New Transportation Benefits Tax on Nonprofits April 10 th Webinar Presented by Hemenway & Barnes

1. New Transportation Benefits Tax on Nonprofits April 10th Webinar Presented by Hemenway & Barnes • Thanks for joining us! A few instructions before we begin: • You may join the audio by selecting the radio button for either “Telephone” or “Mic & Speakers.” If you are using telephone, please dial in with the conference line and audio pin provided. • If you are having any technical issues, please let us know in the chat box. • We will have time for Q&A. Please enter your questions in the chat box at any time. • This webinar is being recorded, and we will distribute the recording after the webinar. Jenny Yuan Operation and Membership Coordinator www.massnonprofitnet.org

2. New Transportation Benefits Tax on Nonprofits Massachusetts Nonprofit Network April 10, 2019 Brad Bedingfield Co-Chair Nonprofit Group

3. Tax on income from Trade or business Regularly conducted Not substantially related to the performance by the organization of its exempt purposes Tax Rates Corporations - 21% federal rate (8% Massachusetts) Trusts – graduated rates up to 35% (5.05% Massachusetts) Various exemptions and exclusions apply Special rules for debt-financed income, certain income from controlled corporations, S corporation interests, and other special situations UBTI Primer

4. Prior law UBTI losses in one activity could be used to offset gains in another activity Extra losses could be carried back for two years or forward for up to 20 years and used against other UBTI activity Example: Activity 1: $1.5 million net loss Activity 2: $1 million net gain Result: Net loss of $500k (carry back for two years or forward up to 20 years) The IRS has long focused, and will continue to focus, on whether particular losses are properly attributable to particular exempt activities 2013 IRS Colleges and Universities compliance report However, on the whole, the ability to net gains and losses has mitigated much of the concern regarding UBTI for many organizations UBTI “Siloing” - Prior Law

5. New law Effective for tax years beginning after December 31, 2017 No more “netting” Each trade or business must be reported separately Losses from one trade or business can no longer offset gains from another Change in use of losses in other tax years Only carry forward (indefinitely) Can only use against gains in same trade or business Only up to 80% of income in each future year Grandfathering of losses generated in taxable year begun before January 1, 2018 Interim Guidance – IRS Notice 2018-67 New 512(a)(6) – “Siloing”

6. UBTI “Siloing” Example

7. Issues Addressed in Notice 2018-67 What is a separate trade or business? Debt-financed income/controlled entities/insurance Investments (de minimus and control tests) Net operating losses Relationship of 512(a)(7) to 512(a)(6) Notice 2018-67 – Interim Guidance, Request for Comments

8. Massachusetts unrelated business taxable income works very differently for corporations than for trusts See 830 CMR 63.38T.1 Corporations – M.G.L. c. 63 – 8% rate Massachusetts UBTI is generally federal UBTI with modifications (M.G.L. c. 62 sec. 10) Modified rules for dividend deductions and net operating loss deductions Apportionment where taxed in multiple states Corporate tax credits allowed where connected with unrelated business activity Trusts – M.G.L. c. 62 – 5.05% rate Massachusetts UBTI is federal gross income derived from unrelated business activity with modifications (M.G.L. c. 62 sec. 2) If nonresident trust, only to extent income derives from Massachusetts sources Massachusetts UBTI

9. File Form M-990T (for corporations) or Forms 2 and M-990T-62 (trusts) Must file if federal gross UBTI is $1,000 or more (even if no tax due) Due on 15th day of fourth month after end of year (April 15 for calendar year filers) Note: This is later than used to be the case (before 2018, was due by 15th day of third month), but EARLIER than the federal Form 990-T is due. Can get up to 8 month extension, but must pay most of the tax due in advance Quarterly estimated payments due, if $1,000 or more UBTI reasonably expected (40%, 25%, 25%, and 10%) Massachusetts UBTI

10. New tax on cost to tax-exempt employer of providing to employees Qualified Transportation Fringe Qualified Parking On-Premises Athletic Facility (very limited application) Tax on COST of benefits, not VALUE Deemed UBTI on Disallowed Fringe Benefits

11. Prior rule Employees were able to exclude the value of certain qualified transportation fringe benefits under Section 132 Employers were able to deduct the costs of providing certain qualified transportation fringe benefits under Section 162 Change to Related Deduction – For-Profit Corporation

12. New rule effective for expenses paid or incurred after December 31, 2017 Revised Section 274 states that no deduction is allowed for qualified transportation fringe benefit expenses Exception where necessary to ensure employee safety Employees’ ability to exclude from income is generally unchanged Except exclusion for qualified bicycle commuting reimbursements, which is suspended through 2025. Change to Related Deduction – For-Profit Corporation

13. For tax-exempt employers, new section 512(a)(7) Must increase UBTI by expenses for providing certain fringe benefits that would be nondeductible for a taxable entity under section 274. Applies to “amounts paid or incurred” after 12/31/17, so affects fiscal year taxpayers starting 1/1/18 Reported on Form 990-T if gross UBTI is $1,000 or more in reporting year New 512(a)(7)

