Say hello to

Julie

CPA | Shareholder

Julie feels right at home at Clark Nuber where her colleagues share her commitment to lifelong client relationships.

On Thursday, November 2, the House Ways and Means Committee released H.R. 1, the Tax Cuts and Jobs Act. This is just the beginning of the sausage-making process. Most of the legislation is focused on individuals and businesses. However, there are some special treats for the tax-exempt sector and there is much to be commented on. The following is a first take on the highlights and lowlights, through the charitable sector lenses.

Individual Tax Provisions That May Affect Charitable Contributions

Itemized Deductions vs. Standard Deduction and the Personal Exemption

  • Keeps the charitable contribution deduction intact for individual taxpayers as an itemized deduction and increases the limit on cash contributions from 50% to 60% of adjusted gross income (AGI).
  • Indexes the standard charitable mileage rate for inflation at the same rate used for medical and moving mileage.
  • Disallows the charitable contribution deduction associated with preferential seating at college sporting events, which is currently limited to 80% of the donation.
  • Other itemized deductions left in place, although subject to new limits by category, include:
    • State real and personal property taxes up to $10,000
    • Home mortgage interest deduction up to $500,000 of indebtedness
  • Elimination of the phase out limitation on itemized deductions (Pease Act). It is replaced with the specific limits on taxes, mortgage interest deductions and the percentage limits on charitable contributions.
  • Another significant itemized deduction eliminated in the proposed legislation is the state income tax deduction. Shrinking the overall number of taxpayers who itemize may have a chilling effect in individual charitable giving.
  • Eliminates the personal and dependency exemption but increases the standard deduction. This is a bit of a bait and switch. The standard deduction goes from $6,350 to $12,000 for individuals; and $12,700 to $24,000 for married couples. The $4,050 personal exemption is eliminated. Therefore, it is really a change from $10,400 to $12,000 for individuals and $20,800 to $24,000 for married couples. The benefit may be less, or lost altogether, if dependency exemptions are lost in the bargain. The new law provides for child and personal credits (subject to income limitations); however, with a $300 personal credit, if an individual is in the 25% tax bracket that is still only the equivalent of a $1,200 personal exemption. Still a net loss over the $4,050 personal exemption the individual had before the proposed reform.

Moving more individuals out of the group of taxpayers who itemize, and having them instead take the standard deduction, means there is less incentive to contribute. One item absent from the legislation is language from the Universal Charitable Giving Act, which would have provided individuals who do not itemize on their tax return an incentive to make charitable contributions. This is because it would provide a limited income tax deduction not subject to the debate over whether itemized deduction, versus standard deduction, better serves the average American taxpayer.

Death and Taxes

  • Estate tax threshold doubles from $5M to $10M and phases out over six years. This may reduce the overall incentive to make charitable bequests.
  • Remember, many states do not have their estate tax thresholds tied to the federal exclusion amount, so there is still reason to discuss charitable estate planning with donors if only to strategize around state level estate tax issues.

Provisions Directly Impacting Exempt Organizations

Exempt Organizations as Employers

  • There is a new proposed tax on fringe benefits offered to employees of tax-exempt organizations. The tax is imposed as an unrelated business income tax on the employer. The tax is imposed on benefits such as parking, transportation, on-site gyms and other athletic facilities. It is confusing at first because the question, “where is the income?” arises. The tax is meant to put for-profit and non-profit employers on equal footing with respect to this proposed change, rather than punish non-profits. For-profits have had the deduction for parking, transportation, and on-site athletic facility fringe benefits under Section 274 and Section 132 eliminated. Because non-profit employers generally do not pay taxes, eliminating the income tax deduction would not be felt. Therefore, the only mechanism that makes sense is to IMPOSE an equal income tax on the disallowed deduction on the tax-exempt employer. Imposing an unrelated business income tax on the disallowed benefit is the mechanism.
  • There is a new 20% excise tax imposed on tax-exempt organizations (exempt under Section 501(a), Section 521(b)(1) farmers’ cooperatives, Section 115(1) governmental entities, or Section 527(e)(1) PACs) paying executive compensation in excess of $1,000,000. Remuneration includes all compensation paid by all related organizations.
  • Limitation on exclusion for employer provided housing capped at $50,000 (half that amount for married individuals filing separate returns) and limited to one home. The $50,000 cap is reduced for excess compensation under IRC 414(q)(1)(B)(i), but not below zero.

