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Updates for Nonprofits under the New Tax Act

This blog was revised on 3/18/19 to address new guidance from the IRS.

AAFCPAs would like to make Tax Exempt Organizations aware of recent legislative and regulatory updates related to the Tax Cuts and Jobs Act, (“TCJA”) and how these may affect charitable nonprofits.

Legislation Attempts to Repeal the New Unrelated Business Tax on Tax Exempt Organizations Providing Qualified Fringe Benefits

On December 20, 2018, the House passed the Retirement, Savings, and Other Tax Relief Act (H.R. 88) that would eliminate the provision under Section 512(a)(7) of the TCJA where Unrelated Business Income will now be increased by the nondeductible amount of fringe benefit expenses incurred by a Tax Exempt Organization.

However, it is widely reported that this bill will fail in the Senate as it does not appear to have the necessary votes to pass.  As of this date, tax exempt organizations may rely upon the below guidance:

What is Considered a Nondeductible Parking Expense that will now Trigger Unrelated Business Income Tax (UBIT)?

On December 10, 2018, the IRS issued Notice 2018-99 which provides guidance on nondeductible parking fringe benefit expenses on which tax exempt organizations would now be subject to UBIT.

IRS Notice 2018-99 states that the parking expenses referenced in Section 512(a)(7) of the TCJA are “those expenses related to the property an employer owns or leases, at or near the employer’s business or at a location from which the employee commutes to work.”  Parking expenses, for purposes of calculating UBIT below, do not include depreciation, but do include “repairs, maintenance, utility costs, insurance, property taxes, interest, snow and ice removal, leaf removal, trash removal, cleaning, landscape costs, parking lot attendant expenses, security, and rent or lease payments or a portion of a rent or lease payment.”

The notice goes on to state that, until further guidance is provided, tax exempt organizations may rely on the following methods to calculate nondeductible parking expenses subject to UBIT:

  1. Calculate the disallowance for reserved employee spots:
    • This percentage of parking expenses is non-deductible under Section 274 and subject to UBIT;
  2. Determine the primary use of remaining spots (“primary use test”):
    • If over 50% of the remaining spots are for the general public and not reserved for employees, then the remaining total parking expenses are not subject to UBIT;
  3. Calculate the allowance for reserved nonemployee spots:
    • If the primary use of the remaining parking spots is not to provide parking to the general public, the exempt organization should determine the spots reserved for visitors and customers that cannot be used by employees. If the exempt organization has reserved non-employee spots, it may determine the percentage of reserved non-employee spots in relation to the remaining total parking spots and multiply that percentage by the taxpayer’s remaining total parking expenses. The result is the amount that is not included in UBIT; and
  4. Determine remaining use and allocable expenses:
    • If there are any allocable parking expenses not accounted for in the above three methods, a tax-exempt organization must reasonably determine the employee use of the remaining parking spots during normal business hours and allocate the parking expenses between nondeductible under Section 274 and subject to UBIT, or deductible and not subject to UBIT.

These rules may seem cumbersome and complicated. AAFCPAs advises clients to consider discontinuing specifically reserved parking spots for employees as a way to avoid being subject to UBIT.

IRS Issues Guidance Allowing for Retroactive Reduction of Reserved Parking Spots

On December 10, 2018, the IRS issued IR-2018-247, which provides guidance allowing tax exempt organizations to retroactively reduce the amount of their nondeductible parking expenses by reducing or eliminating the number of employee reserved parking spots that will trigger UBIT, as mentioned above.  By making this change, tax exempt organizations may be able to avoid having to file a Form 990-T or reduce the resulting tax.  The notice mentions that this change will “apply retroactively to January 1, 2018.” However, this change must be completed by March 31, 2019 to be retroactively applied.

Estimated Tax Penalty Relief

Under section 512(b) of the TCJA, the changes increasing UBIT by the nondeductible amount of fringe benefit expenses paid or incurred by a Tax Exempt Organization apply to amounts “paid or incurred after December 31, 2017.”

On December 10, 2018, the IRS issued Notice 2018-100 which outlines relief from underpayment penalties for certain tax exempt organizations that provided qualified transportation fringe benefits to employees.

In order to qualify for a waiver of underpayment penalties under this notice, the tax exempt organization must:

  1. Not have been required to file a Form 990-T in the preceding taxable year;
  2. Timely pay the amount reported for the taxable year in which relief was granted; and
  3. Write “Notice 2018-100” on the top of its Form 990-T in order to claim the waiver.

2018 990T Observations

In Section 512(a)(6) of the TCJA, losses from one unrelated trade or business cannot be used to offset income from a separate unrelated trade or business. However, under IRS Notice 2018-67, an organization will be allowed to take, as a deduction from total unrelated business tax, any pre-2018 net operating loss deduction without being restricted by the “siloing” requirements of Section 512(a)(6).  A tax exempt organization will be allowed to have separate pre-2018 losses and post-2018 losses.

It was unclear, before the 2018 990-T for 2018 was released, whether tax exempt organizations would be allowed to use pre-2018 losses to offset UBIT paid for providing qualified fringe benefits.  As line 34 lists “amounts paid for disallowed fringes” and line 36 states to subtract any “net operating loss arising in tax years beginning before January 1, 2018 from the amounts paid for disallowed fringes,”  tax exempt organizations will be allowed to offset amounts paid for these disallowed fringes with any pre-2018 net operating losses.

IRS TE/GE FY 2019 Program Letter

In October of 2018, the IRS released a letter outlining their priorities regarding tax exempt organizations for Fiscal Year 19. The highlights of the program letter include plans to:

  • Increase priority examinations of 501(c)(7)s, Section 4947(a)(1) non-exempt charitable trusts, and self-dealing by foundations;
  • Increase use of data-driven selection models to identify informational returns with higher risk of employment tax non-compliance; and
  • Hire around 40 new revenue agents to work in the tax exempt sector of the IRS expediting determination applications and other areas of compliance.

We continue to remind clients that the TCJA represents a dramatic overhaul of the U.S. tax code, and we expect the IRS to continue to issue guidance on the mechanics and rules regarding how these changes will be applied.

As always, 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: Christopher Consoletti, Esq. at 774.512.4180, cconsoletti@nullaafcpa.com; Josh England, Esq., LLM at 774.512.4109, jengland@nullaafcpa.com; or your AAFCPAs Partner.

About the Authors

Chris Consoletti
Chris, in conjunction with our multi-disciplinary team of CPAs, investment & business advisors, provides effective tax planning and research, tax compliance, charitable planning, and asset protection solutions for individuals and their families, trusts & estates, nonprofits & foundations, corporations and partnerships. He has expertise in tax law pertaining to wealth preservation vehicles and will use all of the rules under the law to ensure that AAFCPAs’ clients have every opportunity to protect and save their assets. He engages clients in in-depth discussions to identify what assets need to be shielded, and what current measures are in place for risk management. 
Joshua England, Tax Attorney
Josh is a tax strategist 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.