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Sweeping Changes Come to Tax Exempt Organizations Under the New Tax Bill

AAFCPAs would like to make Tax Exempt Organizations aware that the Tax Cuts and Jobs Act, known officially as H.R. 1, (the “Act”) has enacted widespread changes to the tax rules affecting charitable nonprofits.  AAFCPAs has outlined four changes that are especially noteworthy:

  1. There is now a 21% excise tax on executive compensation exceeding $1 million:
    • This excise tax rate is equal to the new corporate tax rate under the Act;
    • Section 4960 of the Act imposes this 21% excise tax on executive compensation over $1 million to the organization’s ”covered employees”:
      • This includes either current employees who are among the five highest compensated employees, or former employees who were previously among the five highest in any year beginning after December 31, 2016;
      • This is calculated anew each year after 2017;
      • This tax applies to:
        • Current compensation;
        • Deferred compensation;
        • Parachute payments; and
    • This section does not apply to compensation paid to licensed medical professionals who are directly performing medical or veterinary services.
  2. Unrelated Business Taxable Income must be computed separately for each unrelated trade or business:
    • Until the current changes in Section 512(a)(6) of the Act, Tax Exempt Organizations could aggregate all profits and losses from various unrelated businesses and pay tax only on any resulting net income;
    • Going forward losses from one unrelated business may not be used to offset another; and
    • Tax Exempt Organizations will now be required to “silo” each unrelated trade or business from others in order to prevent taking a deduction from one unrelated trade or business and offsetting the gains from another.
  3. Disallowed fringe benefits are now treated as Unrelated Business Taxable Income:
    • Under Section 512(a)(7) of the Act, Unrelated Business Income will now be increased by the nondeductible amount of fringe benefit expenses incurred by a Tax Exempt Organization;
    • Fringe benefits are expenses that include:
      • Any qualified transportation fringe;
      • Any parking facility used in connection with qualified parking; and
      • Any on-premises athletic facility; and
    • Tax exempt organizations who provide these fringe benefits will need to decide whether to eliminate these fringe benefits or be prepared to file a 990-T and pay the resulting tax.
  4. Private colleges and universities with significant endowments will be subject to new excise tax:
    • Under Section 4968 of the Act, there is now a 1.4% excise tax on the net investment income of certain applicable private colleges and universities:
      • These “applicable educational institutions” include those that:
        • have at least 500 students during the preceding tax year, of which 50% are located in the United States;
        • are private educational institutions; and
        • have assets with an aggregate fair market value of at least $500,000 per student (excluding those assets used directly in carrying out the institution’s exempt purpose).

The Tax Cuts and Jobs Act represents a dramatic overhaul of the U.S. tax code, including the above noted areas, as well as provisions that impact donors and the tax benefits they may receive from making a charitable contribution.

AAFCPAs advises nonprofit clients to be aware of these provisions and how they may impact your fundraising and operations. The tax practice of AAFCPAs will continue to monitor the legislative process and keep you informed as significant changes occur or provisions become clarified. If you have any questions please contact your AAFCPAs partner, or Josh England, JD, LLM at 774.512.4109, jengland@nullaafcpa.com.

About the Author

Joshua England, Tax Attorney
Josh is a tax attorney with extensive expertise advising high-net-worth individuals, nonprofits, and business owners and investors on effective strategies to ensure tax efficiency, asset protection, well-executed succession plans, and wealth preservation. He has been practicing law since 2000 and focuses his practice on the areas of wealth transfer planning, fiduciary and individual taxation, business structuring to maximize tax efficiency, and advising tax-exempt organizations, foundations and charitable donors. Josh works extensively with business owners and investors to analyze the financial impact a business structure will have from both a business and personal perspective.