Spring 2018 issue of Horizons

about the impact of these provisions on attendance.

The guidance should be forthcoming from the IRS by June 30, 2018, as set out in the second quarter update to the 2017-2018 Priority Guidance Plan. Changes to Form 990-T are likely to come, which will hopefully aid organizations with the ability to separately track lines of business. This change is expected to increase the number of not-for-profits paying tax on UBI activities. Net Operating Losses Reporting Changes In correlation with the separate lines of business rules, the new tax law also changes the net operating loss rules. Net operating losses (NOLs) generated in tax years before January 1, 2018, (pre-2018 losses) will be allowed to offset 100% of total UBI. The pre-2018 losses will continue to be subject to the 20-year carryforward provisions. However, the Act changes the rules for NOLs generated after December 31, 2017 (post-2017), to the following: ∙ Losses may be carried forward with no time limit (and are not allowed to be carried back to prior years) ∙ Losses may only be used to offset 80% of taxable income generated during the year for each line of business Once the guidance from the IRS is finalized, organizations should plan to review their chart of accounts to ensure the appropriate and separate tracking of UBI activities, as well as plan to review the allocation of expenses to UBI activities for completeness and accuracy. Business Interest Deduction The 2017 Tax Act also limits the current deduction for interest expense when net business interest exceeds 30% of net taxable income (including certain adjustments). Tax exempt entities should consider this new rule when determining the UBI for its various unrelated trade or business activities. ∙ Losses may only be applied to the line of business that generated the specific loss

Increased transparency regarding the fair value received, including a breakout between meals and entertainment value received, may mitigate this impact.

Changes Related to Unrelated Business Income Reduction in Corporate Tax Rate

The changes to the corporate tax rate included in the new tax law also apply to unrelated business income (UBI). In prior years, the tax rate was 15% for the first $50,000 of taxable income, graduating to an effective rate of 35%. The new law subjects UBI to a flat rate tax of 21%. Please note these tax rate changes apply only to tax-exempt organizations established as corporations (not trusts). This could have a positive or negative impact on not-for-profit organizations, depending on the amount of income generated by their UBI activities. Reporting for Separate Lines of Business Beginning January 1, 2018, the Act adds a new paragraph to IRC section 512(a)(6) requiring exempt organizations reporting UBI from more than one unrelated trade or business to compute the net taxable income for each separately. Losses from one activity will no longer be allowed to reduce taxable income from another activity. Further guidance from the Treasury Department and/or the IRS on what constitutes a “separate” line of business, which will be key for organizations who receive numerous K-1s from their partnership investments that reflect UBI, is expected

the Act includes as UBI the costs of certain fringe benefits, including commuter transportation, mass transit passes, parking and on-site athletic facilities

36 Tax Law Impact to the Not-For-Profit and Colleges and Universities Sectors