United States

Senate tax reform bill: An improved outlook for exempt organizations

TAX ALERT  | 

With the Senate passing its tax reform proposal on Dec. 2, 2017, many initial provisions that were in the Senate plan presented last month are absent in the final approved version that will be heading into conference committee due to lobbying and revisions in order to get a bill passed.

Executive compensation

Remaining in proposal:  For taxable years beginning after Dec. 31, 2017, tax-exempt organizations will owe a 20 percent excise tax on total compensation exceeding $1 million paid to the five highest paid employees, and on excess parachute payments made to certain departing employees.

Proposals stricken from final approved bill:  Any provisions that would have modified the tax rules as to nonqualified deferred compensation under Internal Revenue Code Section 457 (both eligible plans under Section 457(b) and ineligible plans under Section 457(f)) were completely removed.

Unrelated business income tax

Remaining in proposal:  Unrelated business income tax (UBIT) must now be calculated separately for each business activity; losses from one activity can no longer offset income from another.

Proposals stricken from final approved bill:  The income derived from licensing names and logos of tax-exempt organizations will not be subject to UBIT as previously proposed.

Excise taxes

Remaining in proposal:  Private colleges and universities will owe a new 1.4 percent excise tax on their net investment income if the aggregate fair market value of their assets (other than those assets that are used directly in carrying out the institution’s exempt purpose) exceed $500,000 per student (raised from $250,000 in the earlier proposal) and certain other criteria are met. In clarifying language, these thresholds take into account the investment portfolio of all organizations under common control, potentially subjecting related entities to this new tax. This control rule could have implications for colleges and universities that have related organizations with significant donated assets, such as academic medical centers or foundations.

Proposals stricken from final approved bill:  None of the Senate’s previous proposals to rewrite the intermediate sanctions standard and expand its application survived in the final bill. The rebuttable presumption of reasonableness (and the protection it provides) remains intact. The intermediate sanctions rules will not be expanded to cover Section 501(c)(5) and 501(c)(6) organizations. Organization managers can continue to rely on qualifying written professional advice as a defense to personal excise tax liability.  Investment advisors and athletic coaches will not be treated as per se disqualified persons subject to the intermediate sanctions rules. Intermediate sanctions excise taxes will not be assessed on the exempt organization itself as the Senate previously proposed.

Tax-exempt bonds

Remaining in proposal:  Bonds issued to advance refund other bonds will no longer produce tax-free interest for bondholders. Tax-exempt financing for Section 501(c)(3) organizations is otherwise unaffected. But, the provision striking out this method of financing remains in the House version of tax reform. 

Changes for college athletics

Remaining in proposal:  College football fans may no longer get a tax break for their ticket costs. The final Senate bill repeals the existing (partial) charitable deduction for a payment to a college or university in return for athletic event tickets or seating rights.

So where do we stand as of now?

With the final provisions above, these are the only changes anticipated in the Senate’s bill to impact tax-exempt organizations directly. However, there are still the following provisions that are a part of the House bill, H.R. 1, that may or may not make it to any final law to be given over to President Trump for his final signature. These provisions are:

  • Housing under section 119
  • Taxable as UBI certain fringe benefits provided to employees not included in their incomes
  • New markets tax credits changes
  • Repeal of private activity bond interest excludible from tax (although both the House and Senate bills have a refunding repeal component)
  • Expand UBI to 115(1) entities
  • Research income exclusion from UBI
  • Private foundation excise tax smoothing to 1.4 percent
  • Private operating foundations as art museums time requirements for public viewing
  • Private foundation excess business holdings exception
  • Churches and political activities from the pulpit
  • Donor advised fund expanded Form 990 reporting
  • Educational assistance plans and tuition reduction/remission untouched

The final outcome for tax reform still remains an unknown. The two chambers of Congress will begin working together to reach a final agreement and hopefully we will know more by year’s end as to what makes it and what does not make it to the President’s desk for signature into final law.  

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