The One Big Beautiful Bill Act ("Act") has passed Congress and has been signed into law by President Trump.
There are a host of wide-ranging changes coming to the Internal Revenue Code ("Code") under the Act, including changes that affect tax-exempt organizations. North Carolina tax-exempt organizations should be aware of these changes; while some may not affect your organization directly, others may have a significant impact either on current operations or future plans. This article discusses a summary of the relevant changes contained in the Act that affect tax-exempt organizations.
Charitable Contributions
All organizations exempt from taxation under Code Section 501(c)(3) should be aware of the changes to the charitable contribution deduction rules so that they may provide accurate information to potential donors.
Typically, only individuals who itemized their deductions are eligible to claim a charitable contribution deduction; those who claim the standard deduction are not eligible. Under the Act, a now-expired provision is reinstated, revised, and made permanent to allow filers who claim the standard deduction to also claim a charitable contribution deduction, up to one thousand dollars ($1,000.00) (two thousand dollars ($2,000.00) for married couples filing jointly).
For individuals who itemize their deductions and who claim a charitable contribution deduction, a floor is implemented whereby a deduction is only allowed to the extent contributions exceed one-half of one percent (0.5%) of the taxpayer's contribution base. Additionally, the contribution limit for cash contributions of 60% of adjusted gross income that was temporarily enacted as part of the Tax Cut and Jobs Act of 2017 is made permanent.
For a corporation to claim a charitable contribution deduction, it now must make aggregate contributions of at least one percent (1%) of its taxable income for the year.
Executive Compensation Excise Tax
Under current law, tax-exempt organizations are subject to an excise tax on excess compensation (compensation exceeding one million dollars ($1,000,000.00) paid to their top five highest compensated employees. (Code Section 4960.) Under the Act, this excise tax is expanded to cover not just the organization's top five highest compensated employees, but all current and former employees during any taxable year beginning after December 31, 2016. While most organizations will be unaffected by this change, large tax-exempt organizations should be aware of the expansion of this excise tax.
Tax Credit for Contributions to Scholarship Granting Organizations
One provision particularly of note for North Carolina, given the recent focus on school choice policies in the state, is the establishment of a tax credit for donations to scholarship granting organizations ("SGO"). SGOs are organizations exempt from taxation under Code Section 501(c)(3) that are not private foundations and grant scholarships to families for qualified educational expenses, including private school tuition. States will have to elect to participate and submit a list of SGOs within their state.
Colleges
North Carolina is home to a number of notable private colleges and universities, which are subject to changes under the Act. Currently, private colleges and universities are subject to a 1.4% excise tax on net investment income under Code Section 4968. The new law implements a new tiered approach to this tax based on the value of the institution's endowment per student. The rate remains the same at 1.4% for endowments of $500,000 to $750,000 per student. The tax increases to 4% for endowments between $750,000 and $2,000,000 per student and increases further to 8% for endowments over $2,000,000 per student. Institutions with an endowment of less than $500,000 per student are not subject to the excise tax imposed by Code Section 4968.
For more information, you may wish to review the legislative summary for the Act on Congress.gov.
