Five Key Changes to Tax Law That Will Affect Colleges and Universities

Colleges, universities and other nonprofits have plenty to digest when it comes to last year’s massive tax overhaul.

Many of the details remain unclear as regulators work out the rules for implementing the law passed in late December. But the broad outlines are concrete and will lead to changes in how colleges, universities and other nonprofits operate.

Here’s a look at some of the key ways the new law will affect colleges and universities.

Charitable Deductions

The new law increases the standard deduction for individuals to $12,000 from $6,350 and to $24,000 from $12,700 for couples.

The alteration may be great news for many individual taxpayers. But the alteration likely causes anxiety for fundraisers because it means fewer taxpayers will itemize their taxes. According to CNBC, a Congressional report estimates 18 million households will itemize deductions this year, a sharp drop from 46.5 million last year.

That could hit the coffers of colleges and universities, since fewer people will be looking to claim charitable deductions and may cut their giving as a result.

New Excise Tax on Compensation

One aspect of the law is specifically targeted at nonprofits such as colleges and universities: an excise tax of 21 percent on organizations that pay employees more than $1 million per year.

While universities don’t normally pay in excess of $1 million, there are exceptions, such as some high-level administrators, sought-after coaches, and money managers. As of 2014, according to an analysis by the Wall Street Journal, about 2,700 employees of nonprofits made more than $1 million per year. Most of those people worked at hospitals and universities.

The 21 percent tax falls on the organizations, not the employees, and is limited initially to the top five most highly-paid employees.

Siloing Income

Colleges and universities have multiple streams of income. They have investment income, and income from such activities as holding summer athletics and camps, and even income from side businesses such as restaurants and catering.  They also bring in income from, for instance, licensing or selling technology they develop to the private sector.

In the past, income from those different sources could be combined into one pot for the purpose of taxes. With the new tax law, colleges and universities are expected to account for each activity separately, a practice being called siloing.

The siloing requirement is one that has raised many questions. Do all summer athletics camps have to be accounted for separately, or can football and cheer be combined? Can all research spun out and licensed to the private sector be combined, or does each instance need to be accounted for?

This requirement is one of those aspects of the law awaiting clarification by rule makers.

Sporting events and entertainment

Congress also changed tax law in ways that will affect sports programs and fundraising efforts for colleges and universities.

There used to be a deduction for part of season ticket packages. A donation, sometimes a large one, would be made to a university’s booster club as part of the package. In the past, taxpayers could combine the cost of tickets with the donation and deduct 20 percent of the total.

The new law eliminates that deduction.

Changes to the rules around meals and entertainment deductions are also of concern for university and other nonprofit fundraisers. While meals are still deductible, entertainment no longer is. If a nonprofit sponsors a fundraising golf tournament with a meal, for example, at $1,000 for a foursome, it will now need to separate the entertainment portion from the donation portion of the event.

Relocation

In the past, qualified moving expenses paid to employees were not counted as income. That has changed with the tax law passed in December.

Now, an employer has to compute relocation reimbursement as part of an employee’s salary. What used to be a straight reimbursement will have added cost associated with it, since employers will have to include a Social Security and Medicare match as part of the cost.

The change has some employers considering whether they should replace reimbursements with a straight bonus for relocating employees.

While the change applies to all employers, colleges and universities, along with such industries as oil and gas, are hit especially hard, since they tend to employ a very mobile workforce.

Summary

Colleges and universities will be affected in multiple ways by changes to the tax law passed at the end of last year. Among the most important alterations:

• Charitable deductions. With the increase in the standard deduction, fewer people will itemize their taxes. That could lead to changes in donations to universities, colleges and other charitable organizations since many taxpayers who would have received a tax benefit no longer will.
• Excise tax on compensation. Nonprofits who pay employees more than $1 million per year will be charged a 21 percent excise tax for each employee. This requirement will hit universities with highly-paid administrators, coaches and money managers.
• Income siloing. Colleges and universities that derive income from such sources as investments or summer camps will be required to separate and pay tax on each of those sources, rather than pooling them together.
• Sporting events. People who buy season tickets to university sporting events used to be able to write off a portion of the price as a donation to the university’s booster club. That deduction has been eliminated.

Like their counterparts in the for-profit sector, colleges and universities will need to come up with ways to cope with a change that makes reimbursing employees for moving expenses taxable.

For questions, or more information, please contact Melisa Beauchamp.