Join us to learn more about how tax reform impacts nonprofits across the industry. By Congress approving the H.R. 1 Tax Cuts and Jobs Act, it significantly alters the U.S. tax code.

1. TAX REFORM UPDATE
FOR NONPROFITS
January 31, 2018
Frank H. Smith, Tax Partner
Aaron M. Fox, Tax Senior Manager

2. LEARNING OBJECTIVES / NASBA
Attendees will learn to:
• Understand how the updated tax law impacts their organizations
• Have a working knowledge of changes in tax law
• Begin making adjustments in operations to minimize tax burden
COURSE UPDATE DATE: JANUARY 25, 2018
COURSE REVIEWED BY: GRAZIELLA RHODES
COURSE REVIEW DATE: JANUARY 27, 2018
NASBA FIELD OF STUDY: NONPROFIT TAX
Tax Reform for Nonprofits/ Page 2

3. INTRODUCTION
FRANK SMITH
Partner
Nonprofit Tax Advisory Services
AARON FOX
Senior Manager
Nonprofit Tax Advisory Services
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4. AGENDA
• Background of tax reform
• Provisions not included
• Excise taxes on executive compensation
• Excise taxes on endowments
• Changes to taxability of fringe benefits
• UBI silos
• Net operating losses
• Charitable giving impact
• Modifications to the charitable deductions
• Other EO tax impacts
• Looking forward
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5. BACKGROUND OF TAX REFORM
“2017 Tax Cuts and Jobs Act”
Many provisions in the bill from older proposals
Tax cuts, base broadening, and “pay-fors”
How IRS studies played a role
• Colleges and universities
• Taxpayers with income on 990 but no tax on 990-T
Provisions sunset due to 10 year senate reconciliation rules
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6. PROVISIONS NOT INCLUDED IN
FINAL BILL
Taxation of royalties and certain research
Johnson amendment repeal
Private foundations rate changes
Intermediate sanctions expansion to 501(c)(5) and (6) organizations
Elimination of rebuttable presumption of reasonableness
Elimination of the Estate Tax
Investment FIFO rule
Donor advised fund rules update
Art museums
Elimination of Private Activity Tax Exempt Bonds
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7. EXCISE TAXES ON EXECUTIVE
COMPENSATION
For employer’s tax years beginning after December 31, 2017
Applicable tax-exempt organizations
• Organizations exempt from tax under §501(a)
• Farmer’s cooperative organizations (§521(b)(1))
• States and municipalities (§115)
• Political organizations (§527)
• State schools?
Covered employees – any current or former employee that is:
Top 5 highest – must be five highest for the tax year, or was a covered
employee of the organization for the tax year after Dec 31, 2016
• Not required to be an officer, director, key employee or HCE on Part VII
• Foreign employees – no exclusion for foreign employees
• Doctors – excluded as the IRS focus was primarily on executive / administrative
Clock starts 1/1/17 for determine who will be covered, excise tax starts 1/1/18
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8. REMUNERATION
Wages subject to federal income tax withholding
• Includes non-cash benefits
• Excludes benefits subject to substantial risk of forfeiture (i.e., not yet vested)
• Excludes payments to licensed medical professionals for medical services (including
veterinarians)
• Includes amounts paid by related organizations and governmental entities
In cases with more than one employer, each employer is subject to their
pro rata share of the tax.
Excess parachute payments – compensation that is contingent on the
employee’s separation from employment
• Must equal or exceed three times the employee’s base amount
• Excludes qualified retirement plans (403(b) and (457(b))
• Employees under $120,000 are excluded
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9. REMUNERATION
Calculating Excise Tax Example
Joe is the Executive Director of a nonprofit with a calendar year. Joe is
the highest paid employee and is leaving the organization and his last
day is 6/30/18. He vests in his 457(f) plan at termination.
2017 annual salary - $600,000
457(f) plan balance - $500,000
Severance package - $1,000,000
Is Joe a covered employee?
