Tax Act Impacts Exempt Organizations

Posted on: 3/28/18 by Thomas W. Hosey, CPA

The recently enacted Tax Cuts and Jobs Act (the “Act”) has resulted in controversy.  The debate has centered around 1) the probable impact on the economy of the changes in corporate and business taxation; and 2) whether the Act will benefit middle-class individual taxpayers or only the wealthiest 1%.  The changes specific to and impacting tax-exempt organizations were barely mentioned. 

Unrelated Trade or Business Changes

Under pre-Act law, an exempt organization that operates multiple unrelated trades or businesses (UTBs) aggregates income from all such activities and subtracts the aggregate of all deductions.  Consequently, a loss from one UTB can offset the income from another UTB. 

The Act provides for tax years beginning after December 31, 2017, an organization’s unrelated trade or business income for a tax year is the sum of the amounts (not less than zero) for each separate UTB, less the specific deduction allowed under IRC Sec. 512(b)(12).  Therefore, a loss from one UTB for a tax year cannot be used to offset the income of a different UTB for the same tax year.  However, a loss from a UTB can be carried forward and used to offset income from the same UTB in another tax year.  A special transition rule exempts net operating losses that arose in a tax year beginning before January 2, 2018, from the separate UTB rule. 

Separately accounting for multiple businesses may require modifications to an organization’s records to ensure that income and expenses can be tracked by business rather than globally for all businesses. 

Private School Excise Tax

Private colleges and universities have previously been exempt from excise tax on their net investment income.  For tax years beginning after December 31, 2017, the Act imposes an excise tax of 1.4% on their net investment income (NII) when the educational institution:

  • has at least 500 tuition paying students, more than half of whom are located in the U.S.; and
  • has assets with an aggregate fair market value at the end of the preceding tax year (other than assets used directly in carrying out the school’s exempt purpose) of at least $500,000 per student. 

In determining if a school meets the asset-per-student threshold and in determining its NII, assets and NII of related organizations are treated as being the school’s, subject to certain specified exceptions.

Executive Compensation

The Act imposes a new 21% excise tax on tax-exempt organizations that pay excessive compensation to their top executives, effective for tax years beginning after December 31, 2017.  Such tax applies to the sum of 1) compensation in excess of $1 million paid to a covered employee and 2) any excess parachute payment to a covered employee.  A covered employee is one of the organization’s five highest compensated employees for the tax year or was a covered employee of the organization (or a predecessor) for any preceding tax year beginning after December 31, 2016.  Special rules apply to compensation paid to licensed medical professionals. 

Conclusion

Exempt organizations should monitor Treasury Department and IRS pronouncements concerning the new legislation, especially where transitional rules may be applicable.  

Contact your Marvin and Company, P.C. representative for additional information.

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