Tax Reform for Higher Education

1. Tax Reform for Higher Education April 25, 2019

2. Agenda Tax Cuts and Jobs Act- What happened and where are we? Charitable contributions Unrelated business income Parking “tax” Executive compensation Excise tax on investment income

3. TCJA- What happened and where are we?

4. Timeline December 22: Signed into law (Introduced in the House November 2, 2017… very short process!) Tax Reform Act of 1986: Discussions spanned several years, first significant vote on October 15, 1985 and signed into law on October 22, 1986 First “wave” of “promised” additional guidance- June 30th (delayed- issued as late as December, a lot still pending) Uncertainty is very much still present Critical need for corrections and guidance (range from typos to very substantive errors) IRS has limited resources

5. Charitable giving impact

6. Indirect impacts to giving Tax benefit of donating is reduced Rely on drivers of donating: Tax benefit vs. emotional impact In theory, more “cash” in taxpayers’ pockets: How to encourage donating using this extra cash  Estate plans can give more to family and friends and avoid tax 

7. Seating rights Charitable donations: No longer allows donors to take an 80% tax deduction on gifts made for the right to purchase tickets or seating in collegiate sporting venues Changes to business entertainment deductions “In college athletics, as an industry, we’re going to have to decide how to price things, how to model things, what your financial structure is moving forward.” – Adam Haukap, executive director of the Red Wolves Foundation, “College donors lose sport-seats tax break,” Arkansas Online

8. Unrelated business income

9. Tax Reform - Unrelated business Income IRC 512(a)(6) Special rule for organization with more than 1 unrelated trade or business Loss “Basketing” – loss from one activity cannot offset income from another activity Tax Rate 21% Changes to net operating loss rules.

10. Application of “Basketing” Old law: Activity 1 has $10,000 of UBI. Activity 2 has $10,000 of loss. Bottom line: $10,000 minus $10,000 equals $0 of UBI. New law: Activity 1 has $10,000 of UBI. Activity 2 has $10,000 of loss. Bottom line: We have $10,000 of income from Activity 1, and the loss from Activity 2 carries over until Activity 2 has income to offset the loss. Net effect: A break-even year under the old law turns into $10,000 of net UBI under the new law.

11. Unrelated business income- Action Steps Understand what “activities” are reported on your 990-T Understand loss and revenue generators Calculate tax impact with new rates Evaluate potential benefit of unrelated business income activities reported in taxable C corporation versus 990-T Consider non-tax reasons Transfer of existing activities from 990-T to taxable C corporation 

12. Passive Investments in Partnerships Aggregated as “investment activities” De Minimis Test • No more than 2% of profits and capital interest • Related party aggregation Control Test • No more than 20% of capital interest • Related party aggregation • No influence Transition rule if acquired on or before August 21, 2018

13. Net Operating Losses Carryforward limited to 80 percent of taxable income for NOLs generated in years beginning after Dec. 31, 2017 Elimination of carrybacks but indefinite carryforwards for tax years ending after Dec. 31, 2017

14. Parking “tax”

15. Qualified Transportation Fringe: “The Parking Tax” “Unrelated business taxable income shall increase by any amount for which a deduction is not allowable and which is paid or incurred for any qualified fringe.” Measurement is based on “cost” rather than value – see Sec. 274 Applies to qualified transportation fringes  Converts an expense into income Applies to amounts paid or incurred after Dec. 31, 2017, regardless of the organization’s tax year Not a true “unrelated business activity” per Notice 2018-67

16. Qualified Transportation Fringe: “The Parking Tax” Notice 2018-99 [December 10, 2018] Payments to Third Party - UBTI up to $260 per month cap per employee  Taxpayer Owns or Leases Parking Facility – provides guidance on calculation of Parking Expense [UBTI addition] under 4-step process Penalty Relief – First Time Filers – Notice 2018-100 Offset “parking” income with one unrelated loss (but only one)

17. “Situation A”: Third-party Nonprofit association, located in downtown Columbus, pays for the parking passes of employees. Parking passes are valued at $250 a month. The nonprofit is paying for 15 employees. Cost to employer - $250 a month Value to employee - $250 a month Over 12 months, the nonprofit will report $45,000 of unrelated business income from parking.

18. “Situation B”- Own or Lease Taxpayer owns or leases parking structure Compute Total Parking Expenses Use 4-step analysis to allocate none, some or all of the Total Parking Expense to UBTI

19. “Situation B”- Own or Lease Four-Step Analysis Step 1 – Calculate Percentage of Reserved Employee Spots = all UBTI Reserved parking policy may be changed until 3/31/19 with retroactive effect to 1/1/18 • Example: 40 spaces, 4 reserved. $10,000 of Parking Expenses. [4/40 = 10%; 10% * 10,000 = $1,000 of UBTI

20. “Situation B”- Step 1 Considerations Intent vs. Written Guidance • Reserved spots are not necessarily the “best spots” • Employer benefit General public access • Signage • Barricades; parking passes • Written parking policy Client-only reserved Employee of the month parking

21. “Situation B”- Step 1 Considerations Defining “employee” • Reserved spots – business purpose • Leased employees; management company • 1099 vs. W-2 Employer vehicle parking Defined number of spots in multi-tenant lease

22. “Situation B”- Own or Lease Four-Step Analysis Step 2 – Determine the primary use of the remaining spots If more than 50% of the usage is for the general public (nonemployee) then none of the remaining spots are subject to UBIT • Example - 40 spaces, 4 reserved; 40 total spaces used [including the 4 reserved]. 10 other spaces are typically used by staff and the rest are made available to the general public. 26 of 36 (i.e. more than 50%) non-reserved spots represent nonemployee use spots. Therefore, none of the remaining spots are subject to UBIT. If less than 50% of the usage is for the general public, move on to Step 3.