Donor Advised Funds (DAFs)

  • Requires organizations sponsoring DAFs to annually disclose:
    • Average amount of grants made from DAFs during the taxable year expressed as a percentage of the value of assets held in such funds at the beginning of such taxable year.
    • Policies on donor advised funds and indicate whether the organization has policies regarding:
      • Frequency of distributions from DAFs, and
      • minimum level distributions from DAFs.

A copy of any such policy must be included with the DAF sponsor’s tax filing.

Donor Acknowledgment

  • Eliminates the confusing language in the code section 170(f)(8) suggesting charities can provide some other documentation or form other than the contemporaneous donor acknowledgment letter, which led to charities attempting to use the Form 990, as well as Treasury issuing proposed regulations, etc. for charitable gifts over $250.

Excise Taxes for Private Foundations and Endowments

  • Simplifies net investment excise tax on private foundations at a rate of 1.4%
  • Subjects the endowments of organizations exempt as a college or university (other than state schools) that have at least 500 students and an endowment valued at $100,000 per student at the close of the preceding tax year to an excise tax of 1.4% on net investment income. The number of students is based upon full-time equivalents.
  • Excess Business Holding exception carve out for Private Foundations, if the private foundation:
    • Owns 100% of the voting stock of a for-profit business;
    • Acquired all its interest in the business means other than by purchase;
    • The business distributes all its net operating income for any tax year to the private foundation within 120 days of the close of the tax year; and
    • The business’s directors and executives are neither substantial contributors to the private foundation, nor make up a majority of the private foundation’s board of directors;

Then the holding in the business is not an excess business holding. Note this carve out specifically does not apply to DAFs, so DAFs are still subject to the full set of excess business holdings rules.

Qualification for Exempt Status

  • Section 5102 of the Bill proposes amending IRC section 4942(j) pertaining to operating foundations to require an operating foundation functioning as an art museum to be open to the public for at least 1,000 hours during “normal business hours” every tax year to be recognized as a private operating foundation. This provision, highlighting art collectors, is a likely outcome of the Senate Finance Committee inquiry into private foundation operations of museums, conducted in 2015. The report issued in 2016 stated the results were not conclusive. However, this provision in the GOP tax bill is a sign Congress still “feels” the playing field needs leveling.

Political Activities

  • Weakens the Johnson Amendment – Allowing for de minimis, incremental expenses to be incurred to engage in political speech in the ordinary course of a church’s activities. Includes publishing and distributing statements for any political campaign on behalf of, or in opposition to, any candidate for public office. Specifically calls out religious organizations as allowed to engage in this activity.

Unrelated Business Income

  • Provides clarification of entities with dual exempt status, stating they are subject to unrelated business income tax.
  • Narrows the exclusion of research income to include only research that is made publicly available. Adds more precise language striking “from research” and inserting “from such research” in section 512(b)(9).

Other Exempt Activities

  • The Bill would repeal the New Markets Tax Credit

Questions?

Please contact Jane Searing and Megan Ryan at info@clarknuber.com if you have questions, or would like additional information.

© Clark Nuber PS and Developing News, 2017. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Clark Nuber PS and Developing News with appropriate and specific direction to the original content.

Keep Reading

Articles and Publications

Business Transition Due Diligence: Avoid Saying, “It was Like That When I Got Here!”

Buyer Due Diligence

Not surprisingly, “it was like that when I got here” is also sometimes heard in the world of business transition. When a buyer’s due diligence identifies deep, sometimes hidden issues, such as issues that affect employee morale or customer dissatisfaction, the seller may be faced with the unwanted reality of needing to sell their business for less than they hoped. Buy-side due diligence is designed to find problems that sellers may not appreciate as significant, but which buyers can use as negotiation points. Even in situations where business control is being transitioned from one generation to the next, the younger generation may not understand the nuances of key vendor relationships, or how the Company navigates regulatory issues. Owners can unwittingly saddle successors with issues that should have been dealt with earlier.

Using Due Diligence to Expose Hidden Issues

Certainly, it may be possible to overcome these issues, at least partially, with an orderly over-lap in the transition of management. That said, not all sellers want to stay involved after their business is sold. In these instances, the buyer is left with the grim reality of a negative situation where all she can say is, “It was like that when I got here.” While due diligence cannot uncover all issues – positive or negative – buyers want to know that due diligence procedures took place. These procedures should include a comprehensive review of the business’ value drivers. Value Drivers are the operating characteristics that underlie every business and form a crucial part of what gets transitioned from seller to buyer. Buyers can use this information to their advantage in negotiating the terms of the deal, as well as in prioritizing future plans for growth. Learn more about the drivers in the video below: [embed] https://vimeo.com/239726388 [/embed]

