Virtually every individual and industry in America will be affected by the Tax Cuts and Jobs Act—including higher education. However, tax reform still lacks clarity.
The Internal Revenue Service and U.S. Department of Treasury have not yet developed the treasury regulations that will govern tax treatment of the new law. Andrea Newman, nonprofit tax director at James Moore, attended the Washington Non-Profit Legal and Tax Conference in March 2018, where she learned that the new regulations will take time to release.
Newman noted that the Attorney-Advisor in the Office of Tax Policy of the U.S. Department of Treasury, who is responsible for advising the tax policy on all tax matters involving tax-exempt organizations and charitable contributions, was present at this conference and explained that the reason the regulations are taking so long is partially due to there being a conflict between the intent of the law and the way the law was worded when written by Congress.
“Many institutions are jumping to make changes based on various interpretations of the law; however, these efforts could be for nothing if the law is interpreted differently as the regulations are written,” says Newman. “Our advice is to be patient, learn about the new law, and be prepared to make changes after the regulations come out later this year.” IRS officials are currently considering delaying the implementation of certain new provisions from this tax reform that apply to tax-exempt organizations.
Earlier this year, we summarized several changes from tax reform that directly or indirectly affect colleges, universities and direct support organizations. To help you better understand the impact of the new law on your operations, we’ve taken a deeper look at some of these changes.
“Basketing” of Unrelated Business Taxable Income (UBTI)
Organizations with more than one unrelated trade or business must now compute UBTI separately for each income channel, or “basket.” As a result, a loss from one activity can no longer offset income from another.
It is not clear whether a K-1 from an investment in a private equity or hedge fund could be offset by another similar K-1 so that the basket would include all alternative investment K-1 activity, or if the IRS will require each K-1 to stand alone. The impact of the regulations related to K-1s could have a significant impact on federal and state tax liabilities to institutions and their related foundations.
IRS officials indicated that the agency is considering delaying the implementation of this new section. However, we recommend that organizations develop systems now to track income and expense for each trade or business so that UBTI by basket can be easily computed once the regulations are put into place.
Tax on Fringe Benefits
The value of employee benefits, such as parking and use of on-campus athletic facilities, is now considered taxable. If these fringe benefits remain nontaxable to employees, the employer will be required to pay a 21% tax on these amounts.
While the regulations about taxable fringe benefits have not been released (and this is another section that the IRS is considering as part of their delayed implementation), many institutions have already started deducting parking and transportation fringe benefits post-tax from employee payroll. If your institution is choosing to make these benefits taxable to the employee in lieu of the institution absorbing the tax, we recommend that this change have a supporting communication plan to employees. The impacts of tax reform on employees will likely reduce their overall individual tax burden, so they will probably have the capacity to absorb the additional tax on fringe benefits at their individual reduced tax rates without seeing a significant impact on their disposable income.
Excise Tax on Executive Compensation
Nonprofits, including those in higher education and collegiate athletics, will now be levied a 21% excise tax on compensation over $1 million paid to any of its five highest-paid employees during the year. This also includes “parachute payments” made to departing employees. Certain salary types are excluded from this tax (for example, a medical or veterinary professional performing services directly related to these areas of expertise).
What is unclear is whether employees of public institutions will be excluded from this excise tax and whether third-party compensation (such as amounts paid to coaches by corporate sponsors) will be included in the compensation amount evaluated. Another uncertainty is whether compensation will be based on the calendar year or the employer’s tax year (in the latter case, this raises questions on how that will be tracked and reported).
This new regulation could have a big impact on athletic departments as it relates to highly paid coaches and athletic administrators—which in turn could put many already struggling athletic programs in a precarious position. Since 2010, the average compensation for head football coaches in the Autonomy Five conferences has increased by 74.3%, and the compensation agreements for those coaches have become significantly more complex.
While it may be tempting to come up with creative ways to restructure compensation in order to avoid the excise tax, we recommend that programs wait and see how the regulations are clarified before making these changes. IRS officials have not indicated that this section is part of their consideration for delayed implementation, so we anticipate more guidance on this sooner rather than later.
Repeal of the Deduction for College Athletic Event Seating Rights
College sports fans often pay a premium for the right to purchase tickets (or priority seating) for athletic events. Previously, 80% of this amount was deductible as a charitable contribution; the new law, however, removes this deduction.
There are differing opinions out there on how ticketing systems are being restructured to allow for deductibility of ticket contributions. One national CPA firm is advising athletics departments to get creative by restructuring ticket systems to encompass memberships or support student-athletes in an effort to keep a portion of the contribution deductible for ticket holders. Another national accounting firm states the opinion that, if a contribution is in any way connected with tickets, it makes the entire contribution non-deductible.
We have found that many athletics departments are restructuring their ticketing systems, and such changes could be valuable if they help to boost ticket revenues and fan engagement. However, we suggest that you don’t make any changes at this point if the only purpose of the change is to maximize deductibility of contributions provided by ticket holders.
The James Moore Higher Education Services Team is staying on top of this. We will release an article with the final regulations once they are released, and we are working on a white paper that highlights changes institutions are making in response to Tax Reform in the fall.
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