Spring 2018 issue of Horizons

Fringe Benefits Taxability Pursuant to new the IRC section 512(a)(7), the Act includes as UBI the costs of certain fringe benefits, including commuter transportation, mass transit passes, parking and on-site athletic facilities, that are not included in the taxable income of employees. As of January 1, 2018, employers that continue to provide these benefits to employees are required to report actual expenditures incurred related to these benefits as UBI. We are awaiting specific guidance from the Treasury for the calculation of expenditures (i.e. allocation of depreciation, other costs, etc.) that would need to be accumulated to determine the amount of UBI income resulting from providing these fringe benefits on a tax-free basis. This is a major shift for tax-exempt organizations, especially those with a large number of employees, such as colleges and universities, health care systems, etc. Consult with your advisor for assistance with modeling through the options, based on a preliminary understanding of the interplay with IRC sections 512(a)(7), 132 and 125. Changes with Tax-Exempt Bonds While private activity bonds will remain an important part of capitalizing exempt organization operations, advance-refunding (defined as refunding bonds issued 90 days or more in advance of the call date of the old bonds) are no longer tax-exempt under the Act, thus eliminating the incentive to issue them. Existing bonds will still be able to be refinanced, as long as the bonds are callable at the time of refinancing.

Executive Compensation Excise Tax Effective for tax years beginning

January 1, 2018, pursuant to new IRC section 4960, exempt organization employers will now be subject to a 21% excise tax on compensation in excess of $1 million to any covered employees. Compensation includes salaries, commissions, bonuses, 457(f) deferred compensation and nonqualified deferred compensation when there is no substantial risk of forfeiture. Compensation does not include Roth elective deferrals. Licensed medical professionals (including veterinarians) performing medical services are carved out of the definition of covered employees; such professional-performing administrative services are not excluded. Covered employees include the top five highest-paid employees in any year after 2016. The 21% excise tax is separate from and in addition to the rebuttable presumption of reasonableness standard governing executive compensation. Compensation received by a covered employee from related organizations is aggregated and the excise tax is allocated between the entities. There are many questions regarding the structuring for the excise tax and the IRS should provide further guidance by June 30, 2018, as set out in the second quarter update to the 2017-2018 Priority Guidance Plan. It should be noted that there is also a 21% excise tax assessed to organizations for excess parachute/severance payments paid to covered employees, as described previously,

Spring 2018

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