Implications of tax reform for tax exempt hospitals Laurie Hanson March 28, 2019

TAX CUTS AND JOBS ACT Most significant piece of tax legislation in 30 years Most provisions are effective for tax years beginning after December 31, 2017 Will require IRS guidance on implementation and interpretation of many of the provisions There was a rushed legislative process Practical effects of the changes

General provisions AMT repealed for Corporations Changed corporate tax rate to flat 21% Tax years beginning after 12/31/17 Fiscal year taxpayers use alternative calculation for years beginning in 2017 Fiscal year ended June 30, 2017 Tax = $340,000 Taxable income of $1,000,000 Fiscal year ended June 30, 2019 Tax = $210,000 Code Section 15 provides guidance on how to calculate the blended rate. Consider if you pay estimates if you want to base your last estimate payments with the blended rate Fiscal year ended June 30, 2018 Tax = $275,534 $340,000 x 184/365 = $171,397 [July- Dec. 2017] $210,000 x 181/365 = $104,137 [Jan- June 2018]

NET OPERATING LOSSES No longer eligible for carryback Carry forward indefinitely Limits NOLS created after 2017 to 80% of taxable income

Unrelated business income

UBI- SEPARATELY COMPUTED INCOME Losses of one activity can not be used to offset income of another Gain/loss computed separately for each trade or business activity – Silo concept Can use losses in one year to offset income on same activity in the future

UBI—CONTEXT FOR CHANGE Between 350,000 and 400,000 tax-exempt organizations file a 990 in any given year. Between 45,000 and 47,500 tax exempt organizations file a Form 990-T: Greater than 50% of all 990-Ts reported no unrelated business income tax liability after subtracting deductions from gross unrelated business income.

IRS guidance-Notice 2018-67 May rely on good-faith effort in determining separate trade or business Six-digit NAICS code Expenses must have a proximate and primary relationships to the activity Continued focus from IRS Priority Guidance Plan Partnership Investments Income from “qualifying partnership interests” may be treated as one activity if organization does not control the partnership Less than 20% ownership Transitional rule for investments acquired before August 21, 2018

IRS GUIDANCE-NOTICE 2018-67 Ordering of NOLs: Amounts included under the fringe benefit rules are not income from a trade or business subject to segregation: NOLS can be used to offset this income Ordering of NOLs: Post 2017-NOLs against same activity income Pre-2018 NOLs against any income Intend to issue regulations on how the 80% limitation applies

UBI Key considerations Review current methods for tracking and allocating expenses to unrelated activities If the separate computation will significantly increase UBTI, consider restructuring to transfer taxable activities to a taxable subsidiary that would be able to net gains and losses on an aggregate basis Document positions on how separate activities are determined Utilize pre-2018 NOLs to offset post 2017 UBTI Calculate estimated payments for 2018 tax year using new corporate tax rates Last point – 2018 estimates – 4th quarter payment due by 5/15/19 for 6/30 yearend taxpayers. Adjust this estimate as needed based on the 2018 tax year (6/30/19) tax rate of 21%.

Fringe benefits

Fringe Benefits Statutory Language: Tax exempt organizations are required to treat certain fringe benefits provided to employees as unrelated business income: Added §512(a)(7) Statutory Language: “deduction is not allowable under Section 274” “which is paid or incurred by such organization for any”: Qualified Transportation fringe132(f) Qualified Parking facility 132(f)(5)(C) Does not change the employee’s exclusion of the benefit from income under Section 132: Subject to monthly dollar limits--$265/month (2019)

Qualified transportation fringe Fringe Benefits Commuter transportation in a commuter highway vehicle Transit passes Qualified parking Qualified bicycle commuting reimbursement Qualified transportation fringe Parking provided on or near the business premises Parking on or near a location from which the employee commutes to work

IRS Guidance-notice 2018-99 Interim guidance for determining amount includible in UBI Provides “reasonable method” to rely on until regulations are issued Employer pays third party Total annual cost for employee parking May be limited if portion is treated as taxable income to employees Over $260/month per employee Employer owned or leased facility Must identify total parking expenses: repairs, maintenance, utilities, insurance, taxes, interest, snow removal, trash removal, cleaning, attendants, security and lease payments (or portion of lease payment) Determine employee usage Can use “safe harbor”

