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Business Income Tax Changes1. Corporate income tax rate reduced to 21% for tax
years beginning after 12/31/17a) Historically low nominal top rateb) Flat ratec) Fiscal year corporations need to apply a blended
rate to tax years that straddle 1/1/18d) Permanente) AMT repealedf) Choice of entityg) Use of C corporation in conjunction with pass-
through entities
Business Income Tax Changes2. 100% cost recovery
a) Old law: 50% first-year bonus depreciation; new property only
b) New law: 100% first-year bonus depreciation (i.e., full expensing); new and used property; amount subject to expensing declines to 80%, 60%, 40% and 20% after 12/31/22
c) Sunsets after 2026d) Applies primarily to tangible personal property; does
not apply to intangibles (e.g., purchased goodwill)
Business Income Tax Changes3. Deductibility of business interest
a) The new law disallows deduction of interest incurred by any business to the extent the interest exceeds 30% of “adjusted taxable income”
b) Adjusted taxable income is taxable income computed with certain adjustments, including, in the case of tax years beginning before 1/1/22, any deduction allowable for depreciation, amortization or depletion
c) The limitation DNA to taxpayers whose three-year average annual gross receipts do not exceed $25 million
d) Real property trade or business can elect out of the limit if it uses ADS to depreciate its real property
Business Income Tax Changes4. Net operating losses
For NOLs arising in tax years after 12/21/17a) there is no more two-year carrybackb) the NOL deduction is limited to 80% of taxable
incomec) NOLs can be carried forward indefinitely
Business Income Tax ChangesEffect of 21% rate, 100% cost recovery, limits on
deductibility of interest, new NOL rules and repatriation tax
on M&A
a) Target’s perspective
b) Buyer’s perspective
c) What if target is an S corporation
Unrelated Business Income Tax (“UBIT”) Changes
1. UBIT rate reduced to 21% for tax years beginning after 12/31/17
2. Organizations subject to UBIT can no longer aggregate income and losses from separate activitiesa) more organizations will be liable for UBITb) new limits on NOL deduction will prevent use of
LOLs to completely eliminate UBIT
Deduction Against Income From Pass-Through Entities1. Applies to non-corporate owners of business entities
taxed as partnerships, S corporations and sole proprietorships
2. Availability and amount of deduction depend upona) whether or not the business is a “specified service
business”b) the amount of the owner’s taxable income
Deduction Against Income From Pass-Through Entities
3. “Specified service business” is any trade or business
involving the performance of services in the fields of
health; law; accounting; actuarial science; performing
arts; consulting; athletics; financial services; brokerage
services; investment services, management, trading or
dealing in securities; or any trade or business where the
principal asset is the reputation or skill of one or more
employees or owners
Deduction Against Income From Pass-Through Entities4. Amount and availability of deduction depends on type of
business and owner’s taxable income –a) Taxable income less than $315,000
(MFJ)/$157,500(SFI)i. Non-service business – deduction is lesser of
20% of taxable income (less net capital gain) and 20% of the income from the business
ii. Service business – deduction is lesser of 20% of taxable income (less net capital gain) and 20% of the income from the business
Deduction Against Income From Pass-Through Entitiesb) Taxable income greater than $315,000 (MFJ)/$157,500(SFI) but less
than $415,000 (MFJ)/$207,500 (SFI)i. Non-service business – limitation based on wages paid and
unadjusted basis of tangible property used in the business is phased in by statutory formula
ii. Service business – deduction is phased out by statutory formulac) Taxable income greater than $415,000 (MFJ)/$207,500 (SFI)
i. Non-service business – deduction is lesser of 20% of taxable income (less net capital gain) and the lesser of –(a) 20% of the income from the business and(b) the greater of W-2 wages X 50% and W-2 wages X 25% plus
2.5% of unadjusted basis of tangible property used in the business
iii. Service business – no deduction
Deduction Against Income From Pass-Through Entities5. Commonly-owned pass-through entities6. C corporation versus pass-through7. Pass-through deduction sunsets after 2025
Affordable Care Act
Individual mandate – penalty reduced to zero 2019
Employer mandate
Cadillac tax – 2022
What is next?
Nonprofit –Executive Compensation
Code Section 4960 - 21% excise tax on an applicable tax-exempt organization with respect to (1) compensation in excess of $1 million and (2) excess parachute payments paid by to a covered employee.What is an applicable tax-exempt organization? Organizations exempt from tax under Section 501(a) Farmer cooperatives described in Section 521(b)(1) Organizations with income excluded from tax under
Section 115(1) Political organizations described in Section 527(e)(1)
Nonprofit –Executive Compensation
Who is a covered employee? An employee who is one of the
five highest-paid employees for the taxable year or who was a covered employee of the organization (or a predecessor) for any preceding taxable year beginning after December 31, 2016.
Once a covered employee, always a covered employee.
