2018 Not-for-Profit Considerations Jay Meglich 1 Economic & - PDF document

2018 Not-for-Profit Symposium See agenda for wifi login and information on how to download the presentation slides. 2018 Not-for-Profit Considerations Jay Meglich 1

Economic & Industry Developments  Economic indicators  Not-for-Profit impact in the U.S.A.  Challenges facing NFP organizations  Legislative and Regulatory considerations 3 Economic Indicators - GDP • Gross Domestic Product increased at an annual rate of 2.3% for 2017 vs. 1.6% for 2016 • For 2018, GDP increased 2.2% for Q1 and 4.1% for Q2 • Only 1 quarter of negative growth in last 8 years 4 2

Economic Indicators – Unemployment Rate • Unemployment rate decreased from 4.7% in 2016 to 4.1% in 2017 • July 2018 rate was 3.9% or approximately 6.3 million people • May 2018 rate of 3.8% was an 18 year low 5 Economic Indicators – Interest Rates • 2017 federal funds rate increased 3 times in 2017 from .75% in January to 1.5% in December • The rate has been increased 2 times so far in 2018 and currently sits at 2.0% • Indications are that the gradual raising of rates will continue assuming continued income and jobs growth 6 3

Economic Indicators - Inflation • Inflation rate at 2.1% for 2017 remained consistent with 2016’s rate • Rate for July of 2018 was 2.9% which is the highest since December 2011 primarily driven by oil prices, housing and transportation • Forecast rates remain around 3% through 2020 7 Economic Indicators – Stock Market • Market total returns remain strong but volatility has increased • Returns on invested assets have been a source of unrestricted income but comes with risk • Dave Brinkman to provide more information this afternoon 8 4

Not-for-Profit Impact in the U.S.A • Currently 1.5 million NFP’s registered with the IRS • Contributions rose to $390 billion in 2016 • Total revenue exceeded $2 trillion and assets topped $5 trillion • Approximately 25% of U.S. adults volunteered providing more than 3 billion hours 9 Challenges Facing NFPs • Succession – Aging workforce impact on leadership ranks is a key risk for organizations and boards • Cybersecurity – Protection of organizational and donor data is critical • Continued increase in demand for programs and services • Engaging with current and future generations of donors and volunteers 10 5

Challenges Facing NFPs • Top 3 operational challenges for U.S. NFP’s* 1. Staffing resources (76%) 2. Effectively managing change (74%) 3. Keeping up with growing demand for programs/services (73%) * - Nonprofit Trends Report – salesforce.org 11 Challenges Facing NFPs • Top 3 priorities/initiatives* 1. Increase program and service visibility to constituents (48%) 2. Expand services within existing programs (35%) 3. Scale and expand program and service reach (35%) 12 6

Challenges Facing NFPs • Top 3 technology solutions necessary* 1. Impact management (69%) 2. Converting prospects to donors (64%) 3. Online/digital fundraising (63%) 13 Challenges Facing NFPs • Top 4 reasons technology adoption lags* 1. Budgetary constraints (89%) 2. Difficulty customizing technology to fit needs (68%) 3. Implementation difficulties (67%) 4. Lack of resources to train employees (66%) 14 7

Legislative and Regulatory Considerations • Impact of the 2017 Tax Cuts and Jobs Act (TCJA) • Several significant new accounting standards impacting NFP’s in 2018 and near future • Minimum Wage implications • General Data Protection Regulation (GDPR) 15 2018 Tax Update – Tax Reform, Trends and Recent Developments Presented by: Eugene J. Logan, CPA August 30, 2018 elogan@schneiderdowns.com 8

2017 Tax Reform • Short Title - The Tax Cuts and Jobs Act of 2017 – Became Public Law No: 115-97 on December 22, 2017 – Amends the Internal Revenue Code of 1986 – Law passed via the budget reconciliation process permitting passage by a simple majority vote – The Byrd Rule • Due to the Byrd Rule the law may only reduce revenue by less than $1.5 trillion over the next 10 years (practical effect is many provisions of new Act sunset prior to 10 year window) 17 Provisions Impacting Exempt Organizations • Unrelated Business Income • Excise Taxes • Charitable Contributions • Employee Benefits • Pennsylvania Changes 18 9