14. As drafted, applies to expenses paid or incurred for providing: Qualified transportation fringes Transportation in a commuter highway vehicle (6 people or more) from home to work Transit passes (including by compensation reduction arrangements) Qualified parking Parking facilities used in connection with qualified parking Parking provided to employee on or near business premises or on or near location from which the employee commutes to work On-premises athletic facilities if the facility is primarily for the benefit of highly compensated employees New 512(a)(7)

15. Qualified transportation benefits remain nontaxable to employees up to applicable income exclusion amount (currently $265 per month for qualified parking, and $265 per month for transit/commuter highway vehicle) General Principle: Benefits taxed either to employee (if non-qualified, or if value of benefit is in excess of $265 per month) or taxed to employer (as lost deduction for for-profit employers, or as deemed UBTI for tax-exempt employers). Potential Mismatch: Taxability of employee benefits under IRC 132 is based on value to employee. Deemed UBTI under 512(a)(7) is based on cost to employer, which may be considerably different than value of benefit to employee Transit passes: Likely similar Parking: Could be very different New 512(a)(7)

16. Interim guidance to allocate qualified parking expenses for purposes of section 274 deduction disallowance and section 512(a)(7) UBTI income inclusion Permits organizations to use any reasonable method Treats certain methods as unreasonable, including Using value of employee parking to determine the allocable expense Allocating no expense to reserved employee parking Notice 2018-99

17. Payments to Third Parties: If amounts for parking are paid to a third party, then the increase in UBTI is the total annual cost paid to the third party, up to the current cap of $265 per employee per month Amounts in excess of $265 are treated as compensation to the employee and should not be treated as UBTI Notice 2018-99

18. Direct Expenses for Owned/Leased Facilities: Parking lot attendant expenses/security Repairs/maintenance/landscaping Cleaning and removal of snow, ice, leaves and trash Utility costs Rent or lease payment or a portion of rent or lease payments Insurance, property taxes, interest Expensesdo not include depreciation Notice 2018-99

19. Expenses of owned or leased parking facilities: Four step reasonable method 1. Allocate UBTI expenses to reserved employee spots Until March 31, 2019, could change parking arrangements to decrease reserved employee spots, retroactive to 1/1/18 No longer retroactive, but still beneficial going forward if workable 2. Determine whether primary use of non-reserved parking spots is to provide parking to general public “Primary use” means greater than 50 percent of actual/estimated usage Non-reserved spots that are available to general public treated as provided to general public even if empty during normal business hours “General public” = customers, clients, visitors, patients, students, parishioners, and individuals delivering goods or services, but not employees or independent contractors. Allocate non-UBTI expenses to reserved nonemployee spots Allocate remaining expense based on typical usage of remaining spots Notice 2018-99

20. 512(a)(6) UBTI calculation rule does not apply to 512(a)(7) This has to some extent been read as indicating that an exempt organization with only one unrelated trade or business can reduce its 512(a)(7) UBTI with losses from unrelated trade or business. However, a strict reading of the statute would appear to preclude that sort of “netting” of 512(a)(7) UBTI with losses from an unrelated trade or business. In addition, the Form 990-T does not appear to allow for netting of any new (siloed) losses – only grandfathered (pre TCJA) losses. Notice 2018-99

21. Massachusetts UBTI includes 512(a)(7) UBTI for corporations (M.G.L. c. 63) Massachusetts unrelated business taxable income = “unrelated business taxable income, as defined in section 512 of the Code” with certain modifications IRC 512(a) defines “unrelated business taxable income” as “the gross income derived by any organization from any unrelated trade or business” less certain deductions and with certain modifications. IRS Notice 2018-67 provides that “the Treasury Department and the IRS do not believe that the provision of the fringe benefits described in sec. 512(a)(7) is an unrelated trade or business.” However, this statement is in the context of deciding whether an organization has “more than one unrelated trade or business” for purposes of the new UBTI siloing rules of 512(a)(6), not whether 512(a)(7) deemed income is “unrelated business taxable income” under section 512. The Massachusetts Form M-990T requires importing the income number from the federal form that includes 512(a)(7) income. Effect on Massachusetts UBTI?

22. Massachusetts UBTI does not appear to includes 512(a)(7) UBTI for trusts (M.G.L. c. 62) Massachusetts unrelated business taxable income = “federal gross income derived from unrelated business activity” with certain modifications. As a general matter, Massachusetts UBTI works very differently for trusts than for corporations Per Form M-990T-62, there appears to be no mechanism by which 512(a)(7) income would be included Most operating charities with employees likely to have 512(a)(7) income are in corporate form. However, for those in trust form, the parking tax burden may be somewhat less. Effect on Massachusetts UBTI?

