Tax reform, FASB updates lead to major changes for nonprofits

• Published date: 01 March 2018
• DOI: http://doi.org/10.1002/nba.30431
• Date: 01 March 2018

MARCH 2018

13

NONPROFIT BUSINESS ADVISOR

© 2018 Wiley Periodicals, Inc., A Wiley Company • All rights reserved

DOI: 10.1002/nba

2017–18 Exempt Organizations Tax Issues

Tax reform, FASB updates lead to major changes

for nonprots

Editor’s Note: This month, Larry Zimbler, MST,

EA, returns with Nonprot Business Advisor’s 2018

Special Tax Issue, reviewing important changes made

to laws and regulations affecting exempt organizations.

The normally scheduled tax update edition in spring

2017 did not occur; consequently, there will be items

in this update that reference events that occurred in

2016 as well as 2017, and 2018 to date. Be sure to read

Zimbler’s analysis, and always seek out competent,

professional advice to safely navigate both tax and

nontax compliance requirements.

The largest single focus for the past year has been

tax reform. On December 22, 2017, the law, with

the full name “An Act to provide for reconciliation

pursuant to titles II and V of the concurrent resolu-

tion on the budget for scal year 2018,” P.L. 115-97

(more popularly known as the Tax Cuts and Jobs

Act), was enacted.

With great fanfare and controversy, Congress

passed its compromise version of tax reform over in

spite of deep party divisions and no support from

any legislators of the opposing party. The law makes

massive changes to substantive tax law—probably the

most since the recodication that occurred in 1986,

most of which is effective Jan. 1, 2018. There are im-

portant changes for nonprot organizations included.

Individuals see substantial modifications to

itemized deductions, and an increased standard

deduction, leading many to believe that charitable

contributions will suffer greatly. However, many indi-

viduals will continue to itemize, and claim a deduction

for charitable contributions (subject to an increased

maximum) under the new law. These features of the

law are designed to sunset after 2025.

More important, the following comment is both

accurate and profound: “Charities are certainly going

to have to be creative in their messaging. Remember,

most of the surveys indicate people don’t give to save

taxes. They give because they want to make a difference

and they believe in the mission. Time to refocus on the

mission and vision. Time to embrace the donor. Sure,

you already do that but do it more” (Randy Fox from

“The New Golden Age of Planned Giving,” at http://

www.pgdc.com/pgdc/new-golden-age-planned-giving,

emphasis added).

The following are the four new tax law changes

that specically address tax-exempt organizations:

• Excise tax on executive compensation: Effective

for tax years beginning after Dec. 31, 2017, an excise

tax is imposed on a tax-exempt organization at the

corporate tax rate of 21% on the sum of:

1) Compensation paid to a “covered employee”

that exceeds $1,000,000; and

2) Any “excess parachute payment” (dened) to

a “covered employee.”

A covered employee is an employee of tax-exempt

organization if the employee is one of the ve highest-

compensated employees of the organization or was a

covered employee of the organization for any preced-

ing taxable year beginning after Dec. 31, 2016.

NOTE: This rule equalizes the tax treatment of ex-

ecutive compensation between taxable and tax-exempt

employers.

• Separate treatment of unrelated business activity

income: For tax years beginning after Dec. 31, 2017,

an exempt organization conducting more than one

unrelated business activity must compute the net in-

come of each unrelated business separately (but not

less than zero), then for purposes of the Unrelated

Business Income Tax, the activities are aggregated

and the aggregate net income amount is then sub-

jected to the $1,000 specic deduction.

This provision prevents an organization from using

the losses generated by one unrelated business activ-

ity from offsetting income from another unrelated

business activity.

Separately, UBTI must be increased (deduction de-

nied) for those transportation fringe benets that are

now disallowed in Section 274 beginning Jan. 1, 2018.

• Excise tax on net investment income of private

colleges and universities: An excise tax is imposed at

a rate of 1.4% on the net investment income of an

“applicable educational institution.”

An applicable educational institution is an institu-

tion:

1) that has at least 500 tuition-paying* students

during the preceding taxable year, more than

50% of whom are in the United States; that is