NBOA’s Jennifer Osland Hillen, director of accounting, finance and tax programs, and John Toscano, leader of the independent school industry practice at CohnReznick, a financial advisory firm, have reviewed the final language. “We have followed tax reform closely as it twisted and turned through Congress since the initial Tax Cuts and Jobs Act was released in early November,” said Hillen. The final language omits some provisions that concerned the independent school community, preserving current law for tuition remission, medical expense deductions, housing benefits and tax-exempt financing. Hillen credits this, in part, to NBOA’s collaboration with NAIS to advocate on behalf of independent schools, but she notes that some remaining provisions could impact schools positively as well as negatively.
Initial concerns that are alleviated in the final language, as analyzed by Hillen and Toscano:
- Qualified tuition reductions (sec. 117(d)): No repeal of tuition remission or related benefits.
- Educational assistance programs (sec. 127): No repeal of the exclusion for educational assistance programs from taxable income (up to $5,250).
- Deduction for educator expenses: Retains the above-the-line deduction and limit for certain expenses of eligible educators ($250).
- Employer-provided housing (sec. 119): No limitation on exclusion for employer-provided housing.
- Qualified private activity bonds interest: No interest on private activity bonds issued after December 31, 2017 as the taxpayer’s gross income.
- Medical expense deductions: Instead of eliminating the deduction for medical expenses as proposed in an earlier version, the bill expands the deduction for two years, to the benefit of some independent school families. Taxpayers who itemize deductions would be able to write off qualifying medical expenses that exceed 7.5 percent of their adjusted gross income for tax years 2017 and 2018. After that, the threshold would return to the current 10 percent.
Provisions impacting independent schools directly:
- Section 529 qualified tuition programs: Allows up to $10,000 in distributions, on a per-student basis, for private school tuition (effective for distributions made after December 31, 2017).
- Advance refunding bonds: Repeals the exclusion from gross income for interest on a bond issued to advance-refund another bond.
- Unrelated business income: Increases unrelated business income by the amount of any expenses paid or incurred by the exempt organization for qualified transportation fringe benefits, a parking facility used in connection with qualified parking, or any on-premises athletic facility provided such amounts are not deducted under section 274.
- Unrelated business income separately computed: Requires that unrelated business income tax (UBIT) be computed separately with respect to each trade or business (effective for taxable years beginning after December 31, 2017 (i.e. fiscal 2019)). The result is that a deduction from one trade or business for a taxable year may not be used to offset income from a different unrelated trade or business for the same taxable year. The provision generally does not prevent an organization from using a deduction from one taxable year to offset income from the same unrelated trade or business activity in another taxable year (i.e. net operating losses can only offset income from the activity that generated them). Under a special transition rule, net operating losses arising in a taxable year beginning before January 2, 2018 that are carried forward to a taxable year beginning on or after such date are not subject to the rule. “This will really impact schools with complex endowment investments,” Hillen said. “We will do additional work to understand how additional business activities (outside of the exempt purpose of the school) will need to be carved out for reporting of net income or losses.”
- Standard deduction thresholds: Increase to $12,000 for individuals, $18,000 for heads of household and $24,000 for married couples filing jointly and surviving spouses. This could reduce the number of taxpayers who itemize deductions, potentially impacting charitable giving.
- Corporate tax rate: Drops the federal corporate rate from 35 percent to 21 percent, potentially leading to higher interest rates on tax-exempt bond financing. (Related article)
- High earners: Imposes a 21 percent excise tax on remuneration to the top five highest paid employees above $1 million. Such compensation is rare among independent schools.
For questions or comments, contact Jennifer Osland Hillen, NBOA's director, tax and accounting programs, at jennifer.hillen@nboa.org.
