Tax Update: Deep Dive into Tax Reform and recent IRS Guidance

Editor's note: This post is one in a series highlighting sessions for the upcoming Endowments and Finance Summit, held in Washington, DC, on September 6-7. The Summit is where foundation leaders – such as CEOs, CIOs, CFOs, Senior Investment Officers and board and investment committee members – converge to dialogue on trends, issues, best practices and innovations dealing with endowments, financial management, business and other professional challenges. 

The latest tax reform, commonly known as the Tax Cuts and Jobs Act, was passed at the end of 2017 and contains many provisions that directly affect tax-exempt organizations. Moss Adams will take a deep dive into these changes—as well as highlight recent IRS updates and guidance—at this year’s Endowments and Finance Summit.

Foundation leaders stand to benefit from gaining a solid understanding of three provisions most likely to affect foundations:

• Reporting certain fringe benefits as unrelated business income (UBI)
• Separating UBI activity into different reporting buckets
• Paying an excise tax when compensation greater than $1 million is paid to covered employees

Fringe Benefits

Historically, foundations that incurred an expense to provide an employee benefit wouldn’t have had a UBI reporting issue because these benefits weren’t a revenue source. Under tax reform, however, foundations now meet a UBI reporting requirement when providing certain fringe benefits to their employees, such as:

• Qualified transportation costs;
• On-site athletic facilities;
• Bicycle commuting expenses.

Although these benefits remain nontaxable to employees, the cost of providing them will now generally be reportable as UBI.

This provision went into effect on January 1, 2018, which means fiscal-year-end foundations will need to have a handle on these reporting requirements and the subsequent tax exposure much earlier than calendar-year foundations. The period between January 1, 2018, and June 30, 2018, for example, will require six months of UBI reporting for fiscal-year foundations.  

We’ll provide more details during the conference about what a transportation fringe benefit is and what costs may have to be reported as well as any further Treasury guidance or updates.

UBI Reporting Separation

Foundations with alternative investments or other UBI activities can benefit from taking the following steps:

• Understanding the new requirement to separately report UBI activities;
• Tracking net taxable income and losses separately;
• Determining the tax impact this may have in the near- and long-term.

It’s worth noting tax reform also imposes new limitations on how much of a net operating loss foundations can use. 

We’re awaiting further guidance on what constitutes a separate activity and will share any recent developments during the conference.

Excise Tax

Foundations that pay their employees well and offer deferred-compensation options, such as 457(f) plans, may be subject to a 21% excise tax for employees whose compensation exceeds $1 million. Understanding which employees are covered and what constitutes compensation can give foundations a better idea of this provision’s impact.

We look forward to seeing you at the conference, where we’ll be prepared to share the latest tax-reform developments and other IRS updates.