How Due Diligence Benefits the Seller

The flip side of this issue, of course, involves the seller. Sellers often have both the best and worst views of their business. Founders, especially, can have difficulty viewing their business objectively. Typically, a founder builds their business with themselves at the helm. While this means that a founder can navigate almost any circumstance, it does not mean their business is well tuned, or that someone could step into their role without missing a beat. To combat the above situation, it’s best to run your business as though it’s always ready to be sold - even if you are not planning to sell it. Here’s an analogy that shows why this is a smart approach: My house is not for sale, but I aspire to keep it in a condition that would provoke a would-be buyer to offer an unsolicited price that I could not refuse. Why not run a business that way? Operating a business that is well-tuned is much like driving a fine car. Or living in a beautifully maintained home. Its condition allows you to know how it will operate and allows you to assure potential buyers of its worth. It makes sense that a seller can become exhausted from years of building a business. They may feel that they do not have the energy to tune up the business before a transition – even though they may be leaving good money on the table. However, those who have the time and the willingness to view their business objectively, and make improvements, can maximize the financial return. They also benefit from walking away from their sale knowing they’ve provided the buyer with a sound purchase.

Due Diligence in Action

I was once accompanying a client on a tour of his new business. On the tour, I noticed that the plant was bustling with activity - employees would smile and say ‘hello’ as we walked by. It was already 15 minutes past quitting time, but the employees were still working. The owner said that the employees wanted to meet the goals for the day and were willing to put in the extra effort to do so. The client was feeling satisfied: the purchase was complete, and the transition had gone smoothly after a good negotiation and thorough due diligence process. I asked the owner what changes he had made since taking over the business. He replied, “Not much, it was like that when I got here.”

Questions?

Questions about due diligence? Contact Ron Rauch at info@clarknuber.com, or read more about due diligence and our Business Value Enhancement tool, CoreValue. © Clark Nuber PS, 2017. All Rights Reserved

Colorado and Massachusetts Put the Heat on Remote Sellers

UPDATED OCT. 2017: On June 28, 2017, the Massachusetts Department of Revenue issued Directive 17-2, revoking its earlier Directive 17-1 (below), which would have required remote sellers to collect sales tax on Massachusetts sales beginning July 1, 2017. On September 22, 2017, Massachusetts adopted a new regulation, 830 CMR 64H.1.7 that requires remote sellers to collect tax from their Massachusetts customers on the same terms outlined in Directive 17-1.  830 CMR 64H.1.7 was made effective immediately upon adoption.
July: it typically marks the start of the dog days of summer, when most people’s thoughts are focused on barbecues, trips to the beach, and summer vacation plans, rather than state and local taxes. But for remote sellers (that is, businesses that sell primarily over the internet or mail order), July 1st is shaping up to be an important date this year.

New Vendor Reporting Requirements

First, Colorado’s long awaited (and litigated) vendor reporting requirements finally go into effect on July 1, 2017. Although the Colorado law was enacted way back in 2010, it was immediately challenged, eventually making its way up to the US Supreme Court. However, the dust has now settled from the litigation and Colorado has announced it will begin enforcing the law. Under the Colorado law, any out-of-state vendor that makes at least $100,000 of annual sales to Colorado customers – and does not collect Colorado sales tax – must inform those customers that their purchases may be subject to the state’s use tax. This notification may be provided on the customer invoice, or in another communication made in conjunction with the sale (an online order summary, for example). Additionally, if individual customers purchase more than $500 worth of taxable goods in a year, these sellers must send them an “annual purchase summary” listing purchase dates and amounts. The annual purchase summary must also reiterate that Colorado consumers must pay use tax on all untaxed, nonexempt purchases. Finally, the vendor must send the Colorado Department of Revenue an annual customer information report, listing the name, address, and total untaxed purchases of each Colorado customer. The first of these annual summaries and customer reports are not due until early 2018. To be in full compliance with the new law, however, remote sellers with Colorado customers should start providing notifications to customers and compiling information on nontaxed sales as of July 1st. Unfortunately, for sellers that make more than $100,000 of annual Colorado sales, the only way to avoid being subject to these requirements is to voluntarily start collecting tax from Colorado customers. It is a Hobson’s choice, to be sure, but one that the Colorado Legislature fully intended when it passed the law back in 2010.

