What Nonprofits Need to Know About the Tax Cuts and Jobs Act | npENGAGE

What Nonprofits Need to Know About the Tax Cuts and Jobs Act

By on May 2, 2018

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nonprofit tax law

*Editors note: This article is an effort by our guest contributor to provide additional clarity around the new U.S. tax law, and should not be viewed as legal advice or replace any guidance from your organization’s accountants or attorneys.

With the Tax Cuts and Jobs Act passing on December 20, 2017 and taking effect on January 1, 2018, nonprofits have been scrambling over the last couple of months to figure out what it means for them.

While there are numerous provisions that will affect every individual, business, and nonprofit in some way, I’ve found three main areas that will specifically impact nonprofits when it comes to paying taxes. To identify whether these could impact your organization, ask yourself these questions:

1. Does your organization compensate any employee over $1 million?

2. Does your organization provide on-site gym membership, parking or commuting expenses?

3. Does your organization currently report and file unrelated business taxable income (UBTI) for activities where some activities result in losses and others result in profits?

If you responded “yes” to any of these questions, then your organization may be affected by the Tax Cuts and Jobs Act. Read on to find out how:

 

“My organization has one or more employees that are compensated over $1 million.”

What does the Tax Cuts and Jobs Act say about this?

The Internal Revenue Code (IRC) Section 4960 imposes an excise tax of 21% on “remuneration” (i.e., compensation) over $1 million of the top five highest paid employees. The purpose of this section is to essentially level the playing field between tax-exempt entities and publicly traded corporations that are unable to deduct compensation in excess of $1 million, creating a similar tax effect.

What should we be thinking about?

The IRC section carves out certain compensation for performance of medical services by qualified medical professionals. More clarity is still being sought out for qualified medical professionals who are compensated not only for the performance of medical services but administrative, teaching, and other services as well.

Nonprofit boards should consider the excise tax as it affects the organization for the true cost of compensation for an employee. In addition, the board may want to consult their legal firm or accounting firm to determine if the compensation package for affected employees can be adjusted to a more favorable outcome for the organization.

 

“My organization provides on-site gym membership, parking and/or commuting expenses.”

What does the Tax Cuts and Jobs Act say about this?

The Tax Cuts and Jobs Act imposes an excise tax of 21% on the amount an organization pays to provide benefits such as on-site gym membership, comminuting, and parking expenses. This is specific to when the cost is paid or incurred directly by the organization.

What should we be thinking about?

Transportation benefits can qualify for pre-tax reduction of compensation. The organization can increase the gross compensation of the employee by the amount of the transportation benefits that will be deducted right back out pre-tax (pre- all taxes including withholding, FICA and Medicare taxes). Rather than paying outright, any reimbursements to employees for parking or commuting under an accountable plan would be excluded from the excise tax as well. In addition, the cost of on-site gym membership may be added to employees’ compensation reducing the cost for the organization.

What is still up in the air on this one?

Part of the provision calls for the excise tax of 21% to be applied on any parking facility used in connection with qualified parking as defined in section 132(f)(5)(C). This can easily be interpreted to suggest that the “cost” would encompass any organization that has a parking lot and allows employees to park there. As such, the industry is calling for clarification on this matter so keep your alerts up and be on the lookout for some additional guidance and clarification on this topic in the future.

 

“My organization has reportable unrelated business taxable activities, some of which result in losses and others of which result in profits.”

What does the Tax Cuts and Jobs Act say about this?

Historically, organizations were able to aggregate income, expenses, and other deductions from all unrelated trade or business activities and report a combined net operating loss (NOL) for all activities. The Tax Cuts and Jobs Act now calls for the reporting of multiple lines of UBTI to be tracked and reported separately, and no longer allows the comingling of NOL carryforwards beginning with 2018 losses. NOL carryforwards from years prior to January 1, 2018 can still be used to reduce all UBTI.

What should we be thinking about?

Historically, organizations may not have given thorough rigor to determining true costs from one UBTI area to another if they had similar sources of costs or potentially shared costs, and may benefit from conducting an analysis to ensure that all expenses are reasonably allocable to the correct applicable activity. As a result of these determinations, the organization may re-evaluate the UBTI activities it conducts or participates in.

In addition, the organization may want to consult with its attorneys to see if it should consider housing all its UBTI activities in a single taxable corporate subsidiary where its expenses and income can again be comingled and allow for potential overall reduction in tax liability.

What is still up in the air on this one?

There is still some clarity being called for on just how fragmented these activities need to be. For example, should every investment be reported as a separate business line activity, or is all investment activity that is subject to UBTI still able to be combined? This will be another area to keep an eye on for future clarification if it potentially affects your organization.

 

How do I learn more about the potential impacts of the tax law?

Note that this article is not intended to be an all-inclusive list of how the 2017 tax law may impact your organization, so be sure to review the effects of this Act in full. In addition, the National Council of Nonprofits has produced multiple resources for nonprofits detailing what has changed and where organizations can go for additional information.

ABOUT THE AUTHOR

Megan has over 10 years of experience with Not-for-Profit audits at Porte Brown. Prior to joining the Porte Brown team upon her graduation from Judson University, Megan had 4 years of industry experience working for a Not-for-Profit organization while completing her college education. As such, she brings a unique perspective to her audit work. Megan is currently working on completing her Masters of Nonprofit Administration with a focus in Organizational Development and Fundraising Management. Megan’s experiences and knowledge have provided her the opportunity to be a frequent speaker on Board Governance and Financial Management. Recent speaking engagements include: featured speaker bi-annually at Board Governance Training and other Workshops throughout the year sponsored by Arts & Business Council of Chicago.  In addition Megan does other various speaking engagements on a regular basis for various local organizations and local conferences.  Megan also serves as board member for the Tri-Town YMCA and her local Chamber of Commerce. Megan also serves as a member of the Illinois CPA Society’s Not-for-Profit Committee.  Megan is also a member of the Association of Professional Fundraisers.  Megan and her husband live in suburban Chicago with their two children ages 2 and 3 and enjoy vacationing at Disney World and attending local sporting events.

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