By Jenny Herrera and Don Hughes
The Tax Cuts and Jobs Act of 2017 will provide new challenges for non-profit board and staff members. The following summarizes provisions of the law that will be of interest to tax exempt non-profit organizations:
Non-Deductible Fringe Benefits – The new law imposes an unrelated business income tax (UBIT) on the amount that a non-profit organization pays for certain employee fringe benefits (commuting, parking, and gym membership). This provision parallels the limit on deductibility by for-profits under the law. Employers may be able to reimburse employees for commuting and parking through pre-tax qualified plans. Note, however, this is currently an unsettled area because the IRS is revisiting the allowability of such plans for these costs.
Unrelated Business Income – The law requires organizations conducting more than one “unrelated trade or business activity” to calculate UBIT separately for each trade or business. This practice prohibits using losses relating to one trade or business activity to offset income from another trade or business. Accordingly, the organization should carefully review which costs are allocated to which activity.
Net Operating Losses – The law eliminates carrybacks of NOLs for UBI but allows an indefinitely carryforward. The law also limits an NOL deduction to 80% of the non-profit’s UBI.
Decrease in Maximum Tax Rate – The law decreases the tax rate for UBIT from a maximum of 35% to 21%. (Note, however, the prior 15% tax rate on the first $50,000 of taxable income is now eliminated.) The new rate also applies to the penalty, or proxy tax, on exempt organizations for lobbying and political expenses that exceed an allowable amount set by the IRS. The proxy tax rate is set each year at the highest corporate tax rate for that particular year.
Local Lobbying Expenses – The law eliminates the deduction for lobbying expenses regarding legislation before local government bodies. These expenses should, therefore, be included in the calculation of non-deductible membership dues or proxy tax liability.
Executive Compensation – The law imposes on the organization a 21% excise tax on compensation over $1 million to any of its five most highly compensated executives.
There are other changes in the new tax law that will affect non-profit organizations and their employees. If you have questions or need assistance dealing with the changes, please contact us.
Jenny Herrera is a shareholder with Rubino & Company, focusing on providing audit, tax, and consulting services for non-profit organizations.
Don Hughes is a senior manager with Rubino & Company, providing tax consulting and compliance services to a wide range of corporate clients including non-profit organizations.