Is the organization subject to excise tax for 2018?
If so, how much?
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10. REMUNERATION
Calculating Excise Tax Example
Joe is the Executive Director of a nonprofit with a calendar year. Joe is
the highest paid employee and is leaving the organization and his last
day is 6/30/18. He vests in his 457(f) plan at termination.
2017 annual salary - $600,000 (same for 5 year period)
457(f) plan balance - $500,000
Severance package - $1,000,000
Is Joe a covered employee? – Yes, one of the highest five paid employees
Is the organization subject to excise tax for 2018? – No, total
remuneration $800,000. No excess parachute payment since payout is
not 3x average salary over last 5 years.
If so, how much? – N/A
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11. REMUNERATION
Calculating Excise Tax Example 2
Susan is the CFO for a nonprofit with a calendar year and has been the
highest paid employee during her tenure. Her last day with the
organization will be 12/31/18. She will receive a severance package upon
her exit, as well as a 457(b) payout.
2014 through 2018 – average annual salary $150,000
Severance package - $500,000
457(b) payout – $250,000
Is Susan a covered employee?
Is the organization subject to excise tax for 2018?
If so, how much?
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12. REMUNERATION
Calculating Excise Tax Example 2
Susan is the CFO for a nonprofit with a calendar year and has been the
highest paid employee during her tenure. Her last day with the
organization will be 12/31/18. She will receive a severance package upon
her exit, as well as a 457(b) payout.
2014 through 2018 – average annual salary $150,000
Severance package - $500,000
457(b) payout – $250,000
Is Susan a covered employee? Yes, one of the highest five paid
employees
Is the organization subject to excise tax for 2018? ((3 x $150,000) =
$450,000 < $500,000
If so, how much? $500,000 - $150,000 = $350,000 x 21% = $73,500
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13. POTENTIAL STRATEGIES FOR
MITIGATION
Make use of compensation that doesn’t enter the calculation
Deferred compensation plans – not when the cash is paid, but when it
vests
Fiscal year clients – excise tax applies to tax years beginning after 1/1/18
There will be enhanced scrutiny for those organizations paying tax so:
• Keep track of all covered employees
• Review compensation agreements and especially deferred comp arrangements to
determine payout and vesting schedules. Avoid big payouts from 457(f) plans.
• Structure future agreements to be sensitive to this tax
• Avoid separation agreements or restructure so that separation is not the trigger to
payout
• If unavoidable, keep payout below 3x average compensation
Rebuttable presumption of reasonableness – this tax essentially says any
compensation taxed is not reasonable, counteracting the effectiveness of
this presumption. If an IRS audit is triggered, will still need this
documentation to demonstrate compensation is reasonable. Will the IRS
issue a refund if its determined later the compensation is reasonable?
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14. EXCISE TAX ON ENDOWMENTS
Private endowments tax – 1.4% excise tax on investment income at
private colleges
Which schools are applicable
• With at least 500 students
• Assets valued at $500,000 per student
• More than 50% of students are located in the US
Tax is expected to raise $1.8 billion in revenue over 10 years
According to National Association of Independent Colleges and
Universities (NAICU) tax will impact about 35 institutions.
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15. EXCISE TAX ON ENDOWMENTS
How is the tax calculated?
Based on net investment income, including interest, dividends, rents,
royalties (and income from similar sources), and capital gain net income
and is reduced by expenses incurred to earn this income.
Similar to net investment income rules under §4940 for private
foundations.
House and Senate Committee of Conference recognizes more guidance is
necessary. Treasury will need to issue regulations to describe:
• Assets that are used directly in carrying out the educational institution’s exempt
purpose
• Computation of net investment income
• Assets that are intended or available for the use or benefit of the educational
institution
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16. FRINGE BENEFITS TAXABLE
Effective for amounts paid or incurred after December 31, 2017
Employers may no longer deduct expenses for providing qualified
transportation, parking, and on-premises athletic facilities.
