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December 20, 2017, the Congress passed the House-Senate tax reform conference
committee of the compromise “Tax Cuts and Jobs Act” (TCJA), which would cut
taxes by roughly $1.5 trillion over ten years and would make significant
changes to and simplify our nation’s tax laws.
The President is expected to sign the bill into law the first week of
compromise bill would not alter or eliminate the credit union federal income
tax status in any way! This is a huge
victory for the credit union movement and an affirmation by the United States
Congress of the value proposition of the credit union difference. This was accomplished against the unified
opposition and lobbying force of America’s banks and their $17 trillion in
Credit Union Income Tax
many other credits, deductions and tax expenditures would be eliminated or
scaled back by the TCJA, this bill makes no change to the federal tax exemption
for state and federally chartered credit unions. We attribute the preservation of the credit
union tax status to an understanding on the part of tax writers that credit
unions continue to fulfill their statutory mission to promote thrift and
provide access to credit for provident purposes through a cooperative,
2016, credit unions provided total member benefits equal to $10.2 billion. In addition, bank customers saved about $4
billion in 2016 from more favorable pricing due to the presence of credit
unions in their local markets. The TCJA
is indeed an affirmation of the good work and positive impact that credit
unions make in the communities they serve.
Unrelated Business Income
credit unions are exempt from the federal corporate income tax under §501(c)(1)
of the Internal Revenue Code for federally-chartered credit unions and under
§501(c)(14)(A) for state-chartered credit unions. Nevertheless, income at state-chartered
credit unions that the Internal Revenue Service (IRS) deems to be unrelated to
the credit union’s tax-exempt purpose is subject to taxation under §511-513;
federal credit unions are not subject to UBIT requirements because they are
instrumentalities of the federal government and subject to restrictions on
activities imposed by Congress.
that is subject to UBIT is defined as any net income derived from any
“unrelated trade or business” – defined as “activity not substantially related
to organization’s exempt purpose.”
Income is “substantially related” if it “contributes importantly to
accomplishment of the organization’s exempt purposes.” UBIT was designed to prevent unfair market
competition from tax-exempt entities against for-profit entities.
The IRS requires that
state-chartered credit unions file annual Form 990s, like most other tax-exempt
entities. These credit unions must also
file a Form 990-T (UBIT Form) if the tax-exempt entity has $1,000 or more of
unrelated business taxable income to report.
bill would require tax-exempt organizations currently subject to UBIT
(including state-chartered credit unions) to pay UBIT on certain employee
fringe benefits, namely transportation and parking benefits, as well as on-site
gyms and athletic facilities. In this
legislation, any taxpaying entity is no longer allowed to deduct these and
other employee benefits. The bill places
this new burden on exempt organizations and shall apply to amounts paid or
incurred after December 31, 2017. The
corporate deduction for business-related entertainment expenses would also be
eliminated. Meals provided to employees
would continue to be deductible until 2025.
When provided by a tax-exempt entity, such fringe benefits would be
considered unrelated business income and therefore taxable.
CUNA remains concerned that this
vague language could be interpreted to apply to association membership dues.
With regard to the above paragraph,
CUNA also seeks clarification from the IRS as to whether a not-for-profit
organizations that are already deducting these expenses against its UBIT income
would then no longer be able to do so.
This would then increase its UBIT income and taxes. This bill does not appear to make these
provisions as taxable as UBIT standing alone.
current law, when a tax-exempt organization operates more than one unrelated
trade or business activity, losses generated by one business may be used to
offset income derived from another.
Under the TCJA, losses generated by one unrelated trade or business
could not be used to offset income derived from another unrelated trade or
business. This provision would result in
an increase in unrelated business taxable income. A net operating loss (NOL) deduction would be
allowed only for the entity where the income loss originated. This provision is effective for taxable years
beginning after December 31, 2017. Under
a transition rule that has been added to the bill, net operating losses that
occurred before January 1, 2018 and that are carried forward to a taxable year
beginning on or after such date would not be subject to this provision.
original Senate bill included provisions that would have imposed a new
Unrelated Business Income Tax (UBIT) requirement on credit unions and the trade
associations like those that represent credit unions. This provision would have imposed UBIT on
logo and royalty income that many credit unions and others depend upon… income
that in reality is in direct relation to their exempt status. CUNA opposition resulted in this provision
being eliminated from the Senate-passed bill.
are other provisions addressing not-for-profit entities in the TCJA. The legislative language, as well as
Congressional intent, need further clarification before CUNA can comment on
those provisions here.