IRS guidance-notice 2018-99 Safe Harbor Approach Reserved Employee Spots Calculate as percentage of total spots times the total parking expense=UBI May remove reserved spots by March 31, 2019 and have treated as not reserved retroactively to January 1, 2018 Primary Use of Remaining Spots If more than 50% of spots are for general public use-none of the expense is UBI General public--Students, patients, visitors, customers, clients, vendors Measured during normal business hours

IRS guidance-notice 2018-99 Safe Harbor Approach If primary use is not for the public Reserved for non-employees Calculate as a percentage of total spots times total parking expense—Not UBI Typical employee use Allocate any remaining spots between employee vs. non-employee use Calculate employee use percentage times total parking expense-UBI Based on actual or estimated usage

Example-Safe Harbor Step One: Reserved Employee Spots Total Parking spaces 500 Total Expenses $5,000 Reserved-Employee 50 Total UBI $2,985 Reserved Visitor 25 Employee Spots 250 General Public 175 Step One: Reserved Employee Spots UBI= 50 spots/500 spots X 5,000 = $500*** Step Two: Primary Use 175 spots/450 spots= 38% Primary use is for employees Step three: Reserved for Non-employees Not UBI: 25 spots/450 spots x 5,000=$275 Step Four: Typical Employee Use UBI: 250 spots/425 spots x $4,225=$2,485 It may or may not be beneficial to remove the reserved employee signage. In this case, removing it would result in a calculation as follows, assuming the reserved parking is fully utilized at all times: (50+250=300) / (500-25) * $4,725 = $2,984 UBTI ***Can eliminate UBI treatment if remove signs by 3/31/19

Estimated tax penalty relief IRS Notice 2018-100 Must not have filed a Form 990-T in 2017 Must timely file and pay tax related to fringe benefit UBI Estimated tax penalty relief

Fringe Benefit Key considerations Determine total parking expenses—if less than $1,000 and no other UBI, no additional effort needed Consider eliminating reserved employee parking spots by March 31, 2019 Determine if Primary Use test can be met Properly report and pay tax Continue to monitor challenges to legislation

Executive compensation

EXCISE TAX ON EXECUTIVE COMPENSATION Added Code Section 4960 Imposes a 21% excise tax on an employer with respect to: Any remuneration in excess of $1 million paid to a covered employee; and Any excess parachute payment paid to a covered employee Effective for tax years beginning after December 31, 2017 Similar treatment as public companies Taxes operate independently -Many orgs don’t think this would apply due to $1 million limit, however could be surprised by the excess parachute -Around 2,700 employees were paid over $1 million based on 2015 tax returns. Estimate 16% of hospitals will pay tax on at least one employee -Two taxes would operate independently—one could apply if the other doesn’t, but only one will be enforced -Creative in developing plans---split dollar may be excluded -Estimated by Joint Committee on taxation to raise $1.8 billion over 10 years

Excise tax on executive Compensation Exempt from tax under 501(a) Farmers cooperatives exempt under 521(b)(1) State or local government entity with excludable income under §115(1) Political organizations described in Section 527(e)(1) Applicable tax exempt organizations One of five highest compensated employees for the tax year (including former employee) Was a covered employee in any prior year Structure of related organizations could impact identification of covered employees Covered employee Example: one hospital system operates all entities under one legal entity. Has 15 employees over $1 million—will only pay tax on 5 Another system has 15 separate legal entities—each hospital is separate could pay tax on all 15 if no more than 5 are at any entity As currently written, maybe not apply to all state colleges and universities---does not reflect congress intent and will be corrected through statutory correction

Excise tax on executive Compensation All compensation as determined for income tax withholding purposes: Considered paid when no longer subject to a substantial risk of forfeiture based on definition under 457(f)(3)(B) Deferred compensation under 457(f) Does not include: Roth contributions Compensation paid to a licensed medical professional attributable to medical services Remuneration Considered related if: Entity controls, or is controlled by, the organization; Entity is controlled by one or more persons that control the organization; Entity is a 509(a)(3) supported or supporting organization; In the case of a VEBA: An entity that establishes, maintains, or makes contributions to the VEBA Includes compensation from a related person or governmental entity If compensation is paid by multiple entities, each will pay proportionate part of tax Definition of related follows 990

Excise tax on executive Compensation Excess parachute payment: Amount equal to the excess of any parachute payment over the portion of the base amount allocated to the payment Parachute payment: Payment in the nature of compensation Payment contingent on an employee’s separation from employment Aggregate present value of all payments is at least three times the base amount. Excludes: Payments under qualified plans Payments under 403(b) or 457(b) Compensation paid to a licensed medical professional attributable to medical services Payment to individual who is not a highly compensated employee. Base amount: Average annualized compensation for the five years ending before the date of separation. Rate to use to determine present value is 120% of AFR

General Provisions Notice 2019-09 Compliance requires “good faith reasonable interpretation of section 4960” The guidance in Notice 2019-09 is reasonable interpretations Future guidance will be prospective Calendar year is used in calculating excise tax Payment of excise tax does not indicate excess benefit transaction General Provisions 6/30/19 yearend – excise tax applies to compensation paid 7/1/18-12/31/18: one-half year.