Remote Sellers and State Sales Tax

The second reason July 1st is significant for remote sellers is that Massachusetts will start requiring sellers with more than $500,000 in Massachusetts sales, and at least 100 transactions with Massachusetts customers in the prior 12 months, to begin collecting the state’s sales tax on that date. The state is following South Dakota, Alabama, and a smattering of other states that have begun imposing a duty to collect sales tax on remote sellers that have never set foot in the state. Massachusetts is notable in that it is the most populous state yet to try to impose such a duty. Further, it is doing so by administrative pronouncement, without any change in the relevant laws or regulations. This action would seem to be a clear violation of the US Supreme Court’s holdings in the 1967 National Bellas Hess and 1992 Quill decisions, which both confirmed that some physical presence on the part of the seller is required for a state to impose a duty to collect sales tax for the state. However, in his dissenting opinion in a 2015 decision related to the Colorado remote seller law, Justice Kennedy stated that he felt that it was time to revisit those earlier decisions. The tax collection requirements now being imposed by Massachusetts, and other states, are a clear attempt to create just such a case.

What Can We Expect?

In response, two trade groups (NetChoice and the American Catalog Mailers Association) filed suit in Massachusetts state court on June 9th, seeking a preliminary injunction to block enforcement of the remote seller directive, as well as a declaratory judgment that the directive is unconstitutional. A decision (at least on the injunction) is expected before the July 1st enforcement date. Thus, it may come down to the wire as to whether remote sellers must actually start collecting Massachusetts tax on that date, or will get some sort of a reprieve. So, it looks like, while the rest of us are working hard to beat the summer heat, remote sellers may be feeling the heat of the Colorado and Massachusetts state taxing authorities. Save them a cool beverage, won’t you? Questions? Seeking more information on the new legislation, or wondering how it might affect you? Contact Joe Haberzetle at info@clarknuber.com for more information.   © Clark Nuber PS, 2017. All Rights Reserved

FASB Exposure Draft: Accounting for Grants and Contracts

Why is the Guidance Necessary? Under existing guidance, there has been a lack of consistency among not-for-profits in accounting for grants and contracts, particularly those from government agencies and private foundations. The proposed Accounting Standard Update (ASU) provides clarifications to help organizations evaluate if a transaction should be accounted for as a contribution, or as an exchange transaction. How Could the ASU Affect Your Organization? Similar to existing guidance, the first consideration that needs to be made is whether the transaction is reciprocal (exchange), or non-reciprocal (contribution). If the resource provider is receiving value in return for the resources being transferred, it is indicative of an exchange transaction. However, an important distinction the proposed ASU makes is that neither providing societal benefits, nor furthering the resource provider’s mission, constitutes commensurate value. In either of those cases, the transaction should be considered nonreciprocal. Government agencies will often make grants to organizations to provide the public with certain benefits. Most not-for-profits have typically classified these as exchange transactions. The new proposed guidance will now consider them “conditional” contributions. Consequently, the FASB also redefines “conditional” contributions in the proposed ASU. Under the proposed guidance, a contribution would be considered conditional if the donor specifies a barrier that must be overcome in order to be entitled to the funds, and the donor has the right of return of resources provided. If the agreement includes both of the above criteria, the organization would not record grant revenue until it has overcome the barriers. The proposed guidance provides the following notable indicators of barriers:
  • The organization is required to achieve a measurable performance-related outcome, or another outcome that is measurable. Some common examples could be requirements to provide a specified level of service, delivering a number of units of output, making qualifying expenditures, and matching requirements.
  • The organization has limited discretion over how the resources are spent.
  • There are stipulations, which are related to the primary purpose of the agreement, that are not trivial or administrative. The proposed ASU specifically addresses that requirements to supply reports are typically administrative in nature and not considered a barrier.
  • The organization is required take additional action.
What Can We Expect Next? If finalized, the proposed accounting changes could significantly impact the timing of when revenue is recognized by not-for-profit organizations. In the meantime, organizations can begin evaluating the potential impact on financial reporting. The proposed standard would follow the same effective dates as the new revenue recognition standard, ASU 2014-09, Revenue from Contracts with Customers, which is used for annual reporting periods beginning after December 15, 2018. If the not-for-profit in question is a conduit debt obligor with publicly traded debt, the effective date is one year earlier. The FASB invites comment on the exposure draft until November 1, 2017. Clark Nuber PS will continue to monitor and provide updates on the proposed change in the accounting standard. Here is a link to the full exposure draft of the proposed ASU. Questions? Please contact Candi Avery at info@clarknuber.com with questions about this article. © 2017 Clark Nuber PS. All Rights Reserved.

Featured Resources