Nonprofit –Executive Compensation
What is “compensation”? Includes all wages paid for services performed as
determined for income tax withholding purposes, plus amounts required to be included in gross income under Section 457(f) at the time they are no longer subject to a substantial risk of forfeiture
Excludes any designated Roth contribution and compensation paid to a licensed medical professional (including veterinarians) for the performance of medical or veterinary services
Special rules for compensation paid by related entities
Nonprofit –Executive Compensation
When deferred compensation is “compensation” under 4960 457(b) plan – when paid or
made available 457(f) plan – upon vesting
Nonprofit –Executive Compensation
What is an excess parachute payment? The payment of compensation that is contingent on
the employee’s separation from employment and the value of all payments is at least three times the base amount.
The base amount is the average annualized compensation includible in gross income for the five taxable years ending before the date of the employee’s separation.
Nonprofit –Executive Compensation
What to do? Review your plans and documentation
Determine payout projections
Identify covered employees
Excess compensation calculations
Structure plans to be under $1 million (incorporate tax into payout?)
Excess parachute payments structure
Sexual Harassment Settlements
Settlement agreements (including attorney’s fees) for sexual harassment/sexual abuse claims that contain a nondisclosure agreement are NOT deductibleWeigh need for NDA against deductibility of any settlement
Retirement Plan Changes
Hardship withdrawalsParticipant loans
Overview
Effect on Charitable Giving
Changes to Fringe Benefits & UBIT
New Tax on Private College Endowments
Effect on Charitable Giving
1. Doubles the standard deduction
2. Reduces or eliminates key itemized deductions
3. Lowers individual income tax rates, thus reducing the
value of all tax deductions
top rate of 39.6% lowered to 37%
4. Doubles the estate and gift tax exemption
Effect on Charitable Giving
Increase in Standard Deduction
2017 2018
Single $6,350 $12,000
Married filing Jointly
$12,700 $24,000
Married filing Separately
$6,350 $12,000
Head of Household
$9,350 $18,000
Effect on Charitable GivingReduce/Eliminate Key Itemized Deductions Deduction for state and local income taxes (SALT) and
property taxes capped at $10,000
previously no cap, floor or phase-out
Eliminated Deductions Miscellaneous itemized deductions subject to 2% of AGI
• unreimbursed employee business expenses;
• tax preparation fees; and
• theft and personal casualty losses.
Amounts donated to educational institutions that entitle donor to purchase tickets for athletic events.
Effect on Charitable GivingHow will these changes impact itemizers? Estimated that 84 percent of households that
currently itemize will opt for standard deduction in 2018.
How will this impact deductions for charitable contributions taken on Schedule A? # of households that claim a charitable deduction on
Schedule A will decrease from 37 million in 2017 to 16 million in 2018, or by 56 percent.
66 percent for middle income households.Source: www.taxpolicycenter.org/taxvox/21-million-taxpayers-stop-taking-charitable-deduction
Effect on Charitable Giving ScenarioMJF w/ 2 dependents; household gross income of $100,000; house worth $250,000; and mortgage of $220,000. Deduction for SALT = $7,700 Deduction for Real Estate Taxes = $2,300 Deduction for Mortgage Interest = $9,000
• Total itemized deductions of $19,000, still $5k less than standard deduction of $24k.
Effect on Charitable GivingDeductions that were left alone or only slightly changed Home Mortgage Interest
• still deductible for “acquisition indebtedness”; not home equity loans
Medical and Dental Expenses• Still subject to floor (7.5% of AGI)
Gifts to Charity• Limitation on charitable gifts of 50% of AGI was
temporarily increased to 60% of AGI.• Rest assured, no changes to charitable contribution
deduction for reasonable and necessary costs of being a whale boat captain
Effect on Charitable Giving
Estate Tax Exemption Doubled 2017 – $5.49M for an individual and $10.98M for
married couple. 2018 – $11.2M for an individual and $22.4M for
married couple. Applies to estate, gift and generate-skipping taxes. Temporary; expires in 2025.
Based on history, this could have a major impact on charitable bequests. Case in point …
Effect on Charitable Giving
11.9
7.49
14.36
0
5
10
15
2009 2010 2011
Charitable Bequests (in billions)In 2009, charitable bequests were $11.9B.
In 2010, estate tax was temporarily repealed and charitable bequests decreased by 37%, to $7.49B.
In 2011, estate tax was reinstated and charitable bequests increased to $14.36B.
Source: www.bloomberg.com/news/articles/2017-08-25/gop-plan-sets-up-charitable-conflict
Overall Effect on Charitable GivingImpact on Marginal Tax Benefit of Giving to Charity
The TCJA will reduce the marginal tax benefit (of all taxpayers) from 20.7 percent to 15.2 percent, a 26 percent decrease.
• Top 1 percent – from 30.5 percent to 28.9 percent (a 5 percent decrease).
• Middle-income taxpayers – from 8.1 percent to 3.3 percent (59 percent decrease).
