Tax Cuts and Jobs Act - Tax-Exempt Organizations

With the passage of the Tax Cuts and Jobs Act (“Act”), there is much concern, as well as confusion, as to the impact the new legislation has on both businesses and individuals alike. The tax changes contained in the Act are the most sweeping since the Tax Reform Act of 1986.  As with any tax change, there will be winners and losers, but all taxpayers should be familiar with how the new legislation could impact their specific situation. Below we address the impact on tax exempt organizations: 

Unrelated business taxable income (UBTI) treatment of entities exempt from tax under Internal Revenue Code sections 501(a) and 511 – The Act does not include any provision to clarify if an entity had dual tax exempt status, for example, under 501a, 401(a), and 115 of the Code pertaining to its exposure to section 511 (UBIT).

Exclusion of research income from UBTI – The thought process was to modify the exclusion; however, there is no change to existing provisions.

UBTI separately computed for each trade or business activity – Under the current law, an organization determines its UBTI based on aggregate income and subtracts aggregate deductions, thereby allowing offset of multiple trades and businesses.

Effective for tax years after December 31, 2017, UBTI must be computed separately with respect to each trade or business, the aggregate of which cannot be less than zero.  A net operating loss is only allowed with respect to a trade or business from which the loss arose.  There will be a special transition rule for NOLs carried into years beginning after January 1, 2018.

21% excise tax on excessive compensation paid by tax-exempt organizations (section 4960) – As of their 2018 tax year, tax-exempt employers will be liable for an excise tax equal to 21% of the sum of remuneration paid to their “covered employees” ÷ (a) in excess of $1 million, plus (b) any amount that would constitute an excess parachute payment under the Golden Parachutes rules (but with respect to the employee's separation from service rather than a change of control of the employer).  

The Conference agreement does not modify: 

• Existing provisions of excise tax of private foundation investment income, or of the private operating foundation requirement relating to the operation of an art museum
• Current provision regarding the exception to private foundation excess business holding rules
• Current provisions for section 501(c)(3) organizations permitted to make statements relating to political campaigns in the ordinary course of carrying out their exempt purposes
• Current provisions regarding additional reporting requirements for donor advised funds sponsoring an organization

The agreement includes no provision:

• To repeal tuition remission or related benefits under sec 117(d) or to repeal the exclusion for educational assistance programs under section 127 from taxable income (up to $5,250)
• On the limitation on exclusion for employer-provided housing under section 119
• On interest on private activity bonds issued after December 31, 2017

The agreement:

• Includes a provision repealing the exclusion from gross income for interest on a bond issued to advance refund another bond
• Follows the Senate amendment with modification regarding excise tax based on investment income of private colleges and universities. The provision impacts only a small amount of colleges and universities, as currently stated.  It is effective after December 31, 2017.

Contact: Thomas Lanning, Partner – Tax, Thomas.Lanning@CohnReznick.com, 646-834-4108

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