UNDERSTANDING THE NEW TAX LAW AND ITS IMPACT ON YOUR ORGANIZATION AND DONORSPresented By:

Tax Reform

RUTHANN J. WOLL, CPAPrincipal |Tax Services Group

• Projected impact

• Direct impact items • Line items from the new law (none of these items

are slated to “sunset”)

• Indirect impact items • Line items from the new law that will impact the

nonprofit community indirectly (most of these items are slated to “sunset” after 12/31/2025, making planning a bit more challenging)

• Planning opportunities for contributors

Agenda

• National Council of Nonprofits anticipate the Tax Cuts and Jobs Act will have the following impact:• Reduce charitable giving by $13 billion or

more annually• Less than 13% of Americans will be able to itemize

• Destroy more than 220,000 to 264,000 nonprofit jobs

• Impair the ability of the nonprofits to address community needs by taxing tax-exempt organizations to fund tax cuts for wealthy corporations and individuals

Projected Impact

• Nonprofits taxed as corporations:• Follow new corporate tax rate of 21%

• Small nonprofits with less than $90,000 of taxable income will now pay MORE in taxes because of the flat tax vs the previous graduated rates

• 15% tax rate was previous minimum tax amount

• For larger nonprofits, this will mean a smaller tax burden and put more money back into the organization’s mission

• No AMT calculation• Same rules apply with regard to using AMT credits

to offset regular tax liabilities in any taxable year

Direct Impact: UBTI

• Example

Direct Impact: UBTI

Taxable Income

Tax

2017 $50,000 $7,500 2018 $50,000 $10,500

2017 $91,000 $19,190 2018 $91,000 $19,110

• Unrelated business income is now calculated on each trade or business individually rather than aggregated• Trade or business definition is unclear –

• Example: Do investments in multiple real estate partnerships count as one trade/business or is each partnership a separate trade/business?

Direct Impact: UBTI

• Interim guidance released• IRS acknowledges administrative burden• Reliance on a reasonable, good-faith interpretation

• Use of NAICS 6 digit codes• Groups together similar economic activities into defined

industries

• Fragmentation rule• Business activity will not lose its identity as an unrelated trade

merely because it is carried on within a larger aggregate of similar activities that are related to the organization’s exempt purpose• For example:

• Sale of jewelry in an art museum gift shop (unrelated)• Sale of postcards replicating art sold in the gift shop

(related)• Use this principle to identify the business and

related expenses

Direct Impact: UBTI

• Interim guidance released• Investment activities

• Plan to propose regulations treating certain investment activities as one trade or business

• Qualifying partnership interest• May aggregate its UBTI from its interest in a single

partnership• De minimis test

• Organization holds no more than 2% of the profits interest and no more than 2% of the capital interest

• Control test• Organization holds no more than 20% of the capital

interest and does not have control or influence over the partnership

Direct Impact: UBTI

• Example:

Direct Impact: UBTI

Unrelated Business Taxable Income

2017 Advertising $15,000.00

Rental income from debt-financed property ($5,000.00)

Gift shop sales $1,200.00

Taxable income $11,200.00

Tax @ 15% $1,680.00

2018 Advertising $15,000.00

Gift shop sales $1,200.00

Rental income from debt-financed property (not allowed) ($5,000.00)

Taxable income $16,200.00

Tax @ 21% $3,402.00

• NOL carryforwards follow new corporate rule of 80% of taxable income, no expiration• Eliminated the option to carryback the NOL

• All new NOLs are calculated by trade/business and can no longer “cross-pollinate”

• NOLs from prior years will be able to offset all UBTI until used in their entirety

• Form 990-T will be completely revamped for the changes

Direct Impact: UBTI

• NOL ordering rules for 2019• Post-2017 NOL will be taken first against the

associated business’ income

• Pre-2018 NOL will be deducted against the entire UBTI for the year

• IRS has requested comments on the ordering rules

Direct Impact: UBTI

• Nonprofits taxed as corporations:• Are they allocating the appropriate

general/shared expenses to each trade or business to get the best benefit?• Start accumulating NOLs in the “start-up” phase

because there is no expiration on them now

• Will need to analyze each trade or business to determine if it is worth pursuing

• May need to end loss activities because the loss does not benefit the corporation

Direct Impact: UBTI

• Nonprofits taxed as corporations:• If there are multiple taxable trade or business

activities, consider moving them all into a wholly owned corporation to house all non-exempt activities so that loss activities can offset profitable activities • NOLs will not be able to be transferred to the

new entity

• Related entity issues to consider as well

Direct Impact: UBTI

• Global Intangible Low-Taxed Income (GILTI)• GILTI should be treated similarly to an inclusion of

subpart F income for UBTI purposes

• Accordingly, GILTI will be treated as a dividend

• Excluded from UBTI under § 512(b)(1)

Direct Impact: UBIT

• Nonprofits taxed as trusts:• Top tax-exempt trust tax rate is 37%

• No repeal of AMT for trusts

• Planning question:• Is this form of entity appropriate for the organization

going forward?

