As we approach the six-month mark since the passage of the Tax Cuts and Jobs Act (“TCJA”), non-profits should be considering the following:
Section 512(a)(7), Increase to Unrelated Business Taxable Income (“UBTI”) by Certain Disallowed Fringe Benefits
The new law increases UBTI for non-profits by the amount of
any expense paid or incurred for a qualified transportation fringe benefit,
parking facilities used in connection with qualified parking, and on-premise
athletic facilities, if the expense is not deductible under Section 274.
Qualified transportation fringe benefits would include public transit passes
and provided bus service or van pools. The IRS has also indicated that it includes
transportation cost amounts employees pay for themselves with pre-tax dollars
(under a compensation reduction agreement/flexible spending account). Under
TCJA, this taxability will start with expenses paid or incurred after December
IRS Publication 15-B still discusses transportation fringe benefits and indicates that although the deduction is no longer available for for-profit enterprises, the fringe benefit exclusion rules still apply, and the payments may be excluded from your employee’s wages. The IRS website has been updated to indicate that for organizations with a fiscal tax year that begins in 2017 that had taxable fringe benefits occurring from January 1, 2018 to the end of their fiscal year, the amount of any increase in UBTI is to be entered on line 12 of the 2017 Form 990-T.
Guidance on how to apply provisions of the new law is being debated among practitioners, and the Treasury has not yet issued specific guidance on many implementation questions raised.
Practitioners point out that only the qualified transportation fringe benefits are non-deductible under IRC Section 274, and that this section does not generally disallow deductions for expenses associated with parking facilities used in connection with qualified parking nor on-premises athletic facilities.Staffers of the Joint Committee on Taxation have indicated that parking facilities are qualified transportation fringe benefits, and the drafters of the new law intended for them to be taxable.
This issue is also complicated by the local jurisdictions (like the District of Columbia) that compel employers, including non-profit employers, to provide qualified transportation benefits or risk local fines.
Non-profit advocacy groups are recommending organizations contact their federal legislators to let them know the adverse impacts from this particular section of the TCJA, as it is anticipated to greatly expand the number of entities that must perform detailed tax calculations and file a Form 990T that had not previously.
Nonprofits should determine if they offer the benefits outlined in Section 512(a)(7), and if quarterly estimated tax payments (at 21% of the total transportation fringes paid/involved in pre-tax arrangements) are due for the taxes on these benefits.
Section 512(a)(6), Requirement to Compute UBTI separately for each Trade or Business
Section 512(a)(6) provides that organizations with two or more unrelated trades or businesses must compute UBTI separately for each unrelated trade or business. Losses from one trade or business cannot offset income of another. This provision relates to tax years beginning in 2018 and going forward.
The Treasury has yet to define what constitutes a separate trade or business; including defining the treatment of passive investment income that is UBTI. No specific guidance yet exists on actually computing taxes under this section of the TCJA.
The National Council of Nonprofits, the American Institute of Certified Public Accountants (AICPA), the American Society of Association Executives (ASAE), National Association of College and University Business Officers (NACUBO), and many specific institutions have been asking for a delay with the two new UBTI provisions.
As an organization, you can comment directly to the IRS. Fill in “ Form 990T” in the comment form on the need for clear guidance and a delay in implementation.
Other sections of the TCJA that impact a smaller number of nonprofit organizations but likely will result in significant tax liabilities include:
Section 4960, Excise Tax on Excess Executive Compensation.For tax years beginning in 2018, an excise tax is required on certain highly compensated employees of tax-exempt organizations equal to 21% on remuneration over $1 million for the top five highest paid employees as well as on any “excess parachute payments” paid to these individuals.Additional clarity of the application of this section is still pending from the Treasury.
Section 4968, Excise Tax on Investment Income of Private Colleges and Universities.For tax years beginning in 2018, an excise tax of 1.4% is computed on the net investment income of private colleges and universities whose aggregate fair market value of assets other than those used in carrying out the organization’s exempt purpose is at least $500,000 per tuition paying student. In IRS Notice 2018-55 issued June 2018, the IRS has indicated that it is planning to issue regulations that will indicate that the new tax won’t apply to unrealized gains before the tax was levied as well as other matters pertaining to the new tax. Applicable institutions may rely on the rules regarding prior unrealized gains before the issuance of the proposed regulations. Additional guidance is likely to be issued by Treasury.