Tax Reform Fall Update – What’s Next for Nonprofits?

The Tax Cuts and Jobs Act (TCJA) has raised a lot of questions in the nonprofit community since it was passed by Congress in December 2017.

Six months ago we talked about the reasons why nonprofit leaders should care about tax reform and now we will highlight recent big news and how it will impact your employees and operations.

ABA Letter to Treasury

On August 28, 2018 the American Bar Association (ABA) Section of Taxation sent comments to the Department of the Treasury (Treasury) regarding guidance needed for Tax Reform Section 512(a)(7) and 4960.  You will recall that 512(a)(7) imposes a tax on qualified transportation fringes and 4960 imposes a tax on compensation over a million dollars or excessive parachute payments.  These reforms were effective December 31, 2017 and will have an immediate impact on your employees, your budget, and employee policies.

The ABA letter reflects the questions that we in the nonprofit community have all been asking and their recommendations will help you prepare a complete and accurate tax return next year.

Qualified Transportation Fringes

The ABA recommend that the Treasury take the following actions regarding qualified transportation fringes (QTFs):

Issue Guidance mitigating the burden on Nonprofits

Some nonprofits will now need to prepare a Form 990-T solely as a result of section 512(a)(7).  The ABA suggests that some of the burden can be mitigate if the Treasury provides guidance instructing these organizations to complete only certain specified lines in the Form 990-T. 

Specific Relief for Penalties until guidance is issued

Treasury should allow nonprofits to apply a reasonable, consistent, good-faith interpretation of section impacting QTFs before guidance is issued and provide specific relief from penalties for underpayment, accuracy-related, and other matters until guidance is issued and in effect.

Clarify guidance for parking facilities

Treasury should clarify that Section 274 does not categorically disallow deductible expenses for nonprofits that operate a parking facility used in connection with qualified parking or an on-premises athletic facility (not used by highly compensated employees (HCEs). 

Issue guidance for calculating unrelated business taxable income

Treasury should clarify that unrelated business taxable income (UBTI) under Section 512(a)(7) is the lesser of (a) the amount of the expense disallowed under Section 274 that is incurred in providing the QTF and (b) the value of the QTF.   Treasury should confirm that existing guidance under sections 51 and 132 for determining the value of a QTF applies and all users of a parking facility other than employees will be considered “customers”.

Employers can include the valued of benefits as wages to avoid UBIT

Treasury should confirm that a QTF provided to an employee is UBTI only to the extent that it is excluded from employee wages under section 132(a)(5).  A QTF treated entirely as wages does not give rise to UBTI at all and the Treasury should confirm that employers have the discretion to include all or a portion of the value of any benefit as wages.

Variable expenses directly connected with a parking lot

Treasury should issue guidance that amounts paid for a QTF are limited to variable expenses directly connected with providing fringes and do not include depreciation or capital expenses required to be capitalized and that amounts paid must relate to the use of the facility.

Other issues needing guidance regarding QTFs

Treasury should clarify that expenses treated as UBTI do not necessarily constitute private business use under qualified private bond activity rules; that employers can take deductions against UBTI such as indirect costs, net operating losses carried forward, and charitable contribution deductions; and that shuttle buses is not a QTF but rather is an ordinary and necessary business expense.

Parachute payments & Comp over $1 million

Section 4960 of the Act imposes a 21% excise tax on “excess parachute payments” and on “remuneration” over $1 million paid to a “covered employee”.   The ABA recommend that the Treasury take the following actions:

Specific Relief for Penalties until guidance is issued

Treasury should allow nonprofits to apply a reasonable, consistent, good-faith interpretation of section 4960 before the date of issuance of any guidelines issued by the Treasury and the Service.

Calendar year can be established accounting period

Treasury should allow nonprofits with a fiscal year for its established accounting period to use a calendar year within that period to determine whether an employee is one of the five “highest compensated employees” and to apply the $1 million threshold.

Do not include remuneration from a prior tax year

Treasury should issue guidance that section 4960 does not apply to remuneration or parachute payments that would have been taken into account in a prior tax year if this section would have applied to the prior tax year, based on a reasonable, consistent, and good-faith interpretation, even if it did not exceed $1 million or it was not considered “excess”.

Limit remuneration to amounts paid

Treasury should issue guidance that remuneration would mean approximately the same thing as “reportable compensation” on the Form 990 and would not include “other compensation”.  It is not entirely clear what remuneration means and but is should not include increases in amounts vested in a section 457(f).

Definition of predecessor means predecessor employer

Treasury should issue guidance that an organization’s reasonable good-faith determination that a transaction did not result in a predecessor-successor relationship will be considered dispositive if the transaction occurred five or more years ago.

Other issues needing guidance regarding compensation

Treasury should issue guidance determining or defining “highest compensated employees”, “control”, “remuneration”, “contingent”, “separation from employment with the employer”, and other terms.

Final Thoughts

At over 63 pages in the ABA letter includes more recommendations than space allowed for this brief newsletter so we have provided a link to our website Resources page ABA Treasury Letter.  In a future newsletter, we will address the other recommendations that space constraints did not allow us to include here.  We recommend you use this summary as a starting point for your next tax planning meeting with your department heads to understand the key issues affecting your organization and be proactive about planning for the future.