Taxing the Tax-Exempt?

2019 Health Care Industry Conference
April 26, 2019
Emily Smithson, CPA, Manager
FLORIDA INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS
Taxing the Tax-Exempt?
Impact of the Tax Cuts and Jobs Act
on Tax-Exempt Organizations

Prepared for Florida Institute of Certified Public Accountants Page 1
Tax Cuts and Jobs Act of 2017
 Signed into law on December 22, 2017
 Sweeping revisions to current tax law impacting
individuals, estates, businesses, and tax-exempt
organizations
 “In the news” changes:
 Reduction in corporate tax rate and elimination of
corporate Alternative Minimum Tax (AMT)
 Lower individual tax brackets
 Significant increase to standard deduction for individuals

Tax Cuts and Job Acts of 2017
 Provisions Impacting Tax-Exempt Organizations Include:
 Executive Compensation
 Unrelated Business Income Activities
 Change in Tax Rate
 Various Employer-Provided Fringe Benefits

Background: Executive Compensation –
For-Profit Corporations
 Internal Revenue Code (IRC) 162 (m) limits deduction to
$1 million for compensation paid to:
 CEO
 CFO
 Any other covered employee that is one of the three
highest compensated
 Applies to publicly traded corporations regulated under
the Securities and Exchange Commission (SEC)
 Rule has no impact on non-SEC corporations or tax-
exempt organizations

An Attempt at Parity
 The Tax Cuts and Jobs Act of 2017 (TCJA) adds an
excise tax to tax-exempt organizations that pay
compensation to a covered employee in excess of $1
million per year or on any excess parachute payment
paid
 The new corporate tax rate is 21%, therefore the excise
tax rate on excess compensation is also 21%
 Excise tax only applies to the compensation over $1
million per covered employee
 Applies to taxable years after December 31, 2017

Definitions: Compensation
 Include:
 Wages--as defined in Section 3401 (a)
 Amounts required to be included in gross income under
Section 457 (f)
 Exceptions:
 Roth contributions
 Renumeration not allowed under Section 162 (m)

Definitions: Covered Employee
 “Any employee (including any former employee) of an
applicable tax-exempt organization if the employee is
one of the 5 highest compensated employees of the
organization for the taxable year” (IRC 4960)
 Five year lookback – first applicable year is 2017

Definitions: Covered Employee
 Does not include compensation paid for services
performed as a medical or veterinary professional
 A member of the C-suite may provide both medical and
administrative services
 Compensation would be allocated to each type of duty
 $1M test only applies to compensation for administrative
services

Definitions: Related Organizations
 “A person or government entity shall be treated as related
to an applicable tax-exempt organization if such person
or government entity –
 Controls or is controlled by the organization
 Is controlled by one or more persons that control the
organization
 Is a supporting organization during the taxable year with
respect to the organization”

Compliance Issues
 Period covered in measuring compensation:
 Section 4960 references “taxable year” – employer or
employee?
 Notice 2019–09 clarifies taxable year is the calendar year
with or within the employer’s taxable year

Compliance Issues
 Form 4720, Return of Certain Excise Taxes Under
Chapters 41 and 42 of the Internal Revenue Code
 This form has historically been used for “punitive” taxes
levied on tax-exempt organizations
 Proposed regulations issued on November 5, 2018,
indicate Form 4720 be filed by the 15th day of the fifth
month after the end of the organization’s taxable year when
the excise liability was incurred
 Form 4720 updated to include Schedule N, Tax on
Executive Compensation
 Because this burden is an excise tax, quarterly estimated
payments are not required

Compliance Issues: Consolidated Groups
 Top 5 determination – appears to apply in aggregate to a
consolidated group
 Compensation includes that which is paid by all of the
members of the consolidated group to the employee
 Liability for excise tax is allocated to each organization
pro rata based on its proportion of compensation paid to
the employee
 How does reporting work if employee splits time between
a for-profit related organization and a tax-exempt entity?

Planning Opportunities
 Identify top 5 covered employees and determine if
compensation exceeds or will exceed $1 million
 Track former employees (in years after 2016) for post-
termination compensation
 Consider consolidating all highly compensated
employees into one employer, such as the parent entity
 Carefully review executive employment contracts,
severance agreements, and non-qualified deferred
compensation (NQDC) plans
 Vesting in NQDC plans may trigger the tax in future years
(even if the executive is not normally paid in excess of $1M)
 Opportunities for longer vesting schedules?