Deferred Compensation Originally,
both House and Senate tax bills would have eliminated 457 deferred
compensations plans. Both chambers
removed these provisions and the conference committee decided to not eliminate these
Compensation The TCJA would impose an
excise tax on certain executive compensation provided by tax-exempt
organizations. Tax-exempt entities would
be required to pay a 21% excise tax on the five highest paid employees’
compensation that individually exceed $1 million annually. The excise tax would be paid by the employer
on amounts that exceed $1 million annually and would be effective for tax years
beginning after 2017. This provision is
designed to create parity with respect to for-profit entities that can only
deduct the first $1 million of each individual employee’s compensation.
The definition of
compensation includes cash and the cash value of most benefits. “Roth” retirement plan contributions are not
included, nor are 457(b) deferred compensation plans. However, somewhat different treatment is
defined for 457(f) plans, also known as “ineligible” deferred compensation
plans. For these plans, the bill treats
the definition of compensation as including plan amounts paid when the rights
to the remuneration are no longer subject to a substantial risk of
forfeiture. Thus, the 21 percent excise
tax can apply to the value of remuneration that is vested in the plan (and any
increases in its value or vested remuneration), even if it is has yet to be
In addition, this
legislation has a huge parity problem between existing for-profit and
not-for-profit employee contracts with regard to the not-for-profit 21 percent
excise tax and the deductibility of corporate executive compensation. This bill exempts from deductibility limits
existing corporate executive compensation contracts by “grandfathering” in
“for- profit” executive contracts in effect on or before November 2, 2017. No such provision is included for
not-for-profit employee contracts. We
expect a tax technical corrections bill to be considered in Congress in 2018
and CUNA will actively advocate for not-for-profit parity with for-profit
businesses regarding employee contract parity and the "grandfathering"
of existing contracts.
Retirement Accounts Early
tax reform discussions on Capitol Hill included consideration of significant
rollbacks in the availability of pre-tax contributions to these retirement
plans to raise revenues in the legislation.
Massive pushback from many sectors convinced Congress to back off such
limits. This bill would make minor
changes around the edges of these savings products but would not make
substantive changes that would adversely affect Americans saving for retirement. Therefore, credit unions could expect
continued demand for IRAs on their balance sheets and off-balance sheet
Mortgage Interest and Property Tax Deduction As
part of fulfilling the credit union mission, many credit unions originate
mortgages, refinance mortgages, and provide home equity loans to their
members. During early tax reform
discussions, tax writers considered eliminating the mortgage interest deduction
and the property tax deduction for homeowners in order to help "payfor”
other tax cuts. Ultimately, the Senate
and House decided to primarily expand on existing limitations on these
compromise legislation preserves the mortgage interest deduction with some
modifications. For homeowners with
existing mortgages, there would be no change to their mortgage interest
taxpayers with new mortgages on a first or second home, the mortgage interest
deduction would be capped on NEW (acquired indebtedness after December 15,
2017) acquisition debt on a first or a second home. The new deduction of
$750,000 is a combined limitation.
However, this provision ends on January 1, 2026. In addition, the deduction would be capped at
indebtedness on homes less than $375,000 in the case of married taxpayers
filing separately. Beginning in 2026,
the mortgage deduction would be capped for home acquisition costs up to $1
million, and half that amount for married taxpayers filing separately. This latter provision would apply regardless
of when the mortgage was taken by a taxpayer.
the compromise bill would eliminate the deduction for interest on home equity
loans. However, similar to the mortgage
interest deduction, this provision would be modified in 2026 to allow for the
deduction of home equity debt.
Regarding refinancing, “acquisition
indebtedness” is defined as indebtedness that is incurred in acquiring or
constructing a residence. Specifically,
the term also includes indebtedness from the refinancing of other acquisition
indebtedness but only to the extent of the amount (and term) of the refinanced
indebtedness. For example, if the
taxpayer incurs $400,000 of acquisition indebtedness to acquire a principal
residence and pays down the debt to $150,000, the taxpayer’s acquisition
indebtedness with respect to the residence cannot thereafter be increased above
$150,000 (except by indebtedness incurred to substantially improve the
deductibility of state and local income and property taxes also affects the
attractiveness and affordability of home mortgage products offered by credit
unions. In this final bill, individual
taxpayers would be able to deduct up to $10,000 ($5,000 for married taxpayer
filing a separate return) in such taxes annually on the itemized portion of
their tax returns.
provision would apply to amounts paid between 2018 and through the end of 2025.
provision may slightly retard long-term home price appreciation.
is important to note that the deduction of mortgage interest and property
taxes, along with other deductions like charitable contributions, are only
attractive insofar as one’s deductions exceed the amount of the standard
deduction. The TCJA would double the
standard deduction. If enacted into law,
even those with average sized mortgages might choose the standard deduction in
lieu of itemizing the home interest they have paid, depending on whether their
itemized deductions will lower their tax bill more than simply taking the new
doubled standard deduction. On the other
hand, existing tax law has a provision referred to as the “Pease” limitation,
which limits itemized deductions for wealthier taxpayers. This legislation would eliminate this
limitation in tax years 2018 through 2025.
