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2 Tax Reform Implications for Nonprofits Indiana Philanthropy Alliance April 4, 2018 David Trimner Timothy Murphy Investment advisory services are offered through CliftonLarsonAllen Wealth Advisors, LLC, an SEC-registered investment advisor CliftonLarsonAllen LLP

3 Learning Objectives Recognize the potential effect that changes to the standard deduction and estate tax exclusion may have on charitable giving. Identify changes that will affect nonprofit organizations, including executive compensation, unrelated business income tax, higher education endowment income, taxation of fringe benefits, event tickets, and tax-exempt bonds. Describe the changes that will affect employers, including new tax credits, treatment of achievement awards, employee meals, tuition benefits, and the repeal of the Affordable Care Act s individual mandate. 3

4 Basic math impacting the nonprofit sector Tax Cuts Available Government Funding Revenue Cuts Reduced Funding to Nonprofits Government Spending Cuts Human Need / Need for nonprofit funding 4

5 What just happened? Internal Revenue Code 2017 Tax Act 5

6 Impact on Charitable Giving Taxpayers Taking the Standard Deduction Taxpayers Who Itemize Their Deductions 6

7 Impact on Charitable Giving 2017 FILERS CHARITABLE DONATIONS 7

8 Impact on Charitable Giving 8

9 Impact on Charitable Giving 9

10 UBI Tax Rate Tax Brackets % 25% 21% 15% 10

11 Net Operating Losses Rental Income from Debt- Financed Property (Sch E) Website Ads (Sch I) Periodical Advertising (Sch J) Net Income: $5,000 Net Income: ($1,000) Net Loss: ($10,000) What is the UBTI in 2017? In 2018? 11

12 Net Operating Losses Planning Consideration: Create a for-profit subsidiary to hold unrelated business activities Activity-by-activity reporting is not required on Form 1120 Creates additional filings and organizational complexity May create UBI issues if the nonprofit parent receives certain income from its taxable sub Interest Annuities Royalties Rent 12

13 UBI on Fringe Benefits Employers could deduct qualified transportation fringe benefits from taxable income Employees could exclude qualified transportation fringe benefits from taxable compensation 13

14 UBI on Fringe Benefits Employers can deduct qualified transportation fringe benefits from taxable income Employees can exclude qualified transportation fringe benefits from taxable compensation 14

15 UBI on Fringe Benefits Van Pools and similar transportation in a commuter highway vehicle Transit passes Free Parking in employer lot or commuter lot if paid for by employer Parking reimbursements for employer lot or commuter lot Bicycle commuting reimbursement On-premise gym, pool, tennis court, golf course, or other athletic facility 15

16 UBI on Fringe Benefits In 2018, employer provides $5,000 of transportation fringe benefits to employees and incurs $10,000 of expense operating an on-premise gym For Profit Employer $50,000 Net Income $15,000 Disallowed Benefits $65,000 Taxable Income For Nonprofit Employer $0 Unrelated Business Income $15,000 Disallowed Benefits $15,000 Taxable Income 16

17 Comments from The American Society of Association Executives to the Treasury Department Guidance needed from Treasury to clarify regulations Historically, pre-tax compensation reduction agreements for transportation fringes were acceptable Delay in implementation requested such that clear guidance can be provided to employers and employees Implementation guidance needed, as smart professionals disagree on the interpretation of TCJA 17

18 21% excise tax applied to compensation in excess of $1M paid to covered employees: CEO CFO Next Hi-3 UBI on Excessive Compensation Prior covered employees Excludes licensed medical professionals 18

19 21% excise tax applied to parachute payments in excess of three times the individual s average salary for the previous five years: Employees paid over $120,000 5% owners Excludes: UBI on Excessive Compensation Amounts paid to 403(b)(3) or 457(b) Licensed medical professionals 19

20 Provisions That Affect Employers Temporary family and medical leave Employee loans from retirement plans Exclusion of awards from taxable income Employer entertainment expenses Onsite eating facilities ACA individual mandate Computers and peripherals Moving expenses 20

21 K-12 education costs & 529 Plans Elementary and secondary schools now eligible for 529 plans: Nondeductible cash contributions can be made to a qualified tuition program, known as a 529 Plan, and accumulate tax-free earnings to be used for qualified higher education expenses. Distributions are not taxable to the beneficiary. Starting with distributions made after December 31, 2017, eligible educational institutions include elementary and secondary schools. 21

22 Provisions NOT Included in the Tax Bill 1.4% flat tax rate for private foundation net investment income Royalty income from licensing of name or logo treated as UBI Repeal of exempt status of private activity bonds Disclosure and/or payout requirements for donor advised funds (DAFs) 22

23 Next Steps 2016 CliftonLarsonAllen LLP Monitor Technical Corrections Bill Read Forthcoming Treasury Regulations Meet with CLA Tax Advisor Implement New Strategies 23

24 Questions? Timothy Murphy, Principal David Trimner, Principal Karen Gries, Principal To receive future invitations, subscribe at CLAconnect.com/subscribe. CLAconnect.com linkedin.com/company/ cliftonlarsonallen facebook.com/ cliftonlarsonallen twitter.com/claconnect 24

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