23. Facts: Charity pays third party vendor who owns parking garage $100 per month for each of 10 employees. 1) Calculate amount of expenses Each employee: $100 per month x 12 months = $1,200 Total (10 employees): $12,000 2) Determine amount (if any) included in employee’s income under 132(a)(5) Each employee excused $265 per month (2019) All excluded from employee income 3) Determine amount treated as 512(a)(7) income Because all excluded from employee income, all $12,000 treated as 512(a)(7) income Example 1

24. Facts: Charity pays third party vendor who owns parking garage $300 per month for each of 10 employees. 1) Calculate amount of expenses Each employee: $300 per month x 12 months = $3,600 Total (10 employees): $36,000 2) Determine amount (if any) included in employee’s income under 132(a)(5) Each employee excused $265 per month (2019) $35 ($300 - $265) per month included in each employee’s income 3) Determine amount treated as 512(a)(7) income Taxed under 512(a)(7): $265 per month (x12) per employee (x10) = $31,800 Not taxed under 512(a)(7): $35 per month per employee = $4,200 Observation: For third-party expenses, all either taxed as deemed UBTI to charity OR as taxable income to employee. Example 2

25. Facts: Rural religious organization has parking lot, with 100 spots, 10 reserved for staff and clergy, and the rest usable by anyone, most used by religious participants and people hiking nearby trails. Cost of maintaining parking is $10,000 per year. Calculate the expenses attributable to dedicated employee parking $10,000 total ÷ 10 (one-tenth of spots reserved) = $1,000 2) Determine primary use of remaining 90 spots During normal business hours on typical business day, empty or used mostly by general public. No amount treated as employee parking expenses. Total 512(a)(7) Income: $1,000 Example 3

26. Facts: Suburban animal shelter has parking lot, with 10 spots, one reserved for veterinarian, three for customers. Signs say parking available only for employees or customers. Most usage is by employees during the business day. Available to public after 6pm. Cost of maintaining parking is $3,000 per year. Calculate the expenses attributable to dedicated employee parking $3,000 total ÷ 10 (one-tenth of spots reserved) = $300 2) Determine primary use of remaining 9 spots Mostly used for employees during the day. Because public barred during business day, only customers considered as general public. 3) Calculate allowance for reserved nonemployee spots 3 spots reserved for customers: $3,000 ÷ 3/10 = $900 excluded from 512(a)(7) income 4) Determine remaining use and allocable expenses 6 spots unaccounted for. Of those spots, estimated 80% used by employees during business hours. So, 80% of expenses attributable to those spots included. $1,800 ($300 per spot x 6) x 80% = $1,440 Total 512(a)(7) Income: $300 (Step 1) + $1,440 (Step 4) = $1,740 Example 4

27. Facts: College has multiple parking lots across the city, totaling 10,000 spaces. 1,000 spaces (separate lot) are reserved for faculty and staff. 8,500 spaces are reserved for students and others on school business, although faculty and some staff may park there as well. North Campus has 2,000 spaces for students and faculty/staff, but faculty/staff use predominates (75%). South Campus has 6,500 spaces, where student use predominates (90%). 500 spaces are available for the general public (visitor lot). Cost of maintaining parking is $50,000 per year. Example 5 - Facts

28. No Aggregation: Calculate the expenses attributable to dedicated employee parking $50,000 total x 1/10 of spaces = $5,000 2) Determine primary use of remaining 9,000 spots North Campus (2,000): Primary use is faculty and staff. Include. South Campus (6,500): Primary use is students (treated as general public). Exclude. Visitor lot (500): Primary use is general public. Exclude. 3) Calculate allowance for reserved nonemployee spots None from North Campus (employees allowed to use all 2,000 spots). 4) Determine remaining use and allocable expenses North Campus = 75% faculty/staff use $50,000 x 2,000/10,000 = $10,000 (North Campus total expenses) x 75% = $7,500 Total 512(a)(7) Income: $5,000 (Step 1) + $7,500 (Step 4) = $12,500 Example 5 – No Aggregation

29. Aggregation (all in “single geographic location”): Calculate the expenses attributable to dedicated employee parking $50,000 total x 1/10 of spaces = $5,000 2) Determine primary use of remaining 9,000 spots Aggregated, the 9,000 spots are used about 76% by students and public. Excluded. Total 512(a)(7) Income: $5,000 Example 5 – With Aggregation

30. Waiver of the addition to tax under section 6655 for underpayment of estimated income tax for certain organizations Underpayment must result from the changes to the tax treatment of qualified transportation fringes under section 512(a)(7) Organizations that do not qualify for relief under this notice may avoid the addition to tax if they meet one of the safe harbor or exception provisions under section 6654 or section 6655 Notice 2018-100 – Relief Regarding Estimated Tax Payments

31. To qualify for relief under Notice 2018-100, the tax-exempt organization must: Provide qualified transportation fringes (IRC 132(f)) for which estimated payments, affected by the new rules, would otherwise be required on or before Dec. 17, 2018 Not have been required to file a Form 990-T for preceding taxable year Timely file Form 990-T for affected year Timely pay the amount reported for the affected year Note: Relief not applicable for purposes of Massachusetts UBTI Notice 2018-100

32. Taxable Compensation Withhold benefits, but provide additional taxable compensation sufficient to cover commuting/parking (perhaps with gross-up amount for taxes)? Charitable Giving Corporations – up to 10% AGI Trusts – up to 50% AGI Both – up to 100% AGI for gifts for qualified disaster relief Credits See Massachusetts tax credit programs Strategies

33. Contact Information Brad Bedingfield 617-557-9704 bbedingfield@hembar.com