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Released late last week, the House Tax Cuts and Jobs Act includes several provisions of interest to the exempt organization community, including independent schools. As Nonprofit Quarterly states, the proposed legislation "promises 'unprecedented simplicity,' 'fairer taxes,' and 'the beginning of the end of our nation's broken tax code.' Simpler, fairer, and unbroken are, of course, in the eye of the beholder [and may come at a] cost to society or to the ability of charitable nonprofits to advance their missions in communities."
NBOA's business partner RSM, experts in not-for-profit tax issues, summarized the specific provisions in House Bill H.R. 1. While there is no specific mention of K-12 schools in the bill, unlike higher education institutions that are specifically carved into certain provisions, many points will be of particular concern and impact to the independent school community.
Repeals education incentives
Employer-provided educational support offered as a tax-free benefit in the form of continuing education, loan relief or tuition remission is a way of life at most any independent schools as it relates to the overall benefits package offered with employment. Per RSM, "some of the simplification in the education arena saw casualties including the repeal of section 222-tuition deduction, section 135-interest on savings bonds exclusion, section 127-for educational assistance programs and section 117(d) related to qualified tuition reductions (remissions), offered by some educational institutions." Presumably, tuition remission is still allowed, but it may be taxable. The $5,250 tax-free employer-provided education benefit will likely expire, although schools may find alternative solutions with other continuing education as allowed within the stricter provisions.
Substantially modifies housing allowances
Heads of school and other employees who receive housing benefits may soon find that benefit taxable, as the housing exclusion is under particular scrutiny in the bill. Employees making less than $120,000 annually would only be able to exclude up to $50,000 in value from their W-2. "Highly compensated" employees ($120,000 salary in 2017), which would almost certainly include heads of school, would likely be able to exclude little to no housing benefit value from income based on the phase-out schedule above the salary threshold. Per RSM, "this benefit will all but go by the wayside for highly compensated persons, and will be mostly available to those employees who are not highly compensated but may have staff jobs and required to live on or near the premises of the employer/educational institution."
The bill is worded as follows: "Under the provision, the exclusion for housing provided for the convenience of the employer and for employees of educational institutions would be limited to $50,000 ($25,000 for a married individual filing a joint return) and would phase out for highly compensated individuals (income of $120,000 for 2017, as adjusted for inflation) at a rate of one dollar for every two dollars of adjusted gross income earned by the individual beyond the statutory threshold of being highly compensated. The exclusion also would be limited to one residence. The provision would be effective for tax years beginning after 2017."
Taxes certain fringe benefits
In order to level the playing field between for-profit and not-for-profit entities when it comes to recruiting and retaining employees, the House bill proposes that not-for-profit entities be taxed on certain benefits offered to employees. Many independent schools allow employees to use athletic facilities, for example. The provision states, "tax-exempt entities would be taxed on the values of providing their employees with transportation fringe benefits, and on-premises gyms and other athletic facilities, by treating the funds used to pay for such benefits as unrelated business taxable income, thus subjecting the values of those employee benefits to a tax equal to the corporate tax rate. The provision would be effective for amounts paid or incurred after 2017." Clarity is needed, too, about what may be included in the "transportation fringe benefits" bucket.
Tax-exempt financing through private activity bonds
George K. Baum and Company shared a summary from Squire Patton Boggs of the provision in the legislation that eliminates all private activity bonds (PABs), including qualified 501(c)(3) bonds. The firm states that "existing PABs, and PABs issued before December 31, 2017, are safe under the bill. But, the bill doesn't contain a transition rule that grandfathers future current re-fundings of these grandfathered bonds. This means that there could be no current re-fundings (or, of course, advance re-fundings) of existing PABs" and "to be very, very careful not to trigger a reissuance of the bonds." Chuck Procknow of GK Baum advised clients considering new tax-exempt debt issuances to move up their timing to close by year-end, if possible.
Other noteworthy provisions
Adjusted gross income (AGI) limitations for charitable contribution deductions are proposed to increase from 50 percent to 60 percent, which could incentivize donors to give more. However, other restrictions may come in place of this expansion, including the repeal of certain charitable deductions.
The bill also includes provisions that may affect members of the school community (employees, parents, etc.), such as changing the allowed terms related to contributions to and spending from certain educational savings accounts and health savings accounts, and more.
For instance, the bill repeals the exclusion from taxable income of:
up to $5,000 in employer-provided childcare,
up to $13,570 in employer-provided adoption assistance, and
employer-paid or reimbursed moving expenses.
The legislation also repeals the special rule permitting recharacterization of Roth IRA contributions as traditional IRA contributions.
The bill is on a fast timeline to pass from the House to the Senate, where there may be significant edits made. NBOA will continue to follow the development of the Tax Cuts and Jobs Act along with our business partners and industry experts. NBOA is in communication with NAIS as to the impact this Act will have on the independent school community and how our associations can advocate for the best interest of our schools. Additionally, NBOA is working with RSM's Jim Sweeney, national lead, exempt organizations technical tax services, and RSM's Bill Turco, director, not for profit tax services to answer frequently asked questions and offer insights specific to independent schools. Please contact NBOA's director of accounting and tax programs, Jennifer Hillen, at email@example.com wi