Direct Impact: UBTI

• Tax-exempt organizations are now required to treat amounts used to pay for certain fringe benefits offered to employees as UBTI• Amounts not deductible under Section 274

• Includes:• Qualified transportation fringe benefits

• Parking facility used in connection with qualified parking

• On-premise athletic facilities

• Excludes amounts that are directly connected with a regularly carried-on unrelated trade or business

Direct Impact: UBTI

• Qualified parking• Prior to 2018

• An employee could exclude up to $255 per month of employer provided parking as a qualified transportation benefit

• Employer was able to deduct 100% of the expense

• Tax reform• An employee can exclude up to $260 per month of employer

provided parking

• Employer can’t deduct the expense

• Employer pays UBIT on the fringe benefit

• $3,120 = tax of $655

• Planning options• Renegotiate parking lease – increase office rent

to include free parking

Direct Impact: UBTI

• Excessive compensation • Overview: 21% of annual compensation paid in excess of

$1,000,000 to the top five highest compensated employees (HCE) and certain “golden parachute” separation pay• Remuneration – includes federal withholding wages, but not

Roth contributions, vesting amounts and taxable under §457(f). Does not include loans made to executives under split dollar life insurance arrangements. Includes compensation from related parties.

• Covered employee – current or former employee that is one of the five HCE for the taxable year or was a covered employee for any preceding year beginning after 12/31/2016.

• Excess parachute payment – amount paid to a covered employee upon their separation from the entity with a PV greater than or equal to 3 times their base salary. Excludes:• Payments under qualified plans

• Payments under §403(b) or §457(b)

• Payments to non-HCE • Surgeon Exception – Medical services provided by

doctors, nurses and veterinarians are excluded.

Direct Impact: Excise Taxes

• Excessive compensation • Purpose of the excise tax is to bring NFP pay in line

with public company compensation rules• The 21% tax burden is on the NFP not the

employee• If remuneration is from multiple entities the burden is

prorated among the entities

• Important to keep track of “covered employees” and “remuneration” from related entities to determine liability

• If there is a way for an affiliate not deemed a related party to pay the individual it might make sense to move portion of pay to them.

Direct Impact: Excise Taxes

• Net Investment Income (NII) of some private colleges and universities subject to 1.4% excise tax• NII follows private foundation rules (no benefit

from excessive net capital losses)

• Does not apply to state universities and their related organizations

• Criteria:• At least 500 students

• More than 50% of students in the US

• Assets of PY at least $500,000/full-time student

Direct Impact: Excise Taxes

• Administrative burden lessened for charities• IRS clarified that $250 is the lowest amount for which the

organization must send a letter

• Deposit receipts must be kept on file for all contributions, regardless of the amount

• Confirms that organizations can use email to send donor receipts

• Confirms that a pay stub plus a pledge card from the charity will substantiate a contribution made through payroll

• Confirmation that if a gift of property exceeds $500,000, the donor must attach the appraisal to the tax return for the year of the gift and any subsequent year deduction is carried over

• Blank forms filled out by donors are no longer acceptable

New Substantiation & Reporting Rules

• Noncash donations• Less than $250 – Receipt from charity or reliable record

• Charity’s name and address

• Contribution date

• Detailed description of the property

• Property’s FMV at the time of the donation

• Condition of the item(s)

• $250 to $500 – Contemporaneous written acknowledgement• Must state whether the donor received any goods or services in

exchange for the donation

• $500 to $5,000 – Contemporaneous written acknowledgement and Form 8283

• $5,000 or more – Above plus qualified appraisal

New Substantiation & Reporting Rules

• Increase in standard deduction amount • Standard deduction is $24,000 (MFJ)• Less than 15% of Americans will be able to itemize

deductions• Reducing the number of contributors getting a direct

tax benefit for their charitable contribution

• Overhaul of itemized deductions• $10,000 limit on state and local tax deduction • Eliminated 2% miscellaneous itemized deductions• In order for individuals (MFJ) to itemize, charitable

contributions and mortgage interest must exceed $14,000

Indirect Impact Items

• Increase in charitable contribution deduction limitation to 60% of AGI• For cash contributions only• Only for contributions to public charities and

private operating foundations• No change for private foundations – remains 30%

of AGI• For those who can still itemize, they will see more

benefit• Remember that the 20% QBI deduction

does not decrease AGI which is the basis for the charitable contribution limitation

• Carryforwards are available for 5 years

Indirect Impact Items

• Estate and gift tax exemptions increased• Reduces incentive for wealthy to move assets out

of the estate to nonprofit organizations as a tax planning strategy

Indirect Impact Items

• Bunching charitable contributions

• Donor advised funds

• IRA qualified charitable distribution• Age 70½• Minimum required distributions

• Donation of appreciated stock

• Use of private foundations to get benefit of charitable contribution deduction and control the disbursement offunds over time• Legal and administrative costs to set up and run new entity• Annual filing requirement• Possible state filing requirements

• Donations to a PA EITC program

Planning Opportunities for Contributors

Bunching Charitable Contributions

0

4000

8000

12000

16000

20000

24000

28000

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7

Bunched Deductions

Taxes Charitable Mortgage Interest Standard Deduction

0

4000

8000

12000

16000

20000

24000

28000

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7

Itemized

Taxes Charitable Mortgage Interest Standard Deduction

Itemized Deductions

• $10,000 – Maximum state income tax• $3,500 – Mortgage interest• $5,000 – Charitable

$18,500 Itemized < $24,000 Standard

Bunching Deductions

Utilizing a charitable vehicle such as a Donor Advised Fund allows larger charitable contributions to be deducted in a single year and distributed at a future point in time.

