Four TCJA Provisions Affecting Exempt Organizations: A Quick UpdateBy Magdalena M. Czerniawski | May 1, 2019
Since the enactment of the Tax Cuts and Jobs Act (TCJA), the IRS has issued interim guidance on each of the four provisions that directly affect exempt organizations. Here’s a brief update on where things stand. To read more about these provisions, please read my full-length article, “What We’ve Learned About the TCJA Provisions Affecting Exempt Organizations.” Be sure to check in with your organization’s tax advisor, especially if you are still working on 2018 filings.
1) Excise Tax on Excess Executive Compensation
Code Section 4960, effective for taxable years beginning after December 31, 2017, provides that “excess remuneration and excess parachute payments paid by an applicable tax-exempt organization to a covered employee are subject to an excise tax (currently at a rate of 21%).”
This 21% excise tax would be imposed on compensation or excess parachute payments in excess of $1 million. “Covered employee” refers to either the Chief Executive Officer (CEO) of the organization or one of the organization’s four highest paid officers (other than the CEO).
The IRS recently issued Notice 2019-09, a 92-page document in Q&A format that provides interim guidance on this excise tax. Click here to read our full Nonprofit Tax Alert on Notice 2019-09.
2) Excise Tax on Investment Income of Private Colleges
Private foundations have previously been subject to 1 or 2% tax on net investment incomes, but the same was not true for colleges and universities. Code Section 4968 introduced a 1.4% tax on the net investment income of applicable educational institutions.
In the time since the TCJA was passed, the IRS issued Notice 2018-55, which defines an “applicable educational institution” as an eligible education institution that:
- has at least 500 tuition-paying students during the previous year
- has more than 50% of those students in the U.S.
- is not a state college or university
- has an aggregate fair market value of “assets” of at least $500,000 per student.
The notice also clarified that “students” refers to the number of students based on a daily average number of full-time students attending the institution, including part-time student equivalents, and specified that the “assets” value includes the fair market value of assets at the end of the filing organization’s preceding tax year and includes the assets of related organizations. Assets used to directly carry out an institution’s exempt purpose are excluded.
3) Unrelated Business Taxable Income
Code section 512(a)(6) imposes a tax of 21% on each separate line of business an exempt organization has. Prior to the TCJA, multiple lines of unrelated trade or business income (UBTI) could offset each other.
Last summer, the IRS issued Notice 2018-67 with transitional guidance on this provision, including the revised treatment of net operating losses and clarification on aggregating UBTI from partnership interests.
Click here to read our full Nonprofit Tax Alert on Notice 2018-67.
4) Disallowed Fringe Benefit Expenses
Previously, exempt organizations were not subject to tax on certain transportation fringe benefits. The new Code section 512(a)(7) imposes a 21% tax on disallowed transportation fringe benefits.
Late last year, the IRS issued Notice 2018-99 and Notice 2018-100 relating to the treatment of the nondeductible portion of parking and transportation fringe expenses as UBTI. Notice 2018-99 provides interim guidance for taxpayers to determine the amount of parking expenses related to qualified transportation fringes that are not deductible by the organization, while Notice 2018-100 provides penalty relief that is particularly noteworthy for organizations filing Form 990-T as a result of this new code section.
About Magdalena M. Czerniawski
Magdalena M. Czerniawski, CPA, MBA, is a Partner at Marks Paneth LLP and a member of the firm’s Nonprofit, Government & Healthcare Group. With over 15 years of nonprofit industry experience, she provides tax services to a wide array of nonprofits, including charitable organizations, schools, social welfare organizations, professional associations and private foundations. In addition to providing tax planning and advisory services, Ms. Czerniawski specializes in matters related to ASC 740-10 (FIN 48), the reporting... READ MORE +
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