Unrelated Business Taxable Income • Unrelated trade of business taxable income must be separately computed – Deductions of one trade or business cannot offset income of another unrelated trade or business for the same taxable year (“silo-ing”) • The term “trade or business” is not defined – Application of the new provision to alternative investments of pass-through entities such as partnerships is unclear 19 Unrelated Business Taxable Income • Application of new provision on alternative investments – Is each partnership a separate silo? – Each activity within a partnership – Can we group? • Changes to structure – Does a C-Corporation make sense? – Low rate and opportunity to net • Effective for taxable years beginning after December 31, 2017 20 10

Unrelated Business Taxable Income • The value of certain fringe benefits provided to employees on a tax-free basis will be treated as unrelated business taxable income (UBTI) – Qualified transportation fringe benefits – Parking – On-premises health facilities • Provision attempts to provide parity between tax-exempt organizations and taxable corporations • Effective for amounts paid or incurred beginning January 1, 2018 21 Net Operating Loss • New rules: – Net operating losses incurred by a trade or business may be used to offset income from the same unrelated trade or business in another year – Special transition rule – net operating losses arising in a taxable year before January 1, 2018 that are carried forward are not subject to the limitation 22 11

UBIT – Notice 2018-67 • First Guidance Related to EO Provisions • No Bright-Line Test for Trade or Business – Rely upon reasonable, good-faith interpretations of the IRC – Indicates use of NAICS 6-digit codes will be considered reasonable • Investment in Partnership with UBIT – Can aggregate UBTI from single partnership if – • Deminimis test (less than 2% ownership) • Control test (less than 20% ownership and no control) – Transition rule for partnership acquired before August 21, 2018. 23 UBIT – Notice 2018-67 (Cont.) • Taxable Fringe Benefits not a UBIT Activity – If only one other UBIT activity § 512(a)(6) would not apply. Does this mean you can offset? • Discussion on NOL and UBTI – Confirms Pre-2018 NOLs can be used to offset any income. – Discusses ordering rules on pre-2018 NOL’s and post 2018 NOL’s. • Requests for guidance throughout, not finalized, but can be relied upon. 24 12

Corporate Provisions • Several corporate provisions will affect exempt organizations organized as Nonprofit Corporations – Net Operating Loss • Limited to 80% of taxable income • Infinite carryforward, but no carryback • Effective for losses on tax years beginning January 1, 2018 – Flat corporate tax rate of 21% 25 Corporate Provisions – Elimination of corporate Alternative Minimum Tax (AMT) – Refund of minimum tax credits – Changes to Bonus Depreciation and Section 179 Deduction Rules – Like-kind exchanges available only for real estate 26 13

Excise Tax on Investment Income • New 1.4% excise tax on investment income of private colleges and universities that meet the following criteria: – 500 tuition-paying students – Assets of at least $500,000 per student (daily average of full-time students or equivalent) – Institution has more than 50% of their tuition paying students in the U.S. • Assets of all related organizations are treated as assets of the institution • Assets utilized to directly carry on educational purposes are excluded • Effective for tax years beginning after January 1, 2018 27 Excise Tax on Executive Compensation • New 21% excise tax on compensation in excess of $1 million paid to the five highest paid employees for the tax year – Applies to “covered employees” – Compensation treated as paid when rights to remuneration are no longer subject to substantial risk of forfeiture – Exempts parachute payment compensation paid to noncovered employees • Special Rules apply to remuneration paid to licensed medical professionals and qualified medical professionals. 28 14

Charitable Contributions • AGI Limitation on cash charitable contributions increased to 60% • 80% deduction for charitable contributions made for university athletic seating rights repealed • Exception to the contemporaneous written acknowledgement requirement for contributions of $250 or more repealed (exception permitted reliance upon an organization’s Form 990 as an acknowledgement) 29 Charitable Contributions • Suspension of the Pease Limitation – Up to an 80% phase-out of itemized deductions for high income taxpayers • Changes to the Gift and Estate Tax Lifetime Exclusion ($11.2M for 2018) • Uncertain whether charitable giving will decrease due to the changes to individual taxes (i.e., increase in standard deduction) – Year-End check writing – Indiana University study 30 15