Overall Effect of TCJA on Dollars Given to Charities
Expected to decrease in 2018 by 4 to 6.5 percent
Equates to $12.3 billion to $19.7 billion. Source: www.taxpolicycenter.org/taxvox/21-million-taxpayers-stop-taking-charitable-deduction
Changes to Fringe Benefits & UBIT1. Code Section 274 makes certain fringe benefits that
were previously deductible by taxable employers no longer deductible;
2. Code Section 512(a)(7) states that “Unrelated business taxable income of an organization shall be increased by any amount for which a deduction is not allowable under this chapter by reason of section 274 and which is paid or incurred by such organization for any qualified transportation fringe (as defined in section 132(f)), any parking facility used in connection with qualified parking (as defined in section 132(f)(5)(C)), or any on-premises athletic facility (as defined in section 132(j)(4)(B)).”
Changes to Fringe Benefits & UBITScope of 512(a)(7) – two part test UBIT will apply to the cost of providing 1) qualified
transportation fringe benefits, 2) parking facilities, or 3) on-site athletic facilities, to employees of the organization;
but only if such costs are made to be non-deductible for taxable employers via section 274.
Application of 512(a)(7) Most taxes are assessed on accessions to wealth, as in
the case of income or a gain on a transaction. However, this tax (21%) is on the cost of providing the
benefit.
Changes to Fringe Benefits & UBITAreas of Ambiguity in 512(a)(7)“UBIT shall be increased [by any amount which is no longer deductible for taxable employers via 274] and which [pertains to qualified transportation, parking facilities, or on-premises athletic facilities.]” “shall be increased” – what if the organization has no
other UBIT to increase and would not otherwise file a 990-T?
“and” – is believed to be conjunctive, yet code section 274 does not identify on-premises athletic facilities; rather, it only identifies qualified transportation fringe benefits (which is believed to include on-premises parking facilities).
Changes to Fringe Benefits & UBIT
Fringe Benefits Listed in § 512(a)(7)
1. Qualified transportation fringe benefits.
2. Parking facility used in connection with qualified
parking.
3. On-premises athletic facility (as defined in section 132(j)(4)(B)).
Changes to Fringe Benefits & UBIT1. Qualified transportation fringe benefits, includes: transportation in a commuter highway vehicle
(seating capacity of at least 6 adults) any “transit pass,” which means any pass, token,
farecard, voucher, or similar item entitling a person to transportation on “mass transit facilities”
qualified parking (more on next slide), and qualified bicycle commuter reimbursement (basically
if you buy an employee a bike that the employee uses to ride to work)
Changes to Fringe Benefits & UBITWhat is Qualified Parking? Section 132(f)(5)(C) – parking provided to an employee on or
near the business premises of the employer. Treas. Reg. Section 1.132-9(b), Q&A 4(d) – includes parking
that the employer pays for, either directly to a parking lot operator or by reimbursement to the employee, or provides on premises it owns or leases.• Includes parking garages operated other entities• Probably includes surface lots requiring a parking pass if
provided to employees for free• Hopefully excludes surface lots open to public or reserved
for employees, for which employees are not charged
Changes to Fringe Benefits & UBIT2. Parking facilities used in connection w/ qualified parking If employer operates a parking facility and charges
individuals to park there, UBIT will probably arise to the extent employees are allowed to park for free.
How is this valued?• Treas. Reg. Section 1.132-9(b), Q&A 4(d) – The value of
employer-provided parking is determined based on the amount an individual would have to pay for the parking in an arm's-length transaction; the existence of the employment relationship is disregarded, as is any subjective valuation of the benefit by the employee.
• Thus, whatever it costs the general public to park in the facility.
Changes to Fringe Benefits & UBIT3. On-premises athletic facilities means any gym or other
athletic facility: which is located on the premises of the employer,
which is operated by the employer, and
substantially all the use of which is by employees of the employer, their spouses, and their dependent children.
But remember, section 274 does not state that the costs of on-premises athletic facilities are nondeductible for taxable employers, so until we hear otherwise, these costs shouldn’t give rise to UBIT under 512(a)(7) keep an eye out for revisions to section 274
Tax on Private College Endowments
TCJA created new Code Section § 4968.
4968(a) imposes a tax of 1.4% on the net investment income of “applicable educational institutions.”
Net investment income shall be determined as it is for private foundations under the rules of section 4940(c). Net investment income is generally equal to interest,
dividends, rents, royalties and net income from capital gains, less the expenses incurred to earn this income.
Tax on Private College Endowments“Applicable Educational Institutions” means an educational institution (as defined in § 25A(f)(2)):1. which had at least 500 tuition-paying students during the
preceding taxable year, more than 50% of whom are located in the United States;
2. which is not a public institution (not a state college or university) as described in § 511(a)(2)(B); and
3. which had endowed assets (assets not used directly in carrying out the institution’s exempt purposes) at the end of the preceding taxable year of at least $500,000 per student
Based on 1 and 3 combined, this law applies to institutions with at least $250M in endowed assets.
Tax on Private College EndowmentsAimed at capturing revenue from small number of wealthy private colleges and universities. Over next 10 years, $1.8 billion in revenue from 35
institutionsBut, also affects “related organizations,” which are organizations that: the educational institution controls or is controlled by; are controlled by on or more persons who control the
institution; or are supported or supporting organizations w/r/t the
institution.The assets and investment income of related organizations are considered in both the asset and income calculations.
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