The newly passed Tax Cuts and Jobs Act (the Act) was sent to the President for signature yesterday and is expected to be signed into law in early January. The Act contains many provisions (most taking effect in 2018) that impact tax-exempt organizations. There will undoubtedly be comprehensive analyses addressing the changes followed by guidance from the IRS on its interpretation of the new law. However, there are several significant provisions in the Act that we believe tax-exempt organizations should be aware of now heading into the New Year.<
Unrelated Business Taxable Income (UBTI)
The Act requires that tax-exempt organizations calculate UBTI separately for each “trade or business”. A loss from one activity cannot be used to offset income from another activity. For example, a tax-exempt organization with a UBTI loss from the rental of debt-financed real property cannot use that loss to offset UBTI income from advertising.
UBTI resulting from certain fringe benefits expenses
For a taxable entity, the Act disallows a deduction for employer costs incurred in providing certain employee non-taxable fringe benefits (Code section 132(f)), including qualified transportation fringe benefits, parking facilities used in connection with qualified parking, and any on-premises athletic facility. To put a tax-exempt organization (which generally does not claim tax deductions) on the same footing as a taxable corporation, the Act requires the tax-exempt organization to report as UBTI the amount spent or incurred on these benefits.
Excise tax on compensation over $1 million
Before the Act, a taxable employer was subject to a deduction limitation of $1 million for compensation paid to an employee in excess of that amount. To put a tax-exempt organization on the same footing as a taxable entity, an excise tax of 21% is imposed on the organization for compensation paid to an employee in excess of $1 million. The tax is imposed only on the five highest paid employees of the organization who each receive in excess of $1 million.
As previously noted, some provisions will require additional guidance in order to assess the impact and comply with the new Act. If you are unsure how these changes will affect your organization, GRF will be providing a number of resources over the coming weeks to help our clients prepare for 2018. Please monitor our website for more information and register for our January 18 webinar, “Tax Reform Myth and Reality: Leveraging Changes in the Tax Law to Achieve Your Best Tax Position.” For more pressing questions related to the law’s impact on tax-exempt organizations, please contact Nonprofit Tax Partner Richard J. Locastro at 301-951-9090 or firstname.lastname@example.org.