Tax Developments Affecting Colleges and Universities for OACUBO 101 - - PowerPoint PPT Presentation

Tax Developments Affecting Colleges and Universities

for

OACUBO 101st Annual Meeting & Professional Development Conference

Presented by: Eugene J. Logan, CPA April 27, 2018 elogan@schneiderdowns.com

2017 Tax Reform

• Short Title - The Tax Cuts and

Jobs Act of 2017

– Became Public Law No: 115-97

• n 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
• nly reduce revenue by less than

$1.5 trillion over the next 10 years (practical effect is many provisions

• f new Act sunset prior to 10 year

window)

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• H.R. 1 – An Act to provide for reconciliation

pursuant to Titles II and V of the current resolution on the budge

Short Title:

The Tax Cuts and Jobs Act of 2017

Provisions Impacting Exempt Organizations

• Unrelated Business Income
• Excise Taxes
• Charitable Contributions
• Employee Benefits
• Not Included in the Final Act
• Other Current Tax Developments

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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

• Effective for taxable years beginning after December 31,

2017

• Form 990-T is currently getting a makeover to account for

this new provision

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Unrelated Business Taxable Income

Unanswered questions ---

• How will the new provision apply to alternative

investments?

– Is each partnership a separate silo? – Each activity within a partnership separate? – Can we group?

• What about phantom income (i.e., qualified transportation

fringe benefits, debt financed income, payments from controlled corporations)?

• Should the structure be changes?

– Does a C-Corporation make sense? – Low rate and opportunity to net

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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

• Intent is to provide parity between tax-exempt
• rganizations and taxable corporations
• Effective for amounts paid or incurred beginning

January 1, 2018

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Unrelated Business Taxable Income

Up Update – –

• 3-23-18 – IRS confirms the new provision

includes qualified transportation benefits received through a salary reduction program

– IRS Publication 15-B updated to reflect clarification

• 2-23-18 – information guidance that amounts

paid/incurred for on site athletic facilities not UBTI because IRC Section 274 does not deny a deduction to taxable employers for the same

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UBIT 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 – NOL’s from tax years beginning after 12/31/17 are limited to 80% of taxable income and are carried forward indefinitely – 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

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UBIT - Corporate Provisions

• Several corporate provisions will affect exempt
• rganizations organized as nonprofit

corporations – Flat corporate tax rate of 21% – Bonus depreciation incentives to stimulate investments in plant, property and equipment – Limitations on business interest deduction

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UBIT - Corporate Provisions

– Elimination of corporate Alternative Minimum Tax (AMT) – Refund of minimum tax credits – Elimination of DPAD Deduction – Like-kind exchanges available only for real estate

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Take Aways -

• Diligently track and document expenses

incurred with unrelated business taxable income (UBTI)

• Consider the impact of the tax reform

changes on the deferred tax provision

• Review and revise budgets to account for

tax changes made to employee benefits

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Excise Tax on Investment Income

• New 1.4% excise tax on investment income
• f 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.

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Excise Tax on Investment Income

• 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

• Where does it go from here?

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Excise Tax on Investment Income

Awaiting IRS aiting IRS guidance on guidance on –

• Who are “tuition paying students?”
• Is financial aid included in defining tuition paying

students?

• Can endowments be reduced through trusts or other

vehicles? Up Update – –

• Bipartisan Budget Act amended definition of student

2-23-18

• 49 private colleges and universities sent a letter to

congress on 3-7-18 requesting the new provision be repealed or amended

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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”

• Top five highest compensated employees for the

taxable year

• Once a covered employee always a covered employee

– Compensation treated as paid when rights to remuneration are no longer subject to substantial risk of forfeiture – Includes payment be a related organization

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Excise Tax on Executive Compensation

• Excess Parachute Payments

– Employee’s separation from employment – Must be covered employee (either in the current year or prior year) – In addition to tax on current covered employee earnings – Applies if payment equal or exceeds three times base amount

• Base amount if average comp for prior five years

– Deduct 1 times base amount

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Excise Tax on Executive Compensation

