Tax Reform: Significant Changes to the Taxation Landscape for Taxexempt

Transcription

1 Tax Reform: Significant Changes to the Taxation Landscape for Taxexempt Entities Focusing on the Tax Cuts and Jobs Act (H.R. 1) Baker Tilly refers to Baker Tilly Virchow Krause, LLP, an independently owned and managed member of Baker Tilly International.

2 Objectives > Understand key changes under the Tax Cuts and Jobs Act > Determine the impact on tax-exempt organizations > Identify planning opportunities to mitigate tax exposure > Participate by asking questions 2

3 TCJA provisions impacting charitable contributions 3

4 Potential impact on charitable contributions > Married couples will now have a $24,000 standard deduction > State tax deduction capped at $10,000 The anti-sweet spot : $14,000 worth of other deductions need to be generated before the value of itemizing starts. Will people give less under these circumstances? 4

5 Charitable contributions >Corporate tax rate decreases from 35% to 21% >No financial incentive to give for non-itemizers >Fewer people will itemize deductions >Increase of the estate tax exemption >Elimination of the athletic seating rights deduction 5

6 Potential impact on charitable contributions As tax rates go down, the after-tax cost of charitable contributions goes up. 6

7 Potential impact on charitable contributions Projected decline in giving of percent (as much as $26 billion) 7

8 Charitable contributions >Tax-exempt organizations must continue to make the mission personal to the donor >Tax laws don t really change generosity >Donors can bunch charitable contributions >The development of new and innovative connections is paramount 8

9 Strategies under new tax law Bunching strategy > Bunching charitable contributions in a given year to take advantage of standard deduction in the off year >Encourage donors to establish a donor advised fund and contribute multiple years worth of donations >Establish a fund at the local community foundation to hold multi-year donations 9

10 Strategies under new tax law (continued) Other positives? > Will increased take home pay equate to higher giving? > Will other economic factors have a greater impact than the tax deduction? More jobs, growing economy, investment portfolio increasing, etc. > States are started to respond with state specific laws 10

11 Other ideas that have been considered at the federal level Ideas that have been discussed (but not in current legislation) Create an above-the-line deduction Expand IRA charity transfers Allow 150% deduction for certain types of charities Longer carryover period for excess contributions Offer a tax credit for contributions to targeted groups 11

12 Excise tax on compensation for certain employees 12

13 Excise taxes > Exempt organization is subject to a 21% excise tax on compensation in excess of $1 million paid to any of its covered employees 13

14 Excise tax on executive compensation Estimated impact to the sector Of the 1.5 million tax-exempt organizations, approximately 2,700 paid compensation in excess of $1 million to highly compensated employees in 2014 according to a WSJ survey of IRS records. Of those reported, 75 percent were in healthcare and 10 percent were in higher education (coaches in high profile sports in significant conferences). 14

15 Excise taxes Executive compensation Includes: Amounts treated as wages for federal income tax withholding purposes Compensation paid by related organizations or governmental entities Taxable amounts included in gross income under 457(f) nonqualified deferred compensation Excludes: Designated Roth contributions Remuneration paid to a licensed medical professional for performance of medical services Excess parachute payments (computed separately) 15

16 Excise taxes Covered employee Considerations > Evaluated for each tax year > Each entity within a controlled group needs to assess employees by entity and as a group > Includes predecessor organizations Employee > Current year s top five highest compensated employees (not just officers or key employees) > Former top five highest compensated employees, as determined for tax years beginning after December 31, 2016 > Once an employee is considered a covered employee, they remain a covered employee regardless of top five highest compensated status in given tax year 16

17 Excise tax on executive compensation Excess parachute payments > A payment contingent on the separation from service of an employee > A payment which exceeds three times the covered employee s base amount, regardless if such amount is less than $1 million [PV of the payment(s)] > Base amount is the average annualized compensation includable in gross income for the five taxable years ending before the date of the employee s separation > Does not include payments under a qualified retirement plan, simplified employee pension plan, simplified retirement account or tax-deferred annuity (403(b)) **Parachute payments made to employees who are not highly compensated employees are exempt 17

