implications of tax reform on nfps · 2020-05-14 · jobs act • largest tax act since the 1986...

Implications of Tax

Reform on NFPs

Jane Pfeifer

Natosha Dilley

PRESENTERS:

Jane PfeiferShareholder

Natosha DilleyManager

Tax Cuts and

Jobs Act

• Largest tax act since the 1986 tax reform

act

• Impacts all entity types and individuals

• Passed quickly - 1986 act took 2 years;

the TCJA took less than 90 days

• As a result, there may be unforeseen

results.

• Much guidance is needed since the

TCJA lacks specifics.

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Tax Cuts and Jobs Act

Tax reform changes with a direct impact on exempt entities:

• UBIT siloing

• Nondeductible fringe benefits tax (UBIT)

• Creation of an excise tax on excessive compensation of an exempt

entity

• Excise tax on excess investment income for colleges and

universities

8


UBIT Siloing:

• Losses from one unrelated activity can no longer offset income from

another activity

• Losses from loss activities will carry forward and offset future income

from that activity

• Notice 2018-67: Reasonable, good-faith interpretation of what a

separate trade or business is, and may use NAICS as a guide

9


UBIT Siloing:

Treatment of NOLs:

• NOLs generated prior to 12/31/17

• Tax years BEGININNG after 12/31/17

• 6/30/18 fiscal year entity - new NOL rules start in the 6/30/19

fiscal year

• Can only offset 80% of income

• Can no longer be carried back but can be carried forward

indefinitely

10


Fringe Benefits

• Addition to UBTI for certain fringes:

• Any fringe for which a deduction is not allowed under Section 274

and, which is paid or incurred by the organization for any qualified

transportation fringe (Sect. 132(f)), or any parking facility used in

connection with qualified parking (Sect. 132(f)(5)(C))

• The above is important because it indicates that other fringes under

Section 274 such as meals and entertainment will not create UBIT

• As a result of this addition, some organizations which otherwise don’t

have a 990T, may need one

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Fringe Benefits - Parking

• Parking/Transit passes - expense is taxed as UBIT

• Parking facility - cost of maintaining the parking facility is treated as

UBIT

12


Parking Lot Tax

• Interim Guidance was issued December 11, 2018 in Notice 2018-99

• The notice sets forth guidance on how to calculate the portion of

parking expenses considered Unrelated Business Income under

Section 512(a)(7).

• A non-profit organization will need to perform a four step process

to determine the taxability of their parking expenses and a

reasonable allocation will need to be applied.

• The Notice specified depreciation will not be included in this new

calculation of Unrelated Business Income.

14


Parking Lot Tax

• Exceptions to the tax:

• Parking included in W-2s – not subject to UBIT

• Majority public use

• Was this the intent?

• Should all organizations be filing 990T extensions?

15


“Lowering” of the corporate tax rate to a flat 21% rate

• This may mean higher taxes paid by exempt entities that typically

benefit from the lower brackets

• Exempts may need to increase estimated tax payments in future

years

• More tax may be due at extension time

16

Tax on Excess Compensation

• Excise tax applicable on excess compensation & certain excess

parachute payments

• Tax Rate is 21%

• Effective for years beginning after December 31, 2017

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• Based on compensation made in the calendar year ending within

the tax year

• Excess compensation is amounts over $1 million to covered

employees

• Excess parachute payments are amounts which are 3 times the

base period amount

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• Applies to Applicable Tax Exempt Organizations - ATEO

• An organization exempt under 501(a)

• A Farmer’s Co-op under 521(b)(1)

• Entity with income excluded under 115(1)

• A political organization under 527

19



• Covered Employee -

• One of the 5 highest employees of an ATEO for the year

• Was one of the 5 highest employees in any previous year

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• Covered Employee (con’t.) -

• Consider remuneration paid for work performed for the ATEO or

a related organization – for profit or non-profit

• Exception for medical services pay

• Exception for limited services

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• Excess compensation subject to excise tax:

• Remuneration paid by any ATEO, including amounts paid by

related entities > $1 million

• Remuneration - includes wages, excludes Roth contributions

and amounts vested during the year in nonqualified plans

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• Excise tax is paid by each related entity in relation to the services

provided by the employee to the entity

• Use Form 4720 to report and pay the tax

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• Excess Parachute payments

• Contingent on a separation of service

• Payment equals or exceeds 3 x base

• Paid to a covered employee

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• Excess parachute tax is calculated by taking the present value of

the parachute payment less the base amount times 21%

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Conclusion

• Parking tax will create UBIT for many new organizations

• Siloing will complicate the Form 990T, and might push the use of

C-corps

• Compensation excise tax is complex with hidden traps

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Questions



THANK

YOU



implications of tax reform on nfps · 2020-05-14 · jobs act • largest tax act since the 1986...

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