The “Tax Cuts and Jobs Act,” signed by President Trump on December 22, 2017 includes three sweeping tax law changes that will directly impact the nonprofit sector. This Nonprofit Advisor identifies important changes to reporting rules, unrelated business income tax and excise tax that will greatly affect your tax-exempt organization and charitable giving strategy in the coming years.
With the shifting tax landscape, it’s imperative that you keep a close eye on how excise tax changes can affect employee compensation and educational institutions.
- Employee Compensation. For tax years following December 31, 2017, an excise tax of 21% is imposed upon an exempt organization for compensation in excess of $1 million paid to covered employees (5 highest compensated employees for the taxable year) and covered employees after December 31, 2016.
- The tax is also imposed on excess parachute payments paid to covered employees If your organization is currently paying or will eventually pay parachute payments to covered employees, seek an advisor’s counsel to determine if there is any exposure to the excise tax. Compensation does not include payments to tax-qualified retirement plans or payments to licensed medical professionals (including veterinarians) in exchange for medical services performed.
- Private universities and colleges. While these educational institutions are considered public charities, some will now be subject to excise tax, similar to private foundations. For tax years beginning after December 31, 2017, the tax of 1.4% on net investment income (gross income less expenses incurred to produce the investment) will be imposed on these institutions and their related organizations if all of the following are met:
- They have at least 500 students during the preceding taxable year,
- At least 50% of the students are located in the US, and
- The fair market value of their assets (including those of related organizations) is at least $500,000 per student. Assets used directly in carrying out the organization’s exempt purpose are not included.
- The number of students is based on the daily average number of full-time students (with part-time students taken account on a full-time basis equivalent)
Impact on the Unrelated Business Income Tax (UBIT):
Early consideration of these new UBIT rules and provisions is essential and can directly impact exempt organizations. As a result, your organization should make a determination as early as possible to see what, if any, impact the new law has to financial statement and tax reporting.
- New Rule for select organizations. A new rule takes effect for organizations with more than one unrelated trade or business. Effective years beginning after December 31, 2017,UBIT must be computed separately for each unrelated trade or business. Losses from one trade or business cannot be used to offset net income generated by another unrelated trade or business.
- Net operating losses (“NOL”), generated in years beginning after December 31, 2017, must be tracked separately and only used to offset future net income from the same category of trade or business. An exception applies to NOL carryovers generated in tax years starting before January 1, 2018.
- Fringe benefits. Effective years beginning after December 31, 2017, certain fringe benefits for which a deduction is not allowed, paid for by tax-exempt organizations, must now be added to UBTI ("Unrelated Business Taxable Income”). These benefits would include qualified transportation fringe benefits and on premise athletic facilities. "Qualified transportation fringe benefits" refer to any of the following provided by an employer to an employee (as provided under Internal Revenue Code Section 132(f)(1)):
- Transportation in a commuter highway vehicle if such transportation is in connection with travel between the employee's residence and place of employment
- Any transit pass
- Qualified parking
- Any qualified bicycle commuting reimbursement
Changing Reporting Rules and their Influence on Charitable Giving:
Be aware of changing reporting rules as they directly impact your charitable giving strategy.
Charitable Giving for Individuals. The limitation on the deduction for cash contributions made to public charities and certain private foundations increases from 50% to 60% of Adjusted Gross Income (effective for tax years beginning after December 31, 2017). As mentioned in the November Nonprofit Advisor, due to changes in the individual tax structure, an increase in the standard deduction and federal estate tax exemption can ultimately lower the inducement to individuals and states to make charitable contributions and gifts.
Seating Rights for Athletic Events: Taxpayers purchasing seating rights to athletic events for an educational institution are no longer allowed an 80% tax deduction for their contribution (effective for tax years beginning after December 31, 2017).
We will continue to keep you informed as the changes presented by the “Tax Cuts and Jobs Act” are further clarified. In the meantime, please reach out to your Friedman LLP advisors for questions on how these major tax law changes will impact your tax-exempt organization and charitable giving strategy.