The 2017 Tax Reform Act that was passed on December 22, 2017 has significant changes that impact tax exempt organizations. As trusted advisors serving more than 100 nonprofit clients, Green Hasson Janks has highlighted select provisions of the Act. Here is a summary of the changes:
PROVISION: DISALLOWED FRINGE BENEFITS SUBJECT TO UNRELATED BUSINESS TAXABLE INCOME
PRE-REFORM LAW
Prior to 2018 tax exempt organizations were allowed to provide certain fringe benefits to employees and those benefits were not treated as unrelated business income to the tax exempt organization or included as taxable wages to the employee.
TAX REFORM LAW
Any of the following disallowed fringe benefit expenses, which are paid or incurred by the organization after 2017, will be included as unrelated business income to the tax exempt organization.
Qualified Transportation Fringe includes:
• Transportation in a commuter highway vehicle if such transportation is in connection with travel between the employee’s residence and place of employment.
• Any transit pass
• Any qualified bicycle commuting reimbursement.
Parking Facility Used in Connection with Qualified Parking
• Parking provided to an employee on or near the business premises of the employer or on or near a location from which the employee commutes to work by transportation.
On-premises Athletic Facility
• The value of any on-premises athletic facility provided by an employer to his employees.
• “On-premises athletic facility” means located on the premises of the employer and operated by the employer
IMPLICATIONS
Should a tax exempt organization decide to no longer provide such fringe benefits, the organization has the option of increasing an individual’s overall wages to compensate for such expenses now being incurred by its employees.
If organizations decide to continue to provide these nondeductible fringe benefits they will need to file the Form 990-T and pay tax on the employee benefits at the corporate tax rate.
PROVISION: SPECIAL RULE FOR ORGANIZATIONS WITH MORE THAN 1 UNRELATED TRADE OR BUSINESS
PRE-REFORM LAW
Tax exempt organizations that carried on more than 1 unrelated trade or business were able to aggregate deductions generated by one trade or business to offset income earned by another.
TAX REFORM LAW
• Tax exempt organizations with more than 1 unrelated trade or business must calculate the unrelated business income for each trade or business separately. Organizations may no longer use deductions from one trade or business to offset the income from a separate trade or business. Gains and losses have to be calculated and applied separately.
• Net operating losses carryovers from operations before January 1, 2018 will still be allowed to offset income derived from another unrelated trade or business. The requirement will apply to tax years beginning after December 31, 2017.
• The tax reform law limits the net operating loss deduction to 80% of taxable income for tax years beginning after December 31, 2017.
• Carry back of losses has been eliminated but operating losses can be carried forward indefinitely.
IMPLICATIONS
• Tax exempt organizations should analyze their current unrelated business income tax cost allocation methodology to ensure all the appropriate expenses are being allocated to the correct unrelated trade or business.
• Another option is for organizations to consider moving their current activities into a separate wholly owned corporation in order to report and offset the unrelated trade or businesses together under one entity.
PROVISION: NET OPERATING LOSS DEDUCTION
PRE-REFORM LAW
Net operating losses could be carried back 2 years and carried forward for 20 years. The entire loss could be used to offset 100% of the taxable income in a current year.
TAX REFORM LAW
• The tax reform law limits the net operating loss deduction to 80% of taxable income for tax years beginning after December 31, 2017.
• Carry back of losses has been eliminated but operating losses can be carried forward indefinitely.
IMPLICATIONS
Tax exempt organizations with an unrelated trade or business will still have to pay tax on 20% of unrelated business income when applying prior year net operating losses.
OTHER TAX REFORM LAWS
Another change that mostly impacts private colleges and universities:
• Excise tax equal to the corporate tax rate of 21% on the tax exempt organization for executive compensation in excess of $1 million. The tax also applies to parachute payments. The excise tax on compensation was really meant to target the larger colleges and universities that are paying large compensations to coaches in the athletic department.
Lizbeth Nevarez, CPA, is Senior Manager and Nonprofit Tax Leader for Green Hasson Janks. She has 10 years of public accounting experience providing tax and consulting services and leads the Firm’s Nonprofit Tax Practice. She currently serves on the Board of Hillsides, a nonprofit organization dedicated to providing family services and the Board of Executive Service Corps.
