January 12th, 2018
Tax Alert for Tax-Exempt Organizations
The Tax Cuts and Job Act of 2017, which was enacted on December 22, 2017 (the "Act"), contains several provisions that impact tax-exempt organizations ("EOs"). Some of these provisions impose new or additional taxes that may adversely affect an EO's ability to accomplish its exempt purposes. The following is a brief summary of certain significant provisions of the Act that affect EOs.
New Excise Tax for Certain Executive Compensation Payments
Effective for tax years beginning after December 31, 2017, the Act adds a new section 4960 to the Internal Revenue Code (the "Code"), under which EO employers will be subject to a 21% tax (the new corporate tax rate under the Act) on (i) compensation in excess of $1 million (excluding any "excess parachute payment") or (ii) any "excess parachute payment" paid to a "covered employee." For this purpose, the "covered employees" of an EO include its five highest-paid employees for the tax year and any other individuals who were "covered employees" for any tax year after 2016. Generally, an "excess parachute payment" is a payment made in connection with an employee's termination of employment that exceeds three times the employee's average annual compensation for the five tax years preceding such termination.
It should be noted that this excise tax is imposed on EOs, but not on their employees or management, as is frequently the case with respect to excise taxes applicable to EOs. Section 4958 of the Code, which imposes an excise tax on EO employees who receive excessive compensation (and, in certain cases, on managers), but not on EOs, remains in effect. It should also be noted that the Act specifically directs the Treasury Department to issue regulations to prevent avoidance of this new provision by, for example, arranging for the performance of services to an EO in a capacity other than as an employee.
Because this provision is effective for tax years beginning after December 31, 2017, every EO should be mindful of its potential application when considering the EO's present and future employee compensation (and any parachute payment) arrangements.
New Excise Tax on Net Investment Income of Endowments of Private Colleges and Universities
Effective for tax years beginning after December 31, 2017, the Act adds a new Code section 4968 to the Code, which imposes a 1.4% excise tax on the net investment income of a private college or university that has (i) at least 500 students (i.e., full-time students plus part-time students on a full-time student equivalent basis), more than half of whom are located in the United States, and (ii) assets at the close of the preceding tax year valued at $500,000 or more per student. For the purposes of determining whether this new excise tax is applicable, the assets of a private college or university will not include assets used directly in carrying out its exempt purposes.
The House-Senate Conference Report accompanying the Act indicates that the Treasury Department should promulgate regulations addressing, among other things, (a) how to determine whether assets are used directly in carrying out a college or university's exempt purpose, (b) the computation of net investment income and (c) how to determine whether a college or university's assets are intended or available for its use or benefit.
Changes Affecting Unrelated Business Taxable Income ("UBTI")
Computation of UBTI by an EO with Multiple Unrelated Trades or Businesses. Prior to the Act's passage, an EO generally reported its UBTI on an aggregate basis. The Act adds new section 512(a)(6) to the Code, which requires an EO to compute its UBTI separately for each unrelated trade or business of the EO, with the result that losses from one unrelated trade or business can no longer offset income from another unrelated trade or business of the EO. This change generally applies to EO tax years beginning after December 31, 2017.
Treatment of Certain Fringe Benefits. The Act adds new section 512(a)(7) to the Code, which requires that an EO's UBTI be increased by any amounts not deductible under current Code section 274 (dealing with payments for entertainment, amusement and recreation) paid or incurred for (i) qualified transportation fringe benefits, (ii) any parking facility used in connection with qualified parking or (iii) on-premises athletic facilities that are not, in each case, directly connected to any unrelated trade or business regularly carried on by the EO. New Code section 512(a)(7) applies to amounts paid or incurred after December 31, 2017.
Donation of $250 or More Requires a Contemporaneous Written Acknowledgement
The Act amends Code section 170 to require that all donors who contribute $250 or more to an EO obtain a contemporaneous written acknowledgement from the EO in order to receive a charitable deduction for the contribution. This new provision eliminates a prior law exception to the requirement to obtain such an acknowledgement where the recipient EO filed a return with the IRS including the donation information. This provision is effective for contributions in tax years beginning after December 21, 2016.
The foregoing is only a summary of certain key provisions of the Act affecting tax-exempt organizations. If you have questions about any of the provisions summarized above or other tax law changes made by the Act, contact Jeffrey Marks at (212) 826 5536 or firstname.lastname@example.org, Bernard C. Topper, Jr. at (212) 826 5547 or email@example.com or any other member of the Frankfurt Kurnit Charitable Organizations Group.
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