• Direct IRA distribution to charity

• Must be age 70½

• Counts toward required minimum distribution

• $100,000 maximum amount allowed

• Reduces taxable amount of IRA distribution• Benefit of reduced adjusted gross income (AGI) could

have favorable impact on Medicare premiums

• Cannot be used for donor advised fund

• Selling point – Reduces the AGI of the donor and taxpayer is still eligible for higher standard deduction

IRA Distribution

• Transfer long-term appreciated stock direct to charity

• Charitable deduction is average fair market value on date of contribution

• 30% AGI limitation applies

• Appraisal not required for noncash contribution of publicly traded securities

• No capital gains tax on appreciated value

• Can be used for Donor Advised Fund

Donation of Appreciated Stock

• Tax credit program for eligible businesses contributing to one of three types of entities registered to receive credit funds:

• Scholarship Organization

• Educational Improvement Organization

• Pre-Kindergarten Scholarship Organization

• Contributions to this program can be:• Cash

• Personal property

• Services of value (no part of the contributors normal course of business)

Pennsylvania EITC Program

• Tax credit value OSTC and EITC:• 75% of contribution to organization up to $750,000

for a 1 year commitment, or

• 90% of the contribution to organization up to $750,000 for a 2 year commitment

• Tax credit value PKTC:• 100% of contribution to organization up to $10,000

and 90% of any additional contributions capped at $200,000

• No difference between a 1 and 2 year commitment

Pennsylvania EITC Program

• Pass-through entity

• Sole purpose can be to receive capital, apply for credits and disburse funds to EITC/OSTC/PKTC organizations

• Made up of partners, shareholders, members or employees of another business firm

• Pooling of contributions

• Different allocations of ownership to accomplish goal of proper allocation of charitable contribution

Special Purpose Entity

• $100,000 annual commitment to EITC for 2 years

• Capital contributed = $100,000

• Federal itemized deduction = $100,000• Tax benefit (assuming highest tax bracket/no

phase out) = $36,000

• Pennsylvania, no deduction• Tax benefit = $90,000

• Total cost = $100,000

• Total benefit = $126,000 tax savings

• Net benefit = $26,000

SPE Example 1

• Same contribution information from Example 1

• Amy, Billy and Cody each own 33.33% of XYZ LLC, a PA partnership

• Donna is a key employee of XYZ LLC, but not an owner

• Amy, Billy, Cody and Donna all support a nonprofit, All About Learning, which is eligible to receive EITC funds

SPE Example 2

Tax Liability Contribution OwnershipFederal Tax

SavingsState Tax

CreditNet Gain Lost Credit

Amy $ 40,000 $ 33,334 33.33% $ 12,000 $30,000 $ 8,666 $ -

Billy $ 10,000 $ 33,333 33.33% $ 12,000 $10,000 $ (11,333) $ 20,000

Cody $ 22,000 $ 33,333 33.33% $ 12,000 $22,000 $ 667 $ 8,000

Donna $ 18,000 $ - 0.00% $ - $ - $ - $ -

$ 90,000 $ 100,000 100.00% $ 36,000 $62,000 $ (2,000) $ 28,000

SPE Example 2:

If the $100,000 contribution is made by the LLC:

If the $100,000 contribution is made by the SPE:

SPE Example 2

Tax Liability Contribution OwnershipFederal Tax

SavingsState Tax

CreditNet Gain

Amy $ 40,000 $ 44,445 44.45% $ 16,000 $40,000 $ 11,555

Billy $ 10,000 $ 11,111 11.11% $ 4,000 $10,000 $ 2,889

Cody $ 22,000 $ 24,444 24.44% $ 8,800 $22,000 $ 6,356

Donna $ 18,000 $ 20,000 20.00% $ 7,200 $18,000 $ 5,200

$ 90,000 $ 100,000 100.00% $ 36,000 $90,000 $ 26,000

• Organizations wishing to become eligible to receive EITC funds:• Initial applications can be submitted at any time

• Annual renewals due on or after May 1st for each fiscal year

• Businesses looking to apply to fund EITC:• Initial application due July 3rd annually

• Renewals and businesses in the middle of atwo-year commitment must apply by May 15

Filing Deadlines

FOCUSED.ON YOU.RUTHANN J. WOLL, CPArwoll@rklcpa.com| RKLcpa.com