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How are higher education organizations affected by the Tax Cuts and Jobs Act of 2017?

On December 22, 2017 President Trump signed the largest tax overhaul of the U.S. tax system in 30 years. We have summarized highlights of this legislation that affect the higher education sector. We have also summarized certain individual tax modifications that may affect the sector.

How are higher education organizations affected by the Tax Cuts and Jobs Act of 2017?

Higher education organizations who are subject to unrelated business income tax will have a single corporate tax rate of 21 percent after December 31, 2017. 

IRC Section 512 was modified and requires organizations that carry more than one unrelated trade or business activity to separately calculate unrelated business income from each trade or business activity.  The losses from one activity cannot be utilized to offset profits from a separate trade or business activity. The change will apply to tax years beginning after 2017. Net operating loss (NOL) carryovers generated in tax years before January 1, 2018 can reduce unrelated business income from all activities generated after December 31, 2017. One caveat is that you may only use 8 percent of your NOL to offset your current year income. As a result, you will likely have a portion of income each year that is taxable and will need to plan for those taxes by filing quarterly estimates.

The Act will impose an excise tax equal to the federal corporate income tax rate (currently set at 21 percent by the Act) on compensation in excess of $1 million paid to an applicable tax-exempt organization’s five highest paid employees for a tax year (or any person who was such an employee in any tax year beginning after 2016).

Unrelated business income will be increased for any disallowance of entertainment, club dues and other expenses under IRC Section 274 and for any qualified transportation fringe (transit passes, parking, bicycle commuting reimbursement), and any parking facility used in connection with qualified parking.  Alternatively, you could include these benefits as taxable compensation to employees.

The Act suspends the exclusion from gross income and wages of employees for qualified commuting reimbursements through January 1, 2026. It also suspends the exclusion from gross income qualified moving expense reimbursements for tax years beginning after December 31, 2017 and before January 1, 2026. The exclusion will still be available for active duty members of the Armed Forces who move pursuant to a military order.

An excise tax will be imposed of 1.4 percent of the net investment income of certain private colleges and universities. An applicable educational institution is one that has at least 500 students during the preceding taxable year, more than 50 percent of students are located in the United States and the aggregate fair market value of assets at the end of the preceding taxable year is at least $500,000 per student of the institution.

Individual highlights of the bill as they relate to Higher Education

Individuals who contribute to IRS Section 529 accounts to assist in paying for higher education can now utilize these funds to pay for enrollment at elementary or secondary public, private or religious schools.  The amount of the distributions to assist with enrollment in aggregate at these institutions cannot exceed $10,000 in any taxable year. This applies to distributions made after December 31, 2017.

The bill excludes (for taxable years beginning after December 31, 2017, and before January 1, 2026) taxable income resulting from the discharge of certain student loan debt on account of death or total and permanent disability of the student.

No individual tax deduction shall be allowed for amounts paid in exchange for college athletic event seating rights under Section 13704 of the Act.

The individual adjusted gross income limitation was increased for cash contributions to up to 60 percent of an individual’s AGI for tax years beginning after December 31, 2017 and before December 31, 2026.

The standard deduction for individuals was raised for single taxpayers to $12,000, taxpayers filing head of household to $18,000 and married filing joint taxpayers to $24,000 for taxable years beginning after December 31, 2017 and before January 1, 2026.

The Act increases the limit for the above-the-line deduction for certain teacher expenses to $500 (from $250) for tax years beginning after December 31, 2017 and before January 1, 2026.

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