18 Excise taxes Minimizing tax exposure > Prospective restructuring of separation agreements and executive compensation packages > Compensation smoothing for deferred compensation > Restructure with increased tax-qualified retirement benefits 18

19 Fringe benefits taxed as UBI 19

20 Taxation of Certain Fringe Benefits Value of providing employees with transportation fringe benefits, on-premises gyms, and other athletic facilities treated as UBI Mirrors TCJA provisions disallowing certain fringe benefit deductions of forprofit companies Effective for amounts paid or incurred after December 31,

21 Fringe benefits Fringe benefits subject to unrelated business income > Transportation fringe benefits excludable from employee income under 132(f): Commuter vehicle/van pooling Transit passes/vouchers Qualified parking Qualified bicycle commuting reimbursement* > A facility used in connection with qualified parking > On-site athletic facility expenses *Disallowed as pre-tax reimbursement for tax years after Dec 31, 2017 and before Jan 1, Sunset on disallowance for years after Dec 31, 2025 resulting in unrelated business income. 21

22 Fringe benefits Qualified parking > Parking provided to an employee > Located on or near the employer s business premises > Used by an employee commuting to work Does not include parking on or near property used by the employee for residential purposes 22

23 Updates IRS guidance > IRS Publication 15-B updated for fringe benefits changes released March, 2018 > This publication indicates that pre-tax parking benefits are transportation fringe benefit expenses and not compensation 23

24 Fringe benefits Options for fringe benefits > File Form 990-T: Maintain pre-reform benefit Pay 21% on the total expense incurred > No Form 990-T: Eliminate pre-reform benefits Tax employees for the benefit Gross up employees taxable wages for increased taxes 24

25 Fringe benefits Options for Fringe Benefits - Example Eliminate benefit; no gross up to employee Maintain benefit as is, report as UBI Eliminate and provide gross up to employee Original cost per employee $260/month 3,120 3,120 3,120 Gross up to employee fed/state/payroll tax 15% + 5.5% + 6.2% % = 28.15% N/A N/A 1,222 Employer share payroll taxes 6.2% % 239 N/A 332 Unrelated business income tax per employee N/A 655 N/A Total employer cost per employee 3,359 3,775 4,674 Total taxes paid by employee 28.15% * Total overall cost 4,237 3,775 4,674 Form 990-T required? No Yes No *Taxes paid by employee are paid through the gross-up of $1,222 25

26 Fringe benefits On-site athletic facilities Must calculate the amount of facility use that employees don t pay for and which is not included in the employee s taxable income for any facility that meets all of the following: > Any athletic facility, > Located on the employer s business premises, > Operated by the employer, > Substantially all of the use is by employees of the employer, their spouses and dependent children, and > Discriminates in favor of highly compensated employees 26

27 Unrelated Business Income (UBI) 27

28 Changes to unrelated business income Summary corporate changes impacting tax- exempt organizations > Flat corporate tax rate of 21%* (be aware of blended tax rate impact for fiscal years beginning prior to Dec. 31, 2017) > Alternative minimum tax repealed > Depreciation method changes for certain property > Limitation on interest expense deduction > Changes to use of net operating losses *Rate change does not apply to entities organized as a trust 28 2

29 Changes to unrelated business income Estimated impact to the sector > Of the 1.5 million tax-exempt organizations, approximately 50,000 filed a Form 990-T for tax year 2013 reporting $13 billion in gross receipts and paying $580 million in federal taxes. > Of those filers, more than 50 percent reported net losses or no income. The top four percent of returns in terms of gross receipts accounted for $521 million of tax paid (90 percent of total). > The Joint Committee on Taxation (JCT) estimates that the provision will increase tax revenues by $3.5 billion over 10 years. 29

30 Unrelated business income tax >Compute taxable income on an activityby-activity basis >Each business activity will be taxed separately > >May cause a tax-exempt organization to pay tax even though in an overall loss position 30

31 Unrelated business income tax What is an activity? > Business activities: advertising, on-line stores, parking, etc. > Investment income: Schedule K-1 vs. other debt-financed > Rental activities: camps, debt financed property, rental of tangible personal property, income from Schedule K-1, etc. All one activity? > Transportation fringe benefits will taxable transportation fringe benefits be considered one activity or separate activities? Pending further guidance Depending on the level of detail required from the IRS, keeping track of each activity both in terms of calculating each year s tax liability and activity-based net operating losses could be onerous 31