 If applicable, organizations should accrue the 21% tax
on the books (and file necessary excise tax forms,
without need for estimated payments)
 Consider licensed medical professionals – track clinical
vs. nonclinical pay

 Regardless of compensation (even if well under $1M),
Intermediate Sanctions still apply
 Do not neglect the requirements for reasonable
compensation!
 Keep watching for additional guidance on the TCJA

Taxing the Tax-Exempt?
 Is it “parity” if the for-profit corporation incurs a taxable
loss and, therefore, is not harmed by a disallowed
deduction for excess compensation?
 Does the 21% excise tax benefit the communities served
by applicable tax-exempt organizations?
 Many states are increasing tax assessments of tax-
exempt organizations or revoking tax-exemption for
other state and local taxes, such as property taxes
 Will the “requirements” of tax-exemption become too
burdensome?
 How will this impact executive compensation and what is
considered fair market value (FMV)?

Unrelated Business Activities:
New Tax Rate
 21%
 Executive Compensation
 UBI Tax
 Tax rate treats tax-exempt entities same as taxable
entities

Unrelated Business Activities
 Historically:
 Unrelated business activities aggregated for purposes of
reporting on Form 990-T
 Profitable activities may be offset by activities generating
losses

 New Rules:
 Losses from one unrelated activity may not offset the
income from another unrelated trade or business
 Calculate UBI tax separately for each UBI activity
 Consistent with IRS position to view perpetual losses as
not maintaining a profit motive
 Effective for tax years beginning after December 31, 2017
 Create “buckets” for each UBI activity to determine the net
income or loss from each
 Unrelated business activities generating losses in one
taxable year may be used to offset income from the same
activity in a subsequent taxable year

 No criteria defined for determining separate UBI
activities
 Notice 2018-67
 Rely on a “reasonable, good-faith interpretation”
 NAICS six-digit codes
 Aggregate all debt-financed income or all income from
controlled entities
 Aggregate investment activities

 Net Operating Losses:
 May be carried forward indefinitely but eliminated
carryback period
 Post 2017 NOLS limited to 80% of taxable income (all
organizations, not just tax-exempt organizations)
 Ordering of NOLS
 Pre-2018
 Post-2017

 Multiple activities? Consider conducting them in a
single taxable corporate subsidiary or within a
subsidiary of a consolidated group
 Audit activities to verify all expenses captured

Parking
 Qualified transportation fringe – parking garages
 Disallow deductions for “the expense of any qualified
transportation fringe (as defined in Section 132 (f))
provided to the employee of the taxpayer”

Parking
 What is qualified parking?
 Qualified parking is defined as either:
 On or near the employer’s business premises
 At a location from which employee commutes to work

Parking
 Employer’s expense of providing the parking, rather than
the value, determines the amount considered UBI
 What is considered expenses?

Parking
 Parking expenses subject to 512 (a) (7)
 Included:
 Repairs
 Maintenance
 Utilities
 Insurance
 Property taxes
 Interest
 Snow and ice removal
 Leaf removal
 Trash removal
 Cleaning
 Landscaping
 Parking lot attendant expenses
 Security
 Rent or lease payments
 Contract fees with outside parties to
maintain the parking area
 Excluded:
 Depreciation
 Expenses paid for items not located
on, or in, the parking facility, such as
landscaping and lighting
 Expenses for parking area where
employees pay to park
 Expenses for parking that is included
as wages in an employee’s W-2

Parking
 Do you have UBI related to providing parking to your
employees?
 Step 1: Calculate costs of reserved employee costs
 Step 2: Determine primary use of the remaining parking
spots
 Step 3: Calculate the allowance for specifically reserved
nonemployee spots
 Step 4: Determine remaining use and allowable
expenses

Parking
 Eliminate reserved parking spots?
 Mixed use parking
 Include the value in compensation to employees?

Fringe Benefits
 Request for Guidance
 June 7, 2018, Rep. Mike Conway introduced Nonprofits
Support Act (H.R. 6037) to repeal sections 512 (a) (6)
and 512 (a) (7)
 June 21, 2018, National Council of Nonprofits sends
correspondence to Secretary Mnuchin and
Commissioner Kautter
 July 11, 2018, Council on Foundations sends
correspondence to Members of the 115th Congress

Fringe Benefits
On-Site Athletic Facilities
 New Law – Value of use of on-site athletic facilities to
employees subject to UBI tax
 On-Premises athletic facility is defined as:
 Located on premises of the employer
 Operated by employer
 Substantially all of the use is by employees, their spouses,
and dependent children

Fringe Benefits
Moving Expenses
 New Law
 May no longer exclude income reimbursements for moving
expenses from income
 May no longer deduct any unreimbursed qualified moving
expenses
 Effective in 2018

Questions

Emily J. Smithson
Manager – Tax Services
PYA, P.C.
esmithson@pyapc.com
(800) 270-9629
www.pyapc.com

Taxing the Tax-Exempt?

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