Tax Exempt Organizations

By Diane M. Straka, CPA, Partner

Changes Relating to Unrelated Business Taxable Income

Under the Tax Cuts and Jobs Act, for years beginning after December 31, 2017, tax exempt organizations must separately compute their unrelated business taxable income (UBTI) by business activity. This means losses from one activity cannot be used to offset income from another activity. This may create additional tax for the exempt organization. Exempt organizations should consider the following:

1)  Do you have separate business activities?

2)  Are some activities profitable and some activities unprofitable?

3)  Are expenses being appropriately allocated to each activity?

4)  Should moving such activities into a C Corporation be considered?

Fringe Benefits Subject to Unrelated Business Taxable Income

Under the new tax law, for years beginning after December 31, 2017, tax exempt organizations must include in unrelated business taxable income the costs of qualified transportation fringe benefits, parking fringe benefits and expenses of on-premises gyms/athletic facilities.  

1)  Are transportation, parking or on-site gym benefits provided to employees?

2)  Should the compensation and benefits plan be changed to save on tax on these benefits?

New excise tax on tax-exempt organization executive compensation

For tax years beginning after Dec. 31, 2017, a tax-exempt organization is subject to an excise tax at the corporate tax rate (21% under the Act) on the sum of: 

  • The remuneration (other than an excess parachute payment) in excess of $1 million paid to a covered employee by an applicable tax-exempt organization for a tax year; and
  • Any excess parachute payment (as newly defined) paid by the applicable tax-exempt organization to a covered employee. 

Items for tax exempt organizations to consider are:

1)  Identify if the organization has covered employees in which this may apply.

2)  We can assist in reviewing the organization’s compensation arrangements and tax implications.

New excise tax on investment income of private colleges and universities

A new 1.4% excise tax will be imposed on net investment income of certain private colleges and universities. Net investment income is gross investment income minus expenses to produce the investment income.The tax applies to private colleges and universities with:

  • At least 500 students,
  • More than 50% of the students of which are located in the U.S., and
  • Assets of at least $500,000 per student. Assets used in carrying out the exempt purpose are excluded from this calculation. 

Given the above requirements, this will apply to educational institutions with large endowments.

1)  Determine if this applies to your educational  institution now or potentially in the near future.

2)  We can help determine what the potential tax owed may be and assist in developing a plan to minimize tax owed.

Charitable contribution deduction limitation increased

Charitable contributions included as a deduction on an individual’s tax return were previously limited to 50% of an individual’s adjusted gross income. With the new law, for contributions made in tax years beginning after December 31, 2017 and before Jan. 1, 2026, the 50% limitation for cash contributions to public charities and certain private foundations is increased to 60%. Tax exempt organizations may want to consider:

1)  Reaching out to potential donors emphasizing this opportunity for an increased deduction. 

Repeal of alternative charitable donation substantiation

Tax exempt organizations receiving donations of $250 or more are required to either provide a contemporaneous written acknowledgement of the donation to the donor, or as an alternative, the charitable organization could file a document with the IRS containing detailed information on the donation.  

Under the new law, for years beginning after December 31, 2016, for contributions made of $250 or more, the alternative donee-reporting option was repealed; therefore a contemporaneous written acknowledgment must be sent.

1)  Review procedures identifying such donations

2)  Ensure acknowledgement with required language is sent timely  

No deduction for amounts paid for college athletic seating rights

For contributions made in tax years beginning after December 31, 2017, a charitable deduction is no longer allowed for any payment to an institution of higher education in exchange for college athletic seating rights. 

1)  As this may have a negative impact on revenues received for seating rights, consider promoting other charitable giving programs. 

 


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