32 Unrelated business income tax Computing net income from activities separately Before tax reform (ignoring specific deduction) Advertising Schedule K-1 Rental Total Gross income 12,000 1,500 10,000 Expenses (4,000) 0 (15,000) Net Income 8,000 1,500 (5,000) 4,500 Tax rate x 15% Tax 675 After tax reform Net income 8,000 1,500 0 Tax rate x 21% x 21% x 21% Tax 1, ,995 32

33 Unrelated business income tax Net Operating Losses Generated before Jan 1, 2018 Generated after Dec 31, 2017 Applies to Consolidated net income Activity that generated the loss Limitation No limit 80% of net income for the activity that generated the loss Carryforward 20 Years Indefinite Carryback 2 Years Not allowed 33

34 Unrelated business income tax Net Operating Loss Example Year 1 Net operating loss (NOL) generated before Jan 1, 2018 of $120,000 Activity net income Net income to apply NOL Activity NOL created Rental (5,000) 0 (5,000) Services to unrelated parties (22,000) 0 (22,000) Advertising 30,000 30,000 0 Fringe benefits 60,000 60,000 0 Schedule K-1 unrelated business 25,000 25,000 0 income Net income 115,000 Pre Jan 1, 2018 NOL (115,000) Net taxable income at 21% 0 34

35 Unrelated business income tax Net Operating Loss Example Year 2 Net operating loss (NOL) generated before Jan 1, 2018 of $5,000 Activity net income Activity NOL Avail Taxable income Activity NOL created/ remaining Rental 8,000 (5,000) 3,000 0 Services to unrelated parties 11,000 (22,000) 2,200* (13,200) Advertising 35, ,000 0 Fringe benefits 62, ,000 0 Schedule K-1 unrelated business (32,000) 0 0 (32,000) income Net income 102,200 Pre Jan 1, 2018 NOL (5,000)** Specific deduction (1,000) Net taxable income at 21% 96,200 *Use of NOL carryforward is limited to 80% of the taxable income of the activity (11,000 (11,000 x 0.8)) = 2,200 **$120,000 pre-2018 NOL less $115,000 used in previous year 35

36 Unrelated business income tax Planning and minimizing tax exposure > Determine each unrelated activity based on professional judgment until guidance is released > Calculate unrelated business income by activity > Review unrelated activities to determine if all reasonable expenses and allocations are assigned to each activity > Apply new limits to certain expenses > Revise estimated tax payments for unrelated business taxable income as necessary > Update net operating loss schedules 36

37 Unrelated business income tax Planning and minimizing tax exposure > Monitor for Joint Committee on Taxation Blue Book explanation; Treasury Department Notices and Regulations; and Technical Corrections Bill > Evaluate options for providing transportation fringe benefits to employees > Determine if a C-Corporation subsidiary structure would help reduce the tax on unrelated business income > Monitor tax law changes at the state level 37

38 Other TCJA provisions 38

39 Student loans > Discharge of certain student loan indebtedness Income from discharge of debt due to death or disability will be exempt from income tax Does not apply for discharges after December 31, 2025

40 Excise taxes Excise tax on net investment income > 1.4% excise tax on net investment income > Applies to private colleges/ universities that have at least 500 students and assets (other than those used directly in carrying out the institution s education purposes) valued at the close of the preceding tax year of at least $500,000 per full-time student > Does not apply to state colleges and universities > Effective for tax years beginning after

41 Bond provisions TCJA Private Activity Bonds No impact Advance Refunding Bonds Interest subject to taxation for bonds issued after December 31, 2017 Tax Credit Bonds Repealed for bonds that would have been issued after December 31,

42 Questions? 42

43 Contact Information Larry Mohr, CPA, MBT Partner, Baker Tilly Virchow Krause, LLP Ethan Roberts, J.D. Director, Jewish Community Relations Council of MN and the Dakotas

44 Disclosure The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments. Baker Tilly refers to Baker Tilly Virchow Krause, LLP, an independently owned and managed member of Baker Tilly International Baker Tilly Virchow Krause, LLP 44