The Tax Cuts and Jobs Act, the U.S. tax reform bill signed into law late last year, repeals a rule that allowed taxpayers to deduct 80 percent of a contribution made for the right to purchase tickets for college and university athletic events.
To get a better understanding of this provision and its implications for colleges and universities, I recently interviewed Preston Quesenberry, managing director at KPMG, and John Taylor, partner at Alexander Haas.
Note that the following Q&A is not legal or tax guidance/advice.
How did the athletic seating deduction rule work prior to passage of the new law?
John Taylor: Typically donors are not allowed to deduct a charitable contribution when they receive a benefit in return; or, if the benefit is insubstantial (cost of a meal, T-shirt), they must generally subtract the value of the benefit from the amount that can be deducted.
However, the tax code included a rule that allowed donors who made contributions in exchange for the right to purchase tickets or seating at a college or university athletic event to treat 80 percent of the contribution as a charitable contribution. Many colleges and universities have relied on this “80/20” rule to encourage charitable gifts to support athletic programs, scholarships, facilities upgrades/construction and other priorities at their institutions.
Note that the actual purchase of tickets for a college or university athletic event is a separate, non-deductible transaction. The 80/20 rule only applied to contributions made for the right to purchase priority seating.
What does the new law do?
Preston Quesenberry: The new law essentially replaces the 80 percent in the 80/20 rule with 0 percent. This means that, as of Jan. 1, 2018, donors who make a contribution to or for the benefit of a college or university in exchange for the right to purchase tickets or seating at an athletic event in the university’s stadium can no longer take a charitable deduction on 80 percent of the contribution.
The law clearly states that, “no charitable deduction will be allowed for any amount” of these contributions.
Seems like a clear change: Seating contributions can no longer be deducted. Is it really that simple?
JT: Not at all. Institutions and athletic departments are trying to assess how this change will affect their bottom line and the programs that these contributions supported.
Development and finance offices are working to figure out how to communicate this change to donors, how to report any new contributions related to seating on their financial statements and whether they need to update or adjust campaign totals.
Have the U.S. Treasury Department or Internal Revenue Service issued guidance on this provision?
PQ: Not yet. This provision is only a small piece of an extremely complex tax bill. Given the speed with which the bill was considered and passed, Treasury and IRS officials have a lot on their plates and will not likely issue guidance anytime soon.
We may see some guidance issued later this year if enough colleges and universities communicate their questions and concerns about this proposal with appropriate staff.
I’ve done some preliminary outreach to Treasury and IRS staff to get their initial thoughts on whether repeal of the athletic seating deduction would affect the point systems that many colleges and universities use to determine priority seating at athletic events.
What have you learned from these initial conversations about point systems and whether gifts tied to points will remain deductible?
PQ: It depends on whether Treasury and IRS officials view points as equivalent to the right to purchase seating. The law is very clear that 100 percent of a contribution made in exchange for the right to purchase tickets or seats is nondeductible.
But what about contributions made above and beyond this amount to earn points toward getting better seats? Do Treasury and the IRS view these additional contributions as tied to the right to purchase tickets or do these gifts just determine how this right is ordered?
Based on my initial conversations, IRS officials appear more inclined to argue that the points received in exchange for contributions are tied to the right to purchase seats and are therefore nondeductible. But this is not necessarily settled, and I’d encourage institutions that feel strongly that points contributions should be treated differently to weigh in with Treasury and the IRS.
JT: That lines up with what I’ve heard from my conversations from campus legal counsel. If the institution previously treated points contributions as subject to the 80/20 rule, then these contributions are most likely not deductible moving forward.
Do institutions need to consider whether the repeal of the athletic seating deduction will subject these contributions to the unrelated business income or sales taxes?
JT: A very good question to ask your legal counsel and tax adviser. Since these contributions are no longer deductible, they could be subject to sales taxes since they are related to the purchase or sale of tickets.
PQ: As to whether these contributions would be subject to the unrelated business income tax, my sense is that if you did not consider 20 percent of the contribution that was nondeductible prior to the law change as unrelated business taxable income, then you presumably would take the same position with respect to the 100 percent of the contribution that is nondeductible under current law. But as John suggests, I would encourage you to consult with your legal counsel and/or tax adviser.
Now that they are nondeductible, can these contributions still be counted as gifts for CASE purposes?
JT: CASE has posted some guidance on this question. In the past, institutions were able to count 80 percent of these contributions toward their giving totals on the Council for Aid to Education’s Voluntary Support of Education Survey and the CASE Campaign Survey. But since these contributions are now nondeductible, institutions cannot count any of these contributions received after Dec. 31, 2017.
CASE plans to update the Reporting Standards and Management Guidelines in the coming months and will likely revisit this decision.
CASE will continue to share guidance issued on this provision and others in the new tax reform law, including during our upcoming Legislative and IRS Webcast on Wed., Feb. 28. We’re also assembling a sample collection of letters, emails and other ways that colleges and universities are communicating with donors about the athletic seating deduction repeal.
Please send CASE any communications you are willing to share.
Brian Flahaven is senior director of advocacy at CASE.