Nonprofit Finance and Tax Reform Issues
“ASAE opposes any increased or additional federal income tax burden on associations. ASAE supports the “relatedness test” — continuation of the present system for determining areas of tax-exempt organization activity that are taxable because they are not related to the purposes for which exempt status was granted. Association activities, which benefit not only association members but also the entire United States economy and society, include education, publications, government affairs, conventions, trade shows, standards-setting, credentialing, research, joint marketing, charitable and community service, and other products and services. Any new tax for associations would threaten those activities and might require replacement of the programs by tax-supported government programs.” – ASAE Board Approved Position Statement #5a
In December 2017 President Trump signed into law the Tax Cuts and Jobs Act (TCJA), the most sweeping overhaul of the tax code since 1986. Throughout the legislative process, ASAE and many other associations opposed several provisions that were stripped from the final bill. The three most important provisions that were removed were the taxation of royalty income, the elimination of non-qualified deferred compensation plans, and the application of intermediate sanction rules to 501(c)(6) groups.
ASAE and the association community are still working to address the following tax issues:
Excise tax on executive compensation. Associations and other tax-exempt organizations will be subject to a 21 percent excise tax on executive compensation over $1 million paid to the five top-earning executives. ASAE has met with leadership at the House Ways and Means and Senate Finance committees to share our concerns about the retroactive nature of this tax and to advocate grandfathering equal to that received by the for-profit sector. ASAE staff has also met with the Joint Committee on Taxation (JCT).
ASAE is concerned about this new tax liability because compensation subject to the tax includes not just base salary, but also the cash value of most benefits, such as those that have vested but have not been received, retirement benefits, and certain retention payments contingent upon service. This means that many nonprofit groups could be impacted, not just those with highly-compensated CEOs. ASAE is particularly concerned about the treatment of amounts payable under Section 457(f) deferred compensation plans in which benefits vest all at once after a period of years (i.e., a “cliff-vesting” provision).
A recent U.S. Department of Treasury (Treasury) notice has brought to light that even if an organization’s top five highest-paid executives earn less than $1 million, the organization could still be subject to the 21% excise tax on executive compensation.
According to Treasury’s Notice 2019-09, if an organization makes parachute payments (i.e., compensation contingent on separation from employment) equal to three times greater than these executives’ salary, an organization may be liable for a 21% tax on these parachute payments. If the 457(f) distribution and any severance exceed three times the executive’s base salary, the association would have to pay the excise tax on the total amount that exceeds the executive’s base salary (not just the excess over three times the base salary), regardless of the executive’s compensation of less than $1 million.
ASAE will continue to press lawmakers for a grandfather rule to exempt all compensation that is a result of a binding contract or agreement in effect on or before November 2, 2017.
Separate computation of UBIT. This provision requires unrelated business taxable income (UBIT) be separately computed for each business activity. In other words, associations are prevented from offsetting income from one business with losses from another business. ASAE believes a sensible work-around on this provision is to route UBIT activity through a for-profit subsidiary that can net the profits and losses of each business.
Still, ASAE is very concerned about the lack of guidance from Treasury on how associations should calculate the remaining aspects of this tax.
Fringe expenses. The TCJA imposes a first-ever tax on fringe transportation benefits for tax-exempts. Employer-provided benefits, such as transportation, parking, and on-premises athletic facilities are subject to the tax. In meetings with Treasury officials earlier this year, ASAE stressed that the new law disproportionately hurts tax-exempt employers by requiring them to pay a new UBIT on the value of these benefits. ASAE contends this is a new tax on an expenditure, not a revenue-generating activity.
In addition, some cities, including Washington, DC, New York, and San Francisco, mandated that employers provide pre-tax mass transit benefits, so employers in those cities do not have the option of changing those benefits to avoid being taxed. ASAE suggests special consideration be given for employers in localities that mandate transportation benefits.
In August, Treasury issued interim guidance stating that UBIT arising from tax-exempt parking and transportation benefits is not subject to the “silo” rule. This will allow some organizations to net their parking and transportation expenses against any other UBIT income, which could wipe out any tax. Still, smaller organizations without unrelated business income (UBI) will still be forced to pay the tax.
ASAE created the UBIT Coalition to bring together other associations and nonprofits to advocate congressional repeal. The Coalition has almost 100 members.
Legislation to repeal this tax has already been introduced in both chambers. Even the architects of the 2017 tax law, including then Ways and Means Committee Chair Kevin Brady (R-TX), have been on record as supporting repeal so that nothing distracts associations and other nonprofits from their core missions.
In the 116th Congress, bills to repeal the tax on nonprofit employee benefits have been introduced by Sen. James Lankford (R-OK), Rep. Mark Walker (R-NC) and House Majority Whip James Clyburn (D-SC).
“Bipartisan support is growing to repeal this onerous tax on nonprofit employee benefits,” said ASAE President and CEO John Graham, FASAE, CAE. “These new tax liabilities create numerous compliance challenges for nonprofits and threaten the financial security and missions of organizations that provide countless services to communities in need and to society as a whole.”
In December, Treasury issued new interim guidance in addition to the guidance released in August. The guidance allows tax-exempt organizations to retroactively reduce the amount of nondeductible parking expenses and provides a safe harbor for nonprofits potentially to exclude all parking expenses from the tax. The guidance stipulates that only parking expenses associated with employee-reserved spots are included when calculating UBIT. Tax-exempt groups have until March 31 to eliminate their employee-reserved spots and avoid the tax entirely. Treasury also provides estimated 2018 tax penalty relief for tax-exempt organizations that offer these benefits. We will continue to monitor this issue closely.
Charitable contributions. TCJA increases the adjusted gross income (AGI) limit on the charitable contributions deduction from 50 percent to 60 percent for cash gifts. However, the final bill roughly doubles the standard deduction to $12,000 for individuals and $24,000 for couples. With a higher standard deduction, fewer taxpayers will itemize deductions on their tax returns and therefore will not receive a benefit for giving to charity, which some charities fear will reduce giving.
Local lobbying expenses. TCJA eliminates the deduction for lobbying expenses regarding legislation before local government bodies. As a result, these expenses will need to be included in the calculation of nondeductible membership dues or proxy tax liability.
Excise tax on investment income of private colleges and universities. The tax bill imposes a 1.4 percent excise tax on the net investment income of private colleges and universities that have more than 500 full-time-equivalent students and assets of at least $500,000 per full-time-equivalent student.
Johnson Amendment. A provision in the House version of the tax bill would have effectively repealed the Johnson Amendment, which prohibits churches and other 501(c)(3) groups from participating or intervening in political campaigns. The provision was removed from the final bill because it conflicted with the Senate’s Byrd Rule, which prevents reconciliation bills from containing provisions that are not fiscal in nature.