by MICPA | Nov 16, 2017   ()

The proposed tax legislation working its way through the House and Senate will have a major impact on non-profits. This impact includes the taxation of fringe benefits non-profits offer to their employees and the taxation of the non-profits themselves.  Consequently, a major review may be required for many non-profits to see whether operational changes are required.

As discussed here, “non-profits” includes Sec. 501(c) organizations, primarily 501(c)(3)s.  Some of the provisions of the proposed legislation are only in the House bill, some only in the Senate bill, and some are in both.  Following each topic, an “H” means House only, an “S” means Senate only, and an “H&S” means both. Unless otherwise noted, the effective date of the provision is taxable years beginning after December 31, 2017.

Remember that the shape of any final legislation is still very much in flux, so stay tuned!

Proposals Impacting the Fringe Benefits and Compensation Offered to Non-Profit Employees

  • Employer provided housing: The exclusion for housing provided for the convenience of the employer and for employees of educational institutions would be limited to $50,000 ($25,000 for a married individual filing a joint return) and would phase out for highly compensated individuals (income of $120,000 for 2017, as adjusted for inflation) at a rate of one dollar for every two dollars of adjusted gross income earned by the individual beyond the statutory threshold of being highly compensated.  H
  • Moving expense reimbursements:  Employer reimbursements for employee moving expenses would be taxable wages to the employee. H
  • Adoption assistance programs:  Employer reimbursements for employee adoption expenses would be taxable wages to the employee. H
  • Excise tax on executive compensation:  A tax-exempt organization would be subject to a 20% excise tax on compensation in excess of $1 million paid to any of its five highest paid employees for the tax year. The excise tax would apply to all remuneration paid to a covered person for services, including cash and the cash value of all remuneration (including benefits) paid in a medium other than cash, except for payments to a tax-qualified retirement plan, and amounts that are excludable from the executive’s gross income.  H&S
  • Entertainment, parking, commuting, and on premises athletic facilities incurred in unrelated business income activitiesThe tax-exempt organization is not allowed this deductions in computing its unrelated business income (if any).  H&S
  • Entertainment, parking, commuting, and on premises athletic facilities incurred in organization’s exempt purposesThe tax-exempt organization must add these costs to its unrelated business income. H
  • Non-Qualified Deferred Compensation:  The current law rules on non-qualified deferred compensation are largely repealed, subjecting such deferred compensation to taxation in the year the services are provided.  The present-law rules for eligible and ineligible deferred compensation plans of tax-exempt employers and for ineligible deferred compensation plans of State and local governments do not apply with respect to deferred amounts attributable to services performed after December 31, 2017. In addition, the proposal applies income tax reporting and withholding, as applicable, to amounts required to be included in gross income of employees and other service providers.  S
  • Independent Contractors vs. Employees:  The proposal provides a safe harbor under which, for all Code purposes (and notwithstanding any Code provision to the contrary), if certain requirements are met with respect to service performed by a service provider, with respect to such service: (1) the service provider is not treated as an employee, (2) the service recipient is not treated as an employer, (3) a payor is not treated as an employer, and (4) the compensation paid or received for the service is not treated as paid or received with respect to employment. S
  • Strengthening of “Intermediate Sanctions” Provisions:  The intermediate sanctions provisions currently require a “market analysis” to determine reasonable compensation of non-profit executives and additional scrutiny of transactions with parties related to the non-profit.  Failing to comply with these provisions can lead to a 25% excise tax on the person benefitted by the transaction.  The proposed provisions significantly strengthen these provisions by removing some presumptions favorable to the entity and the benefitted individual.  S


Proposals Impacting Certain Unrelated Business Income Tax Reporting by the Tax-Exempt Entity


  • Unrelated Business Income Tax Extended to all Tax-Exempts:  All entities exempt from tax under section 501(a), notwithstanding the entity’s exemption under any other provision of the Code, would be subject to the UBIT rules.  Thus organizations like religious entities and state and local government are clearly subject to the UBIT rules. H
  • Exclusion of Research-related Income from UBIT:  Under current law, income derived from a research trade or business is exempt from UBIT in the following cases: (1) research performed for the United States (including agencies and instrumentalities) or any State (or political subdivision); (2) research performed by a college, university or hospital for any person; and (3) research performed by an organization operated primarily for the purposes of carrying on fundamental research the results of which are freely available to the general public. Under proposed provision, the organization may exclude from UBIT only (3), above, the income from such fundamental research the results of which are freely made available to the public. H
  • Royalty Income:  Royalty income from licensed the name and logo of the tax-exempt entity would be treated as unrelated business income. S
  • Multiple Unrelated Businesses.  The proposal would treat separately each unrelated business so that losses from one of them could not offset income from another.  The result would be higher net unrelated business income.  S

Private Foundation Provisions 

  • Simplification of Excise Tax on Private Foundations:  The excise tax would be a flat tax of 1.4%. H&S
  • Art Museum Enhance Requirements:  Under current law, private operating foundations, which are a form of private foundation that may use tax-free donations to fund their own activities rather than make grants to other charities, are exempt from a 30% excise tax on certain undistributed earnings that other private foundations must pay. Under the proposed provision, an art museum claiming the status of a private operating foundation would not be recognized as such unless it is open to the public for at least 1,000 hours per year.H
  • Excess for-profit business holdings:  Under current law, a private foundation may not own more than a 20% interest in a for-profit business, and any private foundation that does hold more than such an excess holding is subject to a 10% excise tax based on the value of that excess holding.  Any private foundation that does not divest itself of such excess holding by the close of the subsequent year is subject to a 200% excise tax based on the value of that excess holding.  Under the provision, private foundations would be exempt from this excess business-holdings tax if they own a for-profit business under these conditions: (1) the foundation owns all of the for-profit business’ voting stock, (2) the private foundation acquired all of its interests in the for-profit business other than by purchasing it, (3) the for-profit business distributes all of its net operating income for any given tax year to the private foundation within 120 days of the close of that tax year, and (4) the for-profit business’ directors and executives are not substantial contributors to the private foundation nor make up a majority of the private foundation’s board of directors. H

Other Proposed Provisions 

  • Political Statements:  Under current law, an entity exempt from tax under section 501(c)(3) is prohibited from “participating in, or intervening in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.”  Under the provision, this language, known as the Johnson amendment, is qualified so that entities described under section 508(c)(1)(A) (religious organizations) would not fail to be treated as organized and operated exclusively for a religious purpose, assuming the speech is in the ordinary course of the organization’s business and its expenses are de minimus.  H
  • Private College Investment Income Excise Tax:  Under the provision, certain private colleges and universities would be subject to a 1.4% excise tax on net investment income. The provision would only apply to private colleges and universities that have at least 500 students and assets (other than those used directly in carrying out the institution’s educational purposes) valued at the close of the preceding tax year of at least $500,000 per full-time student. State colleges and universities would not be subject to the provision.  H&S
  • Charitable Contributions for College Athletic Seating Rights: Currently, 80% of a payment to a university to purchase athletic tickets is deductible. The proposal amends section 170(l) to provide that no charitable deduction shall be allowed for any amount that is a payment to an institution of higher education in exchange for which the payor receives the right to purchase tickets or seating at an athletic event. H&S
  • Additional Reporting Requirements for Donor-Advised Funds:  Donor advised funds would be required to disclose annually their policies on inactive donor advised funds as well as the average amount of grants made from their donor advised funds. H
  • Tax-Exempt Status of Professional Sports Leagues:  The tax-exempt status of such leagues is repealed.  S
Source: MICPA
Source: MICPA

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