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Exempt organizations and the new tax bill

01.03.18

We’ve analyzed the new provisions with exempt organizations in mind. From unrelated business income to executive compensation and employee perks, there are changes and implications you should understand.

It’s not just individuals and for-profit businesses affected by the new tax act. Larger, more complex organizations, such as hospitals, schools, and universities, need to consider most of the information noted below. Even smaller not-for-profits that provide certain fringe benefits or depend heavily on the largess of charitable contributions from individual tax payers need to make sure they understand the act’s specifics.

For tax years beginning on or after December 31, 2017, these issues apply (unless noted otherwise):

Unrelated business income:

  • Under the new rules, you must track net operating losses on a separate basis for each unrelated business activity; you can no longer use losses to offset income derived from another separate activity. An allowable exception is for losses generated in earlier years. Organizations with more than one trade or business that generates unrelated business income should ensure they have processes in place to properly account for and segregate the income (and related expenses) of each activity.
  • Because the top corporate tax rate will drop from 35% to 21%, it will affect exempt organizations as well in calculating the tax on unrelated business income. Those exempt organizations with significant taxable business income may enjoy the tax savings from the corporate tax rate reduction, but many organizations with taxable income will see an increase in their tax as the rate brackets have been replaced with the new flat tax rate of 21%.

Compensation and benefits:

  • There is a new excise tax of 21% on compensation that is vested, even if it has not yet been received. The tax will be imposed on compensation exceeding $1 million paid to each of an organization’s five highest paid employees and on certain excess parachute payments. Amounts are deemed “paid” when there is no substantial risk of forfeiture of rights to the compensation. For example, this would include deferred compensation under a Section 457(f) plan.
  • Payments to licensed medical professionals directly related to providing medical or veterinary services do not count when calculating the new excise tax. The provision appears to apply to all exempt organizations, including exempt governmental entities, public colleges, universities, and political organizations.

    We anticipate further guidance to clarify which specific organizations will be impacted. In the meantime, all organizations should review compensation agreements with any employees that may possibly trigger this additional tax to determine and plan for implications. We will update the information on this page as soon as we know it.
  • Reimbursement for qualified moving expenses can no longer be treated as a tax-free fringe benefit.
  • Funds paid or incurred after December 31, 2017 that provide employees with transportation and parking fringe benefits, including on-site gyms or other athletic facilities are now unrelated business income. This provision eliminates the favorable treatment of these fringe benefits by subjecting them to a tax equal to the corporate tax rate.

Excise tax in higher education

Certain private colleges and universities will be subject to a 1.4% excise tax on the net investment income earned annually on assets not used directly in carrying out educational purposes. The provision applies to organizations with at least 500 full-time students (with 50% of students located in the US) with qualifying assets of at least $500,000 per student, or a total of at least $250 million in applicable assets. Note: you must attribute investment income and applicable assets of related organizations to the school when determining the various thresholds.

Possible impact to charitable giving

  • For individuals, the standard deduction has almost doubled to $12,000. Although the deduction for charitable contributions has been preserved for those who itemize, the increase in the standard deduction will prevent nearly 90% of taxpayers from being able to itemize deductions, removing a known incentive for many individuals who donate to charity.
  • Cash contributions to public charities and certain private foundations are now deductible up to 60% of adjusted gross income, an increase from the previous 50%. While this is a favorable provision, the impact is likely to be diminished as fewer individuals can itemize deductions.
  • The estate tax exemption has doubled for each individual to $11.2 million for 2018. In the past, gifts to charity have been used as a tool to lower the impact of the estate tax. According to the National Council of Nonprofits, the anticipated impact of doubling the estate tax exemption is anticipated to result in lower charitable giving by $4 billion per year.
  • Payments to higher education organizations in exchange for the rights to purchase tickets or seating at an athletic event are no longer considered a charitable deduction. While this may not represent the major reason corporations and individuals purchase the tickets, it’s important information for college administrators to be aware of.

Although there was initially some talk of weakening current law for participating in political campaign activity, the final act maintains the current law.

Regulations and other technical guidance necessary to fully implement some of the provisions in this new act may take months to craft, but taxpayers must take reasonable steps to comply with the law. We recommend:

  1. You work with us to assess the impact of the act on your organization
  2. Check back for updates and new information as it becomes available

Please let us know if you have any questions.

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