§274 – No deduction for benefits provided or reimbursements made to
employees as qualified transportation fringe benefits
In order to keep a “level playing field”, tax-exempt organizations now
must include such expenses in UBTI. (Would exclude amounts paid and
already connected with an unrelated trade or business.)
Qualified transportation fringe
• Commuter transportation
• Transit passes
• Qualified parking
Two small exceptions
• Qualified bicycle benefit
• Necessary for ensuring the safety of the employee
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17. FRINGE BENEFITS TAXABLE
For Employees - Other than qualified bicycle reimbursement, no change to
employees with regards to these benefits. Qualified parking and
transportation benefits excluded from wages, monthly maximum moved to
$260 for 2018.
For Employers – many questions still outstanding…
• Can employers choose to pay out the amount as cash compensation in lieu of
providing a qualified benefit?
• Does this include parking garages owned or leased? How are those costs
determine?
• How to determine the cost of athletic facilities included in the lease if not
stipulated?
• Does it include amounts deferred by an employee through employee’s paycheck?
• How to even pay the tax? File on Form 990-T? Form 5330?
• Make quarterly estimated payments?
• Will states adapt their rules to compensate for federal change?
• Can we cease offering certain benefit programs?
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18. FRINGE BENEFITS TAXABLE
The tax law was passed at the end of 2017, still very recent and
interpretation is still ongoing.
The statute and congressional reports are all that exist currently. Due to
the significant changes to the tax rules for exempt organizations, the IRS
is very likely going to issue guidance on this and related matters later this
year.
Recommend a “wait and see” approach with regards to major benefit
plan decisions. In the meantime start gathering information with regards
to:
• Who used the parking garage or on-site athletic facilities? Employees, members,
students, patients, patrons or the general public
• If parking space is rented, perhaps renegotiate lease to include free parking at no
cost to the EO
• Check with HR to determine state requirements for benefit plan offerings
• Determine total transportation, parking, athletic facility expenses/reimbursements
for employee use to get an idea of additional tax liability
• If tax avoidance is the goal, provide benefits as taxable to employee or cease
offering the benefit
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19. UBI LOSSES
Under preexisting law: Tax-exempt organizations conducting more than
one unrelated trade or business activities are able to offset losses from
one activity Against the gains from another.
Under current law: Such activities must now be treated as separate.
Carryforward losses from an unrelated business can be used against a
future year’s operations of the same business activity.
How are activities grouped? What is considered a single unrelated trade
or business?
• Periodical advertising within different magazines?
• Print advertising and web advertising?
• Career center income and web advertising?
• Alternative investment flowing through multiple investments?
• Rental income from several debt-financed properties?
IRS guidance likely forthcoming
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20. NET OPERATING LOSSES
Under preexisting law: Net operating losses from unrelated business
activities are allowed to offset the taxable income of the previous two
years or, if no taxable income was generated in those years, the current
loss is allowed to be carried forward up to 20 years.
Under current law: Such losses may no longer be carried back but can
be carried forward indefinitely. Furthermore, only an offset of up to 80%
of taxable income is available. Prior losses are still fully available for use.
Considerations:
In combination with UBI silos, individual NOL tracking spreadsheets
required for each activity going forward
GAAP financial impact of the reduced value of NOL’s
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21. TAX RATES EXAMPLE
Foundation earns $40,000 from advertising, ($12,000) from rental, and
($5,000) from a job web program, all of which are unrelated business
income lines. The Foundation also offers qualified commuter and parking
benefits that cost the organization $25,000 to provide.
