Happy National Day of Prayer!

Issue

Last week, the President’s team issued a one-page framework for tax reform.  How might that affect your institution?

Situation

Saltwater Christian College (SCC) is a private college exempt under Internal Revenue Code section 501(c)(3) and section 170(b)(1)(A)(ii).  They are required to file Form 990 annually.  SCC’s CFO calls and asks, “I keep hearing about major tax reform.  How might this effect SCC?”

We tell them this:

Last week, the Trump Administration released a one-page summary of the “core principles” of their proposal for sweeping tax reform.  A fellow at the Urban Institute pessimistically observed, “First, draft of Reagan tax reform: three-volume 500+ page treatise. First draft of Trump: bullet points.”

To be fair, the proposal, for which some Congressional leaders were consulted, appears to be using the detailed, 1000-page, 2014 “Camp Draft” as a foundational document. Republican leaders said that the summary points would be viewed by Congress as “critical guideposts.” Further, these leaders iterated that they expect 2017 tax reform to be a “months-long overhaul process”.

For business taxpayers:

The business tax rate would decrease from 35% to 15% for corporations, and the top tax rate for pass-through businesses (including LLCs, partnerships, and sole proprietorships) would be reduced from 39.6% to 15%.

There would be a one-time repatriation tax on offshore earnings. The exact percentage of the tax rate is still being negotiated, although a 10% rate has been rumored.

There would be a shift from a worldwide system of taxation (under which a U.S. taxpayer is generally taxed on its worldwide income regardless of where earned) to a territorial system (under which income would generally be taxed in the country where it is earned).

For individual taxpayers:

The current seven individual income tax rates would be reduced to three: 10%, 25%, and 35%. The tax brackets (i.e. income levels at which these rates would apply) have not yet been determined.

The standard deduction would be doubled (it was $12,600 for 2016), with the intended result that fewer taxpayers would itemize. The plan as announced does not address the personal exemption, although the President’s plan presented during the presidential campaign called for it to be eliminated. (For 2016, the married taxpayer standard deduction plus exemptions for a family of four was $28,800).

The alternative minimum tax (AMT) would be repealed.

There would be some sort of tax relief for child and dependent care expenses, although no specifics were provided.

The 3.8% net investment income tax (which was enacted as part of the Affordable Care Act, or Obamacare) would be repealed.

The estate tax would be repealed.

Most “tax breaks” (including “above-the-line” reductions and itemized deductions) would be repealed. Exceptions would be made for certain provisions involving home ownership, charitable giving, and retirement savings.

In Wednesday’s press conference, Secretary Mnuchin, in response to a question from the press, said specifically that the mortgage interest deduction and charitable contribution deduction would be retained.

There is some concern for charities in two areas:

First, the effect on charitable giving could be negative. The combination of doubling the standard deduction (projected to change the percentage of Form 1040 “itemizers” from 33% to 5%), getting rid of all itemized deductions except mortgage interest and charitable contributions, and repealing the estate tax would potentially diminish tax-based charitable giving.

Second, the “Camp Draft” contains several revenue-generating provisions focused on UBIT. These include:

    • Name and logo royalties treated as unrelated business taxable income.
    • Unrelated business taxable income separately computed for each trade or business activity (i.e. no taking losses nor NOL’s of one type of activity against profits from another type of activity).
    • Increased specific deduction from $1,000 to $10,000.
    • Modification of qualified sponsorship payments.
    • Clarification of unrelated business income tax treatment of entities treated as exempt from taxation under section 501(c)(3).
    • Increase (doubling) of information return penalties for late, inaccurate, and/or incomplete returns.

We should continue to diligently pray for the process and to plan based upon details as they become available. More to come.

Rules

From the President’s One-page plan “2017 Tax Reform for Economic Growth and American Jobs:

Goals For Tax Reform

  • Grow the economy and create millions of jobs
  • Simplify our burdensome tax code
  • Provide tax relief to American families – especially middle-income families
  • Lower the business tax rate from one of the highest in the world to one of the lowest

Individual Reform

  • Tax relief for American families, especially middle-income families:
    • Reducing the 7 tax brackets to 3 tax brackets of 10%, 25%, and 35%
    • Doubling the standard deduction
    • Providing tax relief for families with child and dependent care expenses
  • Simplification:
    • Eliminate targeted tax breaks that mainly benefit the wealthiest taxpayers
    • Protect the home ownership and charitable gift tax deductions
    • Repeal the Alternative Minimum Tax
    • Repeal the death tax
  • Repeal the 3.8% Obamacare tax that hits small businesses and investment income

Business Reform

  • 15% business tax rate
  • Territorial tax system to level the playing field for American companies
  • One-time tax on trillions of dollars held overseas
  • Eliminate tax breaks for special interests

Process

  • Throughout the month of May, the Trump Administration will hold a listening session with stakeholders to receive their input and will continue working with the House and Senate to develop the details of a plan that provides massive tax relief, creates jobs, and makes America more competitive – and can pass both chambers.

Bottom Line

  • The business tax rate would decrease from 35% to 15% for corporations and other entities
  • There would be 3 individual tax brackets (10%, 25%, and 35%) rather than 7.
  • Itemized deductions would be “dissolved” – except charitable contributions and home mortgage interest
  • The Estate Tax would be repealed
  • Beware of increased “UBIT Taxes”…

Specific questions? Email Dave Moja.

The information provided herein presents general information and should not be relied on as accounting, tax, or legal advice when analyzing and resolving a specific tax issue. If you have specific questions regarding a particular fact situation, please consult with competent accounting, tax, and/or legal counsel about the facts and laws that apply.