New Markets Tax Credit The
House-passed tax bill would have eliminated the new markets tax credit. This credit is important to the Community
Development Financial Institutions (CDFI) community. Under this House provision, no additional new
markets tax credits would have been allocated after 2017 but credits that would
have already been allocated could have been used for seven years. The CDFI Fund administers the New Markets Tax
Credit program, which provides tax credits to Community Development Entities
(CDEs), which in turn provide the tax credits to entities which invest in the
the other hand, the Senate-passed tax bill would not have eliminated the New
Markets Tax Credit. Fortunately, the
Senate position prevailed in the conference committee and this credit would not
Small Business Loan Interest Deductibility Credit
unions play a key role in helping solve the credit crunch facing America’s
small businesses. When other lenders
have been forced to pull back lines of credit, credit unions have continued to
lend and they have the capacity to do more.
Unfortunately, credit unions are unnecessarily restricted from similarly
alleviating the credit crunch that grips America’s small businesses by an
arbitrary statutory cap on business lending of 12.25% of a credit union’s total
assets. Credit unions have been subject
to this statutory cap for nearly 20 years.
However, there is no economic or safety and soundness rationale for this
cap. Prior to 1998, there was no
business lending cap. Credit unions have
a long history of offering their members loans to help start small
businesses. In fact, credit unions have
been offering business loans to their members since their inception. The average credit union business loan is
approximately $200,000; this means that credit union business loans are used
not only to start new businesses but also help credit union members make
payroll, stay in business, expand their businesses and stimulate the
economy. Part of making these small
member business loans attractive for credit union members is the federal tax
deductibility of the interest on these loans.
TCJA would preserve the deductibility of interest on smaller business loans,
like the ones credit unions make. In
general, small businesses with average annual gross receipts of less than $25
million would be exempt from new interest deductibility rules in this bill.
Personal Tax Rates and Deductions This massive overhaul of the tax code would
affect credit union members in various ways by three major changes: reductions in tax rates, a doubling of the
standard deduction, and elimination or curtailment of many itemized deductions
and credits. The tax rate reductions for
income levels of most credit union members would provide significant decreases
in total tax bills. This legislation would
also reduce the attractiveness of itemizing deductions for many credit union
members. Some of the itemized deduction
changes which would directly affect members’ use of credit unions, are
discussed in more detail below.
The net income increases that most households
will enjoy from this legislation, after a long period of real wage stagnation,
would likely make a difference in many households’ spending plans. Some of that spending will likely involve
increased consumer loan demand at credit unions.
The bill would sharply reduce itemized deductions by middle-income
households. This is due both to the
doubling of the standard deduction and elimination or reductions of
deductions. According to the Tax Policy
Institute, under current rules less than half of tax filers with annual incomes
under $100,000 itemize, while the vast majority of those with higher incomes
do so. If this tax legislation is
enacted, fewer taxpayers with incomes below $100,000 would itemize, and many
with incomes between $100,000 and $150,000 would likely find it no longer
worthwhile. That encompasses the vast
majority of credit union members.
Effects on Economic Growth Proponents of this tax overhaul suggest that
tax simplification and reductions would spur economic activity. That is very likely to happen, but the size
of the effect is subject to debate.
There would also be some dislocations as sectors whose tax preferences
are reduced grow more slowly and other industries enjoy faster growth due to
tax rate reductions. The net effect
would likely be to strengthen the current economic expansion and delay the next
recession. Of course, the bill would
also increase the national debt over the next decade. Faster growth would recover some of the $1.5
ConclusionThis bill is a huge win for credit unions and
is an affirmation by Congress that the credit union system is loyal to its
founding principles and serves a vital function in promoting thrift and
providing essential financial services to a large segment of the American
population that is considered underbanked. We expect a tax technical
corrections bill to be considered in Congress in 2018 and CUNA will again
aggressively defend this unique tax status afforded credit unions.
This summary should not be
considered as formal tax advice and should not be used as an alternative to
seeking professional legal tax advice.
In addition, this new law will be subject to future interpretation by
the Treasury Department and the Internal Revenue Service. Also, legislative language, as well as Congressional intent, need further
clarification before CUNA can comment on certain bill provisions. Finally, there are other provisions
addressing not-for-profit entities in the TCJA.
The legislative language, as well as Congressional intent, need further
clarification before CUNA can comment on those provisions here.
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Credit Union National Association is the most influential financial services trade association and the only national association that advocates on behalf of all of America's credit unions. We work tirelessly to protect your best interests in Washington and all 50 states. We fuel your professional growth at every level and champion the credit union story at every turn.
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