2017 calculation
$40,000 – $12,000 – $5,000 = $23,000 x 15% = $3,450
2018 calculation
($40,000 + 25,000) x $21 = $13,650
Same fact pattern, $10,200 increase in federal taxes year to year
Rental and job web program NOL carryforwards at 80% of net income
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22. CHARITABLE GIVING IMPACT
Factors creating reduced tax incentive for giving:
• Estate and gift taxes – Exemption for estate and gift taxes is increased to
$11,200,000 (indexed for inflation)
• Standard deduction is increased
– Married filing jointly: $24,000
– Head of Household: $18,000
– All other categories: $12,000
• Ordinary tax rates – rates are lowered for all taxpayers and thresholds are
adjusted. Current seven tax brackets remain.
• State and local deduction – limited to $10,000 on Schedule A, which includes
income, property, and sales/use.
• Athletic seating rights – Denial of charitable deduction for payments made in
exchange for athletic seating rights. Under old law donors were able to deduct
80% paid.
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23. MODIFICATIONS TO CHARITABLE
DEDUCTION
Factors creating increased tax incentive for giving:
• Cash contributions to public charities are limited to 60% of AGI instead of
previously at 50%
• “Pease” limitation repealed – overall limitation on itemized deductions removed
through 2025.
Overall impact of law
Brookings Institution study - $12-$20 billion/year reduction
Council on Foundation - $16-$24 billion/year reduction
Indiana University - $4.9 and $13.1 billion in charitable giving reduction
Joint Committee on Taxation - $13 billion/year reduction, costing 220,000
– 264,000 nonprofit jobs
Around 94% of filers have no tax incentive to give
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24. OTHER EO MATTERS
Tax exempt bonds
• Private activity bonds would have been completely eliminated in the House bill,
requiring nonprofits to finance activities with taxable debt
• The bill repeals the exclusion from gross income for interest on a bond issued to
advance refund another bond. Interest paid to advance refunding bond investors is
now taxable.
• No change to current refunding bonds otherwise
Affordable care act mandate
• Penalty removed from Individual Mandate effective 2019
• Self-insured plans no longer required to report persons covered under
the plan
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25. OTHER EO MATTERS
Employer credit for paid family and medical leave
• Employers can claim a tax credit ranging from 12.5 – 25 percent of the amount of
wages paid to employees during family and medical leave for up to twelve weeks
• Leave benefit amount doesn’t have to be equal to the employee’s normal pay but
must be at least 50% of that amount
• Qualifying employees are those that have been employed for at least a year and
who are not paid more than 60% of the “highly compensated employee” dollar
amount on an annual basis (equates to $72,000 for 2018)
Employer must have written policy
Policy must provide for FT EE’s two weeks of paid leave and must
provide PT E’s proportionate amount of leave.
Credit will be revisited by Congress in two years
Should be available to nonprofits through the general business credits
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26. OTHER EO MATTERS
Employee withholding
• IRS issued updated income-tax withholding tables for employees on January 11
• Must be implemented as soon as possible but no later than 2/15
• Draft W-4 is available, final not yet released
Foreign reporting for international investments
State conformity to law changes
• States that use federal taxable income as basis for paying taxes will follow suit
• DC, Virginia, and Maryland are similar to the federal income tax definitions, but not
identical
• Some states don’t subject nonprofit corporations to state income tax (PA, NV, NJ)
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27. LOOKING FORWARD
Treasury and IRS guidance – will be busy in 2018 issuing guidance
Technical corrections – unintended consequences of the bill
Tax courts – will be providing guidance for years to come
10-year sunset – we will be talking again about tax reform in 2028
Early days with tax law, still a lot of uncertainty about how to interpret the
law.
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28. LOOKING FORWARD
To do list:
• Review compensation arrangements
• Review deferred comp plans
• Review transportation, parking, athletic benefit offerings
• Determine if UBI Silos will have an impact on quarterly payments
• Determine impact of NOL changes on quarterly payments
• Evaluate how changes in tax code will impact your donors
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29. 29
THANK YOU!
Frank H. Smith
Direct: 202-822-5000
E-mail: fsmith@raffa.com
Aaron M. Fox
Direct: 202-822-5000
E-mail: afox@raffa.com
Tax Reform for Nonprofits/ Page