IRS Proposes Criteria for New Section 4968 Excise Tax Impacting Some College Endowments
The Tax Cuts and Jobs Act (TCJA) enacted on December 22, 2017 ushered in comprehensive tax reform impacting many taxpayers. Tax-exempt organizations were one group targeted for reform. The details of these changes are still being sorted out as guidance is provide by the IRS. The IRS and Treasury recently released proposed regulations for the new 1.4% excise tax imposed on the net investment income of certain private colleges and universities. These proposed rules define several terms to help educational institutions determine whether this new Section 4968 excise tax applies to them.
Who Does the Section 4968 Excise Tax Affect?
This new excise tax applies to any private college and university that has:
- At least 500 full-time tuition paying students more than half of whom are located in the U.S.; and
- Assets, other than assets used in its charitable activities, worth at least $500,000 per student.
Although it is not anticipated that many private colleges and universities will be affected by this tax, it is important that these institutions become familiar with this new excise tax. As with many taxes, the above threshold of $500,000 in assets per student may perhaps be reduced in future years by Congress, and thus the tax would apply to many more private colleges and universities.
The proposed rules clarify how to determine net investment income, including how to include the net investment income of related organizations, and how a private college and university determines the basis in its non-charitable use property. The proposed rules also incorporate the interim guidance in IRS Notice 2018-55. These rules were published on July 3, 2019 and had a 90-day comment period.
Opportunity for Repealing the New UBIT Rules May be Closing for 2019
Two other TCJA provisions have been controversial virtually since they were enacted and have not been warmly received by tax-exempt organizations.
- Separate reporting of trades or businesses by a tax-exempt organization. Section 512(a)(6) added by TCJA requires tax-exempt organizations to report separately each unrelated trade or business activity and does not allow the loss from one trade or business activity to offset the income from a different trade or business activity.
- Limitation on fringe benefits, including parking, to tax-exempt organizations. The TCJA also added Section 512(a)(7) which subjects certain qualified transportation benefits provided by tax-exempt employers to the unrelated business income tax. This is now being referred to as the “Parking Tax.”
There has been a concerted effort to have both of these TCJA items repealed, or at least delayed. NACUBO (the National Association of College and University Business Officers) has played a key role in these repeal efforts. Repealing these unpopular provisions, however, presents challenges to tax-exempt organizations, and time may be running out.
Sikich advisers recently attended the AICPA Not-For-Profit Tax Conference in Washington, D.C. At the conference, Christopher Arneson, senior tax policy adviser with the U.S. Senate Finance Committee Democratic Staff, indicated that legislative options are closing for a repeal of Section 512(a)(6) and Section 512(a)(7). During 2019, the following three bills have been introduced in Congress to repeal these provisions:
- “Lessening the Impediments from Taxes (“LIFT”) for Charities Act”
- “Stop the Tax Hike on Charities and Places of Worship Act”
- “Non-Profits Support Act”
At this point, however, there is no legislation on the Senate floor or in committee to repeal these measures. Also, according to Arneson, as the 2020 elections approach, it is likely Congress will not pass major bills, including possibly any TCJA tax changes. This is something we will continue to follow.
IRS Reform Expands Mandatory Electronic Filing of Not-for-profit Returns
On July 1, 2019 President Trump signed into law H.R. 3151, the Taxpayer First Act. This new law adopts various procedural changes in how taxpayers deal with the IRS and file their tax returns. This includes tax-exempt organizations. One change in this new law expands the tax filing requirements for tax-exempt organizations who are required to file electronically and who file IRS annual information returns (Forms 990, 990-PF, 990-EZ, and 990-T). This new law also extends mandatory e-filing to the periodic contribution and expenditure reports (IRS Form 8872) filed by Section 527 political organizations.
Further, the new law requires the IRS to publicly release data from these returns in a machine-readable format as soon as practicable. The Independent Sector and many like-minded organizations have requested for years: language mandating that annual Form 990 information returns be filed electronically and made available in a machine-readable format. This is a significant policy change for those who have pushed for transparency and accountability with not-for-profit organizations and who seek to better understand their operations.
Under the new law, mandatory e-filing will arrive for most tax-exempt not-for-profit organizations in 2021 and for all tax-exempt not-for-profits that file returns with the IRS by 2022. The new requirements apply to calendar-year filers for tax returns covering tax year 2020 (due May 15, 2021), and to fiscal-year filers for tax returns covering tax years beginning on and after July 2, 2019 (due the 15th day of the fifth month after the end of the tax period). Because the law takes effect for years starting after July 2, 2019, the many not-for-profits that just started a new fiscal year on July 1, 2019 will also be required to e-file in 2021 (for the July 1, 2020 – June 30, 2021 tax period) rather than in 2020 (for the July 1, 2019 – June 30, 2020 tax period).
Please contact your Sikich tax adviser for the latest developments with these new provisions.
Bryan Pautsch, CPA, JD
Bryan has extensive experience in structuring and tax planning for both tax-exempt and taxable organizations. His expertise includes working with closely held businesses to identify planning opportunities and assist them as they implement these strategies. Bryan also specializes in IRS and state audits and appeals, employee benefit issues, and acquisitions.
Richard Lynch, CPA
Richard is a partner-in-charge and not-for-profit (NFP) industry leader, who has worked in public accounting since 2000. He has extensive experience providing audit, tax, accounting and management consulting services to a wide variety of NFP clients, including colleges and universities (both public and private), social service agencies, private foundations, health and welfare organizations, religious organizations, political action committees, civic and community organizations and trade associations.