• Special Rules apply to remuneration paid

to licensed medical professionals and qualified medical professionals

• IRS listed as a priority in its guidance plan
• Take away –

– Assess exposure to the excise tax – Consider changes to existing compensation schemes

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Charitable Contributions

• AGI Limitation on cash charitable contributions

increased to 60%

– Trap for the unwary – limitation reduced to 50% if any amount of property is donated

• 80% deduction for charitable contributions made

for university athletic seating rights repealed

– Trap for the unwary – cash deduction will be denied regardless of the value assigned to seating rights

• Exception to the contemporaneous written

acknowledgement requirement for contributions

• f $250 or more repealed (exception permitted

reliance upon an organization’s Form 990 as an acknowledgement)

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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)

– Indiana University study

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Charitable Contributions

• Action items to protect charitable giving

– Emphasize mission to donor who may longer receive benefit of itemized deduction – Touch base with life time giving program to ensure gifts are unchanged – Reach out to corporate donors to provide an

• pportunity to give back part of there tax

windfall – Inform high net worth donors of new savings due to the suspension of Pease limitation – Stay in touch with Donor Advised Funds

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Employee Benefits

• Pickup of qualified transportation,

qualified parking and on-site athletic facilities

• Option to report on W-2 as income

– Overall tax likely to be less if reported as UBIT

• Credit for Family Medical Leave

payments

– Applies to exempt organizations? – Offset to UBIT and Parking Fringe Tax

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Employee Benefits

• The exclusion from gross income for

qualified moving expense reimbursements and the moving expense deduction have been suspended for tax years beginning after January 1, 2018 and before January 1, 2026

• Employees are no longer able to exclude

from gross income the value of employee achievement awards (regardless if the gift is given as cash, cash equivalents, gift cards, vacations, meals, lodging, event tickets, stocks, bonds or other securities)

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Other Provisions

• Elementary and secondary school

expenses (up to $10,000 per year) qualify toward qualified tuition programs. The provision applies to contributions made after Dec. 31, 2017

• Discharge of student debt is not taxable if

the discharge is due to the student’s death or disability. The provision applies for tax years 2018 through 2025.

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Not Included in the Final Act

• Private foundation excise tax reduction on

investment income

• Private foundation excise tax on failure to

distribute income

• Exception from excess business holdings

tax for independently operated philanthropic business holdings

• 501(c)(3) organizations permitted to make

statements related to political activities (“The Johnson Amendment”)

• Additional reporting requirements for

donor advised funds

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Not Included in the Final Act

• Licensing of an
• rganization’s name or logo

considered UBTI

• Elimination of research

exemption from UBTI unless results freely available to the public

• Changes to the intermediate

sanctions rules

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Not Included in the Final Act

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• The following provisions related

to education were not repealed:

– Deduction of interest on student loans – Deduction for qualified tuition and related expenses – Exclusion for qualified tuition reduction programs – Employer-provided education assistance

• Employer-provided housing

exclusion

• American Opportunity Tax Credit

Bipartisan Budget Act

• Passed and signed into law 2-9-18
• Included provisions of interest to higher ed

sector:

– Above the line deduction for qualified tuition expenses reinstated for 2017 – New exception from excess business holdings excise tax for independently operated philanthropic business holdings – Amended new IRC Section 4968 regarding 1.4% excise tax on investment income of private colleges and universities

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Other Recent Tax Developments

• 2017 Form 990 and instructions released

– Very few notable changes – Appendix D – penalty increase for failure to follow public inspection requirements – IRS is returning Forms 990 (electronic and paper) when the return is incomplete or incorrect

• IRS Select Check Database will be renamed

Tax Exempt Organization Search

– Will offer four years’ worth of determination letters

• IRS issues new withholding tables (Notice

1036)

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Other Recent Tax Developments

• Rev. Proc. 2018-15: Simplification of Tax

Exempt Organization Restructuring

– New application not required – .Surviving organization must

• Be a U.S. corporation of an unincorporated

association classified as such

• Carry out the same purposes as the original
• rganization
• Use the same TIN as the original organization
• If the original organization was a Section 501(c)(3),

it must have articles that meet the organizational test

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Going Forward

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