Redpath Insights

Tax-Reform-for-the-Tax-Exempt-7-17-18

Tax Reform for the Tax-Exempt

by Ashley Rehn, CPA

Recently, the nations tax-exempt professionals gathered at a national conference where there was much discussion around the recent tax reform and its extensive impact on the Not-for-profit sector. If you are involved in the Not-for-profit sector, either as a volunteer board member, executive director, finance officer, or employee you’ll want to be aware of the impacts the Tax Cuts and Jobs Act (TCJA) currently has on your organization. Additional guidance is necessary in order to apply the new law; which leaves the entire sector wondering what to do now?

Not-for-profit organizations and professionals across the country are advocating for additional guidance, a delay in the implementation, and transition relief.  In the meantime, below are two changes from the recent reform most likely to impact your tax-exempt organization.

Nondeductible Fringe Benefit Expenses

Beginning January 1, 2018, tax-exempt organizations are now required to value qualified transportation fringe benefits, any parking facility used in connection with qualified parking, and on-premises athletic facilities and report these on the 990-T as UBTI.

  • Recommended Action: Identify what transportation fringe benefits your organization provides and the cost associated with these benefits that your organization incurs, as well as the cost each employee would incur if they were to pay for these expenses personally.  Using the greater of these two valuations, estimate the UBIT that may be applicable for the 2018 tax year using an approximate rate of 31% (combined state and federal rates).  You may wish to accrue this amount internally if it is a substantial amount to the organization.
  • A conservative approach is to enroll in the IRS EFTPS System (https://www.eftps.gov/eftps/) and make estimated UBTI payments which are due throughout 2018.  If the IRS does not provide transition relief or delay implementation, it is possible that organizations will incur interest and late payment penalties if quarterly payments are not made.

Netting of Separate UBI Activities No Longer Allowed

Beginning January 1, 2018, organizations are now required to identify and separately compute UBTI for each separate trade or business.  In addition, any net operating losses will be carried forward for each specific trade or business and applied up to 80% of taxable income.

Recommended Action: Review all UBTI activities, determine what you would consider to be separate trade or business activities, determine whether you have processes in place to separately identify the related expenses and allocable expenses related to each respective activity.  Know these activities may be reportable separately as early as the 2018 tax year.  It may be beneficial to run a preliminary analysis to identify if this will result in increased taxable UBI and accrue tax accordingly.

Our recommendation is to be aware of the changes, determine how they may impact your organization, and choose which of these actions your organization would like to take now.

Ashley Rehn, CPA

Ashley Rehn, CPA

Ashley Rehn is a senior tax manager at Redpath and Company providing tax compliance and consulting services for a variety of exempt organizations including charities, foundations, charter schools, member organizations, business leagues, civic organizations, and social clubs. She assists clients with tax planning, form 990 series preparation, and research. Specific areas of expertise include unrelated business income, private foundation compliance and excise tax reporting, entity structuring (including multiple entities and joint ventures), monitoring and analysis of public charity status, and board education. Ashley is holder of the Not-For-Profit Certificate I issued by the AICPA. The Not-for-Profit Certificate I offers a comprehensive, foundational overview of a non-profit’s unique financial needs. Certificate holders learn to recognize applicable GAAP reporting standards, identify state and federal filing requirements, understand best practices in board governance, risk assessment, and internal controls, and are able to outline the planning steps of a successful audit engagement. She has provided public accounting services at Redpath and Company since 2007.