Nonprofit Tax Update: What We’ve Learned About the TCJA Provisions Affecting Exempt Organizations

By Magdalena M. Czerniawski  |  April 2, 2019

Since the passing of the Tax Cuts and Jobs Act (TCJA) in 2017, nonprofits and exempt organizations have grappled with the provisions that would affect their 2018 returns. As we’ve written about in this newsletter before, four provisions in particular directly affect exempt organizations: the excise tax on excess executive compensation; the excise tax on investment income of private colleges; Unrelated Business Taxable Income calculated separately for each trade or business; and disallowed fringe benefit expenses.

Since the enactment of the TCJA, the IRS has issued interim guidance on each of these provisions, providing clarity on how to treat these provisions and what to expect moving forward. As your organization plans for 2018 tax returns, it would be wise to revisit each of these areas and the additional guidance that is now available.

Excise Tax on Excess Executive Compensation

In an effort to achieve parity between tax-exempt organizations and taxable publicly held corporations, Congress enacted Code Section 4960, effective for taxable years beginning after December 31, 2017, “provid[ing] 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 paid to covered employees 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. The guidance primarily provides clarification on the definitions of applicable tax-exempt organization, excess remuneration, covered employee and excess parachute payment.

Click here to read our full Nonprofit Tax Alert on Notice 2019-09.

Excise Tax on Investment Income of Private Colleges

While private foundations were previously subject to 1 or 2% tax on net investment incomes, the same was not true of colleges and universities. Code Section 4968, in an effort to parallel the tax on private foundations, 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 includes interim guidance and proposed regulations on this provision. Specifically, the guidance provided a definition for “applicable educational institution,” defining it 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; and whose aggregate fair market value of “assets” is at least $500,000 per student.

The notice also clarified that “students” here refers to the number of students based on a daily average number of full-time students attending the institution, including part-time student equivalents. In addition, it 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 that are used to directly carry out an institution’s exempt purpose are excluded.

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.

Disallowed Fringe Benefit Expenses

Prior to the enactment of the TCJA, 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, with the goal of achieving parity between tax-exempt organizations and for-profit entities, which are no longer allowed to deduct these expenses.

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.

Click here to read more about these notices from our Nonprofit, Government & Healthcare Group.

About Magdalena M. Czerniawski