Applicable Tax Exempt Organization Notice 2019-09 Applicable Tax Exempt Organization Governmental entities May not cover all state colleges and universities Subject to legislative change Definition of related organization follows Form 990 reporting Covered employee One of top five employees regardless of amount paid Based off remuneration paid during calendar year Does not include remuneration for medical services Includes compensation paid by related organizations Limited services exception

Notice 2019-09 Remuneration Does not include director fees or independent contractor payments Amounts are included in remuneration when vested, not paid No longer subject to substantial risk of forfeiture Calculated based on present value of future payments Include additional gains on previously vested amounts Does not include amounts vested in previous years New covered employees Pre-effective date remuneration

Notice 2019-09 Medical Services Performed by a licensed medical professional Licensed under state law to perform medical services Services for “diagnosis, cure, mitigation, treatment or prevention of disease” Does not include teaching or research Includes documenting care and accompanying another licensed professional when providing care Does not include scheduling, staffing, appraisal or other functions Must use a reasonable basis for allocating salary between functions

Notice 2019-09 Parachute Payment Only includes payments in the nature of compensation Payment arises out of an employment relationship or refraining from performing services Payment would not have been made in the absence of an involuntary separation from employment Includes all forms of payments and considered made when included in taxable income or when benefits received Payment Contingent on Separation from Employment Employer would not make the payment in the absence of involuntary separation Provides numerous examples on how various types of payments are considered At least 80% reduction in employment

Notice 2019-09 Calculation Discount rate for determining present value=120% AFR Short years must be annualized for purpose of calculating base amount Base amount only includes gross income, not certain benefits Liability Excise tax liability shared by multiple related organizations proportionately Tax liability will be reported on Form 4720 Due on the 15th day of the fifth month Not subject to estimated payment requirements

Comments Requested Must be submitted on or before April 2, 2019 Internal Revenue Service CC:PA:LPD:PR (Notice 2019-09), Room 5203 P.O. Box 7604 Ben Franklin Station Washington, DC 20044 Electronically: www.regulations.gov Type IRS-2019-09 in the search field to find this notice and submit comments

Fringe Benefit Key considerations Determine covered employees Consider if any covered employees may receive remuneration in excess of $1 M in the future based on compensation arrangements Consider impact of parachute payment provisions in termination situations Calculate potential tax and consider the need for accruing for book purposes Consider submitting comments regarding application

South Dakota vs. Wayfair

June 21, 2018 decision Upset result Supreme Court issued decision in South Dakota v. Wayfair case decision Court ruled in favor of South Dakota and overruled Quill Corp. v. North Dakota. Upset Quill had been law of the land since 1992 regarding nexus for remote sellers. result Court concluded “…a business need not have a physical presence in a State to satisfy the demands of due process.”

Impact on remote sellers Before Wayfair decision No requirement by out-of-state online retailers to charge, collect, remit sales tax Purchaser tasked with paying use tax Remote Sellers A business without a physical presence in South Dakota that meets one or both of the following criteria in the previous or current calendar year: The business’s gross revenue from sales into South Dakota exceeded $100,000; or The business made sales for delivery into South Dakota in 200 or more separate transactions. Gross sales or transactions includes the sale of tangible personal property, any products transferred electronically, or services. As of November 1, 2018, remote sellers meeting the above requirements must obtain a South Dakota sales tax license and pay applicable sales tax.

what does this mean to me? If you have a sales tax exemption More important than ever to provide out-of-state vendors with sales tax exemption certificate If you are not exempt from sales tax Vendors who meet state imposed thresholds should be charging sales tax on goods sent to you Use tax still applies to purchases made for which sales tax was not charged

QUESTIONS?

Manager lhanson@eidebailly.com (605) 977-2753 Thank You! Laurie Hanson Manager lhanson@eidebailly.com (605) 977-2753