On Thursday, December 21, President Trump is expected to sign the new law. Most of the Tax Cuts and Jobs Act’s provisions will take effect on January 1, 2018.
This leads to the next logical question: “Is there anything I need to do before January 1st to take advantage of, or avoid, the new tax plan’s negative impacts?”
Although it will take several weeks—and possibly months—for the Treasury to issue regulations to fill in the new tax law’s details, the basic principles of year-end tax planning remain constant: defer income and accelerate deductions.
However, some provisions of the new law add some urgency to this perennial advice. The points below outline what tax-exempt organizations and private foundations should do to prepare for tax reform. In the months to come, we will provide more details and additional planning advice that is not urgent to year-end.
Tax Reform Changes for Tax Exempt Organizations
- The value of certain non-taxable employee benefits, including parking, transportation, and on-site athletic facilities, will be subject to unrelated business income tax for pay periods beginning January 1, 2018.
- Repeals the 80 percent deduction allowed for amounts paid in exchange for college athletic event seating rights. Amounts paid after December 31, 2017 are afforded no charitable contribution deduction if associated directly or indirectly with the right to purchase tickets for seating at an athletic event in an athletic stadium of such institution. Institutions should encourage donors to accelerate contributions into 2017 to take advantage of this expiring tax deduction.
- For tax years beginning after December 31, 2017, a new 21% tax is imposed on organizations exempt under IRC sections 501(a), 521(b)(1) farmers’ cooperatives, 115(1) governmental entities, or 527(e)(1) political action committees paying executive compensation greater than $1,000,000 to covered employees. These generally include the five highest-compensated, current and former employees from the past five years. There is an exception for certain licensed medical personnel. Remuneration includes all compensation paid by all related organizations. The excise tax is also applicable to parachute payments.
- Unrelated business income from separate business activities is segregated for tax years beginning after December 31, 2017. Losses from one activity may not be used to reduce the taxable income from another activity. Similarly, net operating losses from each activity can only carry forward to offset future income from that same activity. Finally, those net operating loss deductions are limited to 80% of taxable income for losses incurred in tax years beginning after December 31, 2017. Treasury is charged with providing regulation filling in the details and definitions for implementing this portion of the tax act.
- Private colleges and universities with at least 500 students and endowments valued at $500,000 per student at the close of the preceding tax year will be subject to an excise tax of 1.4% on net investment income.
- The Act allows for the deferral of the gain on sale of appreciated property reinvested in “Qualified Opportunity Zones,” which are areas identified as low-income census tracts. This provision is designed to spur economic growth in areas needing to attract economic development investment.
- The Act repeals the income exclusion for interest from advanced refunding tax exempt bonds issued after December 31, 2017.
Tax Reform Changes for Private Foundations
Many provisions specific to private foundations did not make the final version of the law. Instead the following points remain true:
- Excise tax on net investment income for private foundations remains at 2%. Foundations may qualify for a reduced excise tax rate of 1% if distributions exceed the five-year average, plus one percent of the current year’s net investment income for any year other than the first tax year.
- There was hope an exception to the excess business holding rules under IRC section 4943 would pass in this bill, allowing foundations to receive, hold, and operate under independent management bequests of a business enterprise. This did not pass in the final version of the law.
- Earlier drafts of the proposed legislation included a very specific requirement for operating foundation status of art museums. This provision was not included in the final law.
- The requirement for taxpayers to use the first-in-first-out “FIFO” method of tracking basis for the sale of investment assets failed to pass. Had it passed, it would have applied to private foundations and the calculation of net investment income under IRC section 4940 and any potential unrelated business income on debt financed assets.
For private foundations, little to nothing has changed other than rules applying to unrelated business income tax. Regarding unrelated business income tax, see the changes to corporations, trusts, and the isolating of UBI activities.
We do not know exactly how the IRS will propose regulating isolating UBI activities. It may be by investment, by broad category—all rental, all oil and gas, etc.—or it may allow for the aggregation of all UBI from leveraged or pass-through investments. Generating unrelated business income and losses may be netted into one activity.
Want More Information?
For information about how tax reform will impact individuals and businesses, please see our article about year-end tax planning for individuals and businesses, or our advice regarding five ways individuals can get ahead of tax reform.
Please watch our website for additional details and planning ideas as we learn more about our new tax law and how to apply it to specific fact patterns. If you have questions about any of the information in this article, please contact a Clark Nuber professional.
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