23. “Situation B”- Step 2 Considerations Average employee use • Defining “normal business day” • 24 hour business operation • Shift changes/employee volume • Business hours (rec centers; library) • Multi-tenant leases • Worker classification • Reserved spots for independent contractors

24. “Situation B”- Step 2 Considerations Aggregation • Defining “geography” • Multiple lots under different EINs • Option to not aggregate Supportable documentation for positions

25. “Situation B”- Own or Lease Step 3 – Calculate the allowance for reserved nonemployee spots Only if the primary use is for employee parking Example - $10,000 of parking expenses; 40 spaces, none reserved for employees; 30 total spaces used are typically used by staff and 5 are reserved for visitors/clients. Step 1 – No reserved employee spaces Step 2 – only 10 of 40 space are nonemployee; no exclusion Step 3 – 5 of 40 spaces = 12.5%; 12.5 * $10,000 = $1,250 attributable to nonemployee reserved. Maximum of $10,000 – $1,250 = $8,750 can be attributable to employee parking

26. “Situation B”- Own or Lease Step 4 – Determine remaining use and allocable expenses Example - $10,000 of parking expenses; 40 spaces, none reserved for employees; 30 total spaces used are typically used by staff and 5 are reserved for visitors/clients. Step 1 – No reserved employee spaces Step 2 – only 10 of 40 space are nonemployee; no exclusion Step 3 – 5 of 40 spaces = 12.5%; 12.5 * $10,000 = $1,250 attributable to nonemployee reserved. Maximum of $10,000 – $1,250 = $8,750 can be attributable to employee parking Step 4 – 30/35 = 75%; 75% * 8,750 = $7,500 represents the remaining use, which will be picked up as taxable income. Alternate Calculation - This can also be calculated excluding Step 3 which provides the same result. Step 4 - (Alternate) 30/40 = 75% of the $10,000 of parking expenses or $7,500,.

27. Coordination with UBI Siloing provisions and parking Losses Notice 2018-99 provides that a loss from exactly one current year unrelated activity can offset Sec. 512(a)(7) UBTI from qualified transportation benefits. Existence of a second unrelated activity triggers Sec. 512(a)(6) basketing provisions, resulting in no offset available [for 512(a)(7) UBTI] NOL’s incurred prior to tax reform may be used to fully offset any 2018 UBTI including 512(a)(7) UBTI from qualified transportation benefits.

28. Excise tax on excess compensation

29. Excise Tax on Executive Compensation Executive Compensation • Top 5 highest paid individuals • Make greater than $1 million • Tax applies to amount in excess of $1 million • Includes the value of benefits received • Excess parachute payments • Exemption for medical professionals

30. Excise Tax on Executive Compensation New 21 percent excise tax Effective for tax years beginning after December 31, 2017 21% excise tax imposed on Tax-Exempt Organizations for: • Remuneration in excess of $1,000,000 paid to a covered employee • Excess parachute payments paid to a covered employee Organization (not the employee) is liable for the tax Based on compensation earned during the calendar year which ends during the organization’s tax year

31. Excise Tax on Executive Compensation Covered Employee • An employee (including a former 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. Special rules apply to compensation paid by related entities.

32. Excise Tax on Executive Compensation How is “compensation” defined? • All remuneration 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 as defined under Section 402A(c) • Compensation paid to a licensed medical professional (including veterinarians) for the performance of medical or veterinary services

33. Excise Tax on Executive Compensation When deferred compensation is "compensation” under 4960? 457(b) plan – when paid or made available 457(f) plan – upon vesting • May inadvertently trigger excise tax • Non‐qualified deferred compensation amounts not subject to 457(f)

34. Excess Parachute Payment What is an excess parachute payment? The excess of (a) any payment (in the nature of compensation) to or for the benefit of a covered employee that is contingent on the employee’s separation, and the aggregate present value of all payments is at least three times the base amount, over (less) (b) the portion of the base amount allocated to such payment. 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. Compensation does not need to exceed $1,000,000 to apply

35. Final Thoughts Identify population of covered employees Be aware of: • Nonqualified deferred compensation plans building up large balances over time • Potential large severance payments in management contracts Educate compensation committees and boards

36. Excise Tax On Investment Income

37. Excise Tax on Investment Income Investment Income Applicable Educational Institution At least 500 students Not a state college or university Aggregate fair market value of assets (other than those used directly in carrying out the institution’s educational purpose) is at least $500k per student Only institutions with more than 50% of the students located in the United States Computation of Net Investment Income 1.4% Tax Rate

38. Q&A

39. Contact Information Carol LaLonde 269-567-4587 Carol.Lalonde@plantemoran.com