Tax Reform for Tax Exempt Organizations

The Tax Cuts and Jobs Act (TCJA) of 2017 introduced several provisions that directly impact tax-exempt organizations under Section 501(c). One significant change was the imposition of a 21% excise tax under IRC Section 4960 on compensation exceeding $1 million paid to certain highly compensated employees (the five highest-paid employees) at applicable tax-exempt organizations. This effectively applies a corporate-level tax on executive compensation excess, previously absent for nonprofits. The TCJA also created a 21% excise tax on excess parachute payments to covered employees. Additionally, the act required unrelated business income (UBI) to be calculated separately for each unrelated trade or business, eliminating the previous practice of netting losses from one activity against income from another. The near-doubling of the standard deduction under TCJA reduced the incentive for many individual donors to itemize charitable contributions, potentially affecting nonprofit fundraising. Aurora Training Advantage's accounting webinars help nonprofit finance professionals and their advisors understand these compliance requirements.

Unrelated business income tax (UBIT) is a federal tax imposed on tax-exempt organizations when they earn income from activities that are not substantially related to their tax-exempt purpose. UBIT prevents nonprofits from gaining an unfair competitive advantage over for-profit businesses in commercial activities. The tax is generally imposed at the corporate rate on net unrelated business taxable income (UBTI) exceeding $1,000. Common activities that may generate UBIT include advertising revenue, rental income from debt-financed property, income from partnerships or S corporations, and certain services provided to nonmembers. Exclusions from UBIT include passive investment income such as dividends, interest, royalties, and rent from real property (unless debt-financed). Post-TCJA, organizations must calculate UBIT separately for each unrelated trade or business, preventing loss-netting across activities. Accurate identification and segregation of UBIT activities is essential for Form 990-T compliance. Aurora Training Advantage's accounting webinars provide nonprofit finance teams and CPAs with UBIT identification, calculation, and reporting guidance.

Tax-exempt organizations face a growing list of compliance obligations shaped by recent tax law changes. Form 990 filing remains central—disclosing executive compensation, governance practices, program service accomplishments, and financial data. The Section 4960 excise tax on excess compensation requires organizations to identify and track covered employees and calculate compensation including benefits, deferred compensation, and parachute payments. Organizations with UBTI must file Form 990-T and pay corporate-level taxes on each separate unrelated business activity. Private foundations face excise taxes on net investment income, self-dealing transactions, failure to distribute income, jeopardizing investments, and taxable expenditures. Donor disclosure rules and state charitable registration requirements add additional reporting layers. Organizations operating internationally must comply with foreign grantmaking procedures. Board governance expectations have intensified, with the IRS scrutinizing conflicts of interest and compensation-setting processes. Aurora Training Advantage's accounting webinars provide nonprofit finance professionals and their advisors with up-to-date guidance on navigating these complex post-reform compliance requirements.

Section 4960, introduced by the TCJA, imposes a 21% excise tax on applicable tax-exempt organizations (ATEOs) that pay covered employees remuneration exceeding $1 million or excess parachute payments. Covered employees are the five highest-compensated employees in the current year or any prior year after 2016—creating a permanent tracking obligation even if a covered employee leaves the organization. Remuneration for this purpose includes wages, benefits, and deferred compensation vesting in the current year, calculated on a cash basis regardless of when services were rendered. Related organizations must aggregate compensation paid to shared employees. Excess parachute payments—amounts paid upon separation that are three times or more the employee's average annual compensation—trigger a separate 21% excise on the excess. Nonprofits must complete Schedule J of Form 990 and use Form 4720 to calculate and pay the excise tax. Strategic planning around compensation structures, deferred compensation timing, and related organization agreements is essential to minimize exposure. Aurora Training Advantage's accounting webinars provide nonprofits with practical guidance on Section 4960 analysis and reporting.

The Tax Cuts and Jobs Act's near-doubling of the standard deduction significantly reduced the proportion of taxpayers who itemize deductions, which in turn reduced the marginal tax benefit of charitable contributions for many donors. Prior to TCJA, approximately 30% of taxpayers itemized; post-TCJA, that figure dropped to roughly 10%. For nonprofits relying on tax-motivated giving, this shift created fundraising headwinds. Strategies to mitigate this impact include promoting donor-advised funds (DAFs), which allow donors to bunch multiple years of contributions into a single tax year while distributing grants over time. Qualified charitable distributions (QCDs) from IRAs—allowing donors aged 70½ or older to contribute up to $105,000 directly to charity without the distribution being included in income—have gained prominence as a tax-efficient giving mechanism not dependent on itemizing. Planned giving vehicles such as charitable remainder trusts and charitable gift annuities also provide tax-advantaged options. Understanding these strategies helps nonprofit fundraising and finance professionals communicate giving options effectively. Aurora Training Advantage's accounting webinars address charitable tax planning developments and their fundraising implications.