussed in our previous alert, the House Bill and Senate Bill both include a proposed 20% excise tax on excess tax-exempt organization executive compensation.

Provisions Found Only in Senate Proposal and Removed from Senate Bill

  1. Name and Logo Royalties Treated as UBTI (Senate Proposal Section 13702)

Under the Senate Proposal, this provision would have amended Code Sections 512 and 513 to subject royalty income derived from the licensing of any name or logo of an organization (including any trademark or copyright relating to such name or logo) to unrelated business income tax (“UBIT”). It would also have repealed the exclusion of royalties or other income derived from any licensing of a name or logo of the organization from unrelated business taxable income (“UBTI”).

However, this provision was not included in the Senate Bill.  The House Bill also does not include a similar provision.

  1. Modification of Taxes on Excess Benefit Transactions (Intermediate Sanctions) (Senate Proposal Section 13705)

Under the Senate Proposal, the intermediate sanctions rules found in Section 4958 of the Code would have been significantly revised. More information about these proposed revisions can be found in our prior alert.

The Senate Bill does not include these provisions, nor does the House Bill.

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We will continue to provide updates as the two chambers move toward reconciliation.