With the many changes brought on by tax reform, here are key provisions affecting tax-exempt organizations:
• The legislation enforces a 4% excise tax on net investment income on private colleges and universities and their related organizations that have:
• At least 500 students;
• At least 50% of students are located in the United States; and
• Assets that have an aggregate fair market value of at least $500,000 per full-time student at the end of the preceding year. This applies to assets that are not used directly in carrying out the institution’s educational purpose.
The assets and net investment income of related organizations would be included in determining the applicability and amount of the tax if the assets and income are available to the educational institution. The number of students is calculated using an average daily student count. Part-time students are on a full-time equivalent basis. The tax is effective for tax years after 2017.
- Tax-exempt organizations must treat funds used to pay for certain fringe benefits, including qualified transportation and on-premises athletic facilities provided to their employees as UBTI for amounts paid or incurred after 2017.
- Modifies UBTI to require organizations to calculate UBTI separately for each trade or business carried on — in effect, prohibiting deductions relating to one business from offsetting income derived from another business, effective for tax years beginning after 2017.
- The rule enforces an excise tax equal to the corporate tax rate on compensation plus any parachute payment in excess of $1,000,000 paid to any of a tax-exempt organization’s five top compensated employees or covered people for the tax year (including any employee who was one of the organization’s five highest paid employees in any tax year beginning after 2016).
The tax applies to all remuneration (including non-cash benefits) except for payments to tax-qualified retirement plans and amounts that are excludible from the executive’s gross income. Certain rules regarding the determination of when rights to compensation are not subject to a substantial risk of forfeiture applicable to deferred compensation plans apply in determining when compensation may be subject to the tax.
Additionally, payments to medical professionals for services rendered are exempt from the definition of “compensation” for purposes of the tax. The tax is effective for tax years beginning after 2017.
If you have questions about these changes, contact an MCB NFP Advisor at 703-218-3600 or click here. To review a summary of recent articles related to exempt organizations, click here. To learn more about MCB’s Not-for-profit practice, click here.