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Tax Reform and Tax-Exempt Organizations (for tax years beginning after 2017)

February 28, 2018

By Joseph Barreca, CPA

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The Tax Act, signed into law by President Trump on December 22, 2017, included provisions applicable to tax-exempt entities as well.

Unrelated Business Taxable Income

  • Generally, unrelated business income tax (UBIT) is assessed on an activity that is from a trade or business regularly carried on by the entity not related to its exempt purpose. The tax law will now consider certain fringe benefit expenses as income subject to UBIT.  These would include expenses for qualified transportation fringe benefits, parking facilities, and onsite gyms.  You will need to analyze your expenses to make sure you will be in compliance.  However, UBTI (unrelated business taxable income) would not include these fringe benefits to the extent the amount paid or incurred is directly connected with an unrelated business which is regularly carried on by the organization.
  • Organizations that carry on more than one unrelated trade or business will now be required to separately calculate UBTI for each trade or business, effectively prohibiting using losses relating to one trade or business to offset income from another trade or business. It remains unclear what will be considered separate lines of unrelated businesses.  There are many unanswered questions about this UBTI provision and there is potential for tax planning once these questions are answered. 
  • The tax rate on UBTI will correspond to the tax rates as imposed under the new law (i.e. 21% for tax-exempt organizations taxed as corporations).

Excise Tax on Tax Exempt Organization Executive Compensation

  • Compensation paid to a “covered employee” in excess of $1 million will be subject to an excise tax of 21%. This also includes excess parachute payments, regardless of the amount of the compensation. A covered employee is any current or former employee who is either one of the five highest compensated employees for the taxable year or was a covered employee of the organization (or any predecessor organization) for any taxable year after December 31, 2016.  Compensation paid to a licensed medical professional, such as doctor, nurse or veterinarian, for services performed in such capacity is excluded from the excise tax.

Excise Tax on Investment Income of Private Colleges and Universities

  • The new law imposes a 1.4% excise tax on the net investment income of certain private colleges and universities and their related organizations. This provision only applies to private institutions that have more than 500 tuition-paying students and assets of at least $500,000 per full-time student (not including assets used directly by the institution in carrying out the institution’s educational purpose). The assets and net investment income of related organizations would be treated as the assets of the private college or university. The tax applies only to institutions with more than 50% of their tuition-paying students located in the United States and the number of students at an institution for purposes of applying the tax is based on the daily average number of full-time (or full-time equivalent) students attending. These entities were not previously subject to tax on their investment income.

No changes:

501(c)(3) Organizations and Statements Relating to Political Campaign

  • The conference agreement did not include the House bill provision that would allow a 501(c)(3) organizations to make political statements in the ordinary course of activities in carrying out its exempt purposes, if the incremental expenses incurred was de minimis.

Private Foundation Excise Tax on Investment Income

  • The conference agreement did not include the House bill provision to simplify the private foundation excise tax on investment income and reduce the rate from 2% to 1.4%.

Other changes relating to Tax-Exempt Organizations:

Charitable Contributions

  • Increases the AGI limitation on cash contributions from 50% to 60%.
  • 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.

Since these changes are taking effect beginning in this tax year, now is the time to start planning for how these changes will impact your organization. 

Joseph Barreca is a manager within Citrin Cooperman’s tax practice. He can be reached at 212-697-1000 or at jbarreca@citrincooperman.com.