Congressional Republicans yesterday passed the most sweeping overhaul of the tax code since 1986, delivering a much-needed legislative victory to the GOP and President Trump before the holidays.
The plan cuts the corporate tax rate dramatically and will lower taxes for the vast majority of American families in 2018, though critics have pointed out that the wealthy will benefit more than the middle class or lower-income taxpayers. Also, many of the individual tax breaks are set to expire in the coming years unless Congress intervenes to extend them, while the corporate tax breaks are permanent.
Still, Republicans were jubilant to have pulled off a significant overhaul of the tax system which they say will trigger economic growth and job creation and lower taxes for the vast majority of Americans.
“This is one of the most important pieces of legislation Congress has passed in decades,” said Speaker Paul Ryan (R-WI). “For all those millions of Americans struggling paycheck to paycheck, help is on the way.”
Democrats unanimously oppose the tax bill and have spent the past month pointing out how the legislation disproportionately benefits corporations and the wealthy.
“The wealthy and well-connected will be exploiting the hidden loopholes and giveaways in the GOP tax scam for years to come,” said House Minority Leader Nancy Pelosi (D-CA). “Meanwhile, middle class families pay more and our children get stuck with the bill for an exploding national debt.”
ASAE has been reviewing the legislative text since it was released last Friday night, and the following provisions we have opposed are NOT in the final bill:
Taxation of royalty income. This provision was in the original Senate bill but was removed after opposition from ASAE and hundreds of other associations. Royalties are a significant source of non-dues revenue or non-contributed revenue that can be reinvested in education, skills training, standard-setting, research and other activities critical to the mission of a tax-exempt entity. Thanks to our collective outreach, passive income from royalties will not be subject to UBIT.
Deferred compensation plans. This provision was originally in both the House and Senate bills and would have eliminated 457 plans for associations and other nonprofit employers. It was removed from both bills before passage.
Intermediate sanctions. This provision was originally in the Senate bill and would have applied intermediate sanction rules to 501(c)(6) groups and eliminated the “presumption of reasonableness” for nonprofit organizations that practice due diligence in setting compensation arrangements. It was removed from the Senate bill before passage.
As expected with any issue as sweeping and complex as tax reform, there are still a few issues ASAE was disappointed to see in the final bill. One is the 21 percent excise tax on executive compensation over $1 million. ASAE had sought a transition rule that provides an exception for existing contracts or nonqualified deferred compensation plans for applicable tax-exempt organizations, similar to the amendment for private corporations included during the Senate Finance Committee markup prior to passage. Compensation includes salary and the cash value of most benefits, including those that have vested but haven’t been received yet by the executive. Compensation also includes payments contingent on the executive’s separation that are at least three times the executive’s base compensation – also known as “parachute payments.”
ASAE strongly believes this is an issue of fairness, and if Congress is going to grandfather in existing contractual arrangements for for-profit corporations, then tax-exempt organizations deserve the same treatment. We will continue to make this case with lawmakers. Ways and Means Chairman Kevin Brady has acknowledged there will likely be a need for a technical corrections bill in January to fix any glitches in the tax bill. ASAE will continue to urge Congress to fix this fairness issue and we will update you on the timing of that effort as soon as we can.
There is also a provision in the bill requiring that unrelated business taxable income be separately computed for each business activity. In other words, associations are prevented from offsetting losses from one business with income from another business. ASAE will provide additional guidance in this area to associations.
Lastly, ASAE is seeking clarifying language on a provision that eliminates the deductibility of membership dues paid to clubs which are exempt from tax under Internal Revenue Code Section 501(c)(7) or which are for-profit entities. We believe this provision is not intended to impact the deduction of membership dues paid to a trade or professional association, but we prefer to see the language clarified and not left to interpretation by the IRS.
If you have any specific questions about how the tax bill affects associations, please contact the Public Policy team at email@example.com.