1. Tax Reform Highlights for Higher Education
April 13, 2018

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3. Tax Reform – Highlights for Higher Education
Topics:
UBTI Increased by Disallowed Fringe Benefits
Excise Tax on Excess Executive Compensation
Excise Tax on Net Investment Income (“Endowment Tax”)
UBTI Separately Calculated for Each Trade or Business
General Tax Reform Items
Modification of Deduction for Contributions in Exchange for Athletic Seating Rights
Individual Tax Reform and Potential Impact on Donor Activity

4. UBTI increased by disallowed fringe benefits
Tax Reform – Highlights for Higher Education
UBTI increased by disallowed fringe benefits
UBTI Treatment of Disallowed Fringe Benefits
UBTI generally includes any amount paid or incurred in providing:
qualified transportation fringes (§132(f)),
any parking facility used in connection with qualified parking (§132(f)(5)(C)), or
any on-premises athletic facility (§132(j)(4)(B)),
if such benefits would be nondeductible (under § 274) if provided by taxable employers.
UBTI does not include the amounts described above to the extent the amount paid or incurred is directly connected with an unrelated trade or business which is regularly carried on by the organization.
For amounts paid or incurred after Dec. 31, 2017.

5. Applying section 512(a)(7)
Tax Reform – Highlights for Higher Education
Applying section 512(a)(7)
Step 1
Is the employer providing a QTF?
Confirm: is a transportation benefit described in 132(f), in part or in whole, excluded from employee income under section 132?
Step 2
What is the fair market value of the transportation benefit that is excluded from employee income as a result of section 132?
To determine the FMV of parking, determine the amount someone would pay in an arm’s-length transaction to obtain comparable parking at the same site or in a comparable lot in the same general location
Step 3
In the case of an employer-owned or -leased commuter highway vehicle or parking facility used to provide qualified parking, what is the amount the employer is paying or incurring for the vehicle or facility allocable to employees?
Step 4
Amount included in UBTI is the lesser of Step 2 and Step 3

6. Cost ≥ FMV – assumptions
Tax Reform – Highlights for Higher Education
Cost ≥ FMV – assumptions
Employee of tax-exempt organization earns $1,000 per month
There are 20 parking days per month
FMV of daily parking is $14/day ($280/month)
To provide daily parking, employer pays or incurs an amount greater than or equal to the FMV of the daily parking

7. No qualified parking arrangement
Tax Reform – Highlights for Higher Education
No qualified parking arrangement
Employee has his/her taxable wages increased by the value of the parking in an employer-owned or -leased facility
Employee’s reportable wages = $1,280/month
No exclusion = no QTF → no UBTI
Employee pays $280 per month by having the value of the parking withheld on an after-tax basis for his/her paycheck
Employee’s reportable wages = $1,000/month

8. Qualified parking arrangements
Tax Reform – Highlights for Higher Education
Qualified parking arrangements
Employer provides parking for free
$260 is excluded from employee’s wages under section 132(f), and employer increases employee’s taxable wages by $20
Employee’s reportable wages = $1,020/month
$260 exclusion = QTF ≤ cost → UBTI = $260
Employee elects to pay for $260 of parking using pre-tax wages through a salary reduction arrangement
$260 is excluded from employee’s wages under section 132, and employee pays $20 remainder using after-tax wages
Employee’s reportable wages = $740/month

9. Cost < FMV – assumptions
Tax Reform – Highlights for Higher Education
Cost < FMV – assumptions
Employee of tax-exempt organization earns $1,000 per month
There are 20 parking days per month
FMV of daily parking is $14/day ($280/month)
To provide daily parking, employer pays $5/day ($100/month) to:
Lease a facility, or
Maintain an owned facility

10. Qualified parking arrangements
Tax Reform – Highlights for Higher Education
Qualified parking arrangements
Employer provides parking in employer-owned or -leased lot for free
$260 is excluded from employee’s wages under section 132(f) and employer increases employee’s taxable wages by $20
Employee's reportable wages = $1,020/month
$260 exclusion = QTF > cost = $100 → UBTI = $100
Employer charges employees $100 per month ($5/day) to park in the lot and employee elects to pay for $100 of parking using pre-tax wages through a salary reduction arrangement
The employer excludes from employee income not only the $100 deducted from his/her salary but also an additional $160 (up to the $260 limit) and includes $20 per month in employee income
Employee's reportable wages = $920/month
$260 exclusion = QTF > cost = $100 + $100 in salary reduction → UBTI = $200

11. Excise Tax on Excess Executive Compensation
Tax Reform – Highlights for Higher Education
Excise Tax on Excess Executive Compensation
Excise Tax Imposed on Tax-Exempt Organizations That Pay Excess Compensation
21% excise tax on the sum of the following paid to a “covered employee”:
remuneration in excess of $1 million for a tax year (other than any excess parachute payment); and
any excess parachute payments.
“Covered employee” – generally, any current or prior top 5 highest compensated employees.
Remuneration is treated as paid when there is no substantial risk of forfeiture of the rights to such remuneration.
For tax years beginning after Dec. 31, 2017.

12. Excise Tax on Net Investment Income (“Endowment Tax”)
Tax Reform – Highlights for Higher Education
Excise Tax on Net Investment Income (“Endowment Tax”)
Net Investment Income Tax (“Endowment Tax”)
An excise tax equal to 1.4% is imposed on net investment income of certain private colleges and universities with:
at least 500 students (more than 50% of which are located in the United States),
assets (other than those used directly in carrying out the institution's exempt purpose) of at least $500,000 per full-time student at the close of the preceding year.
Sec. 4940(c)-type calculation:
Net investment income is gross investment income plus capital gains minus expenses to produce the investment (but disallowing the use of accelerated depreciation methods or percentage depletion).
A university’s assets include assets held by certain related organizations (including supporting organizations to the university and organizations controlled by the university), and a university’s net investment income includes investment income derived from those assets.
For tax years beginning after Dec. 31, 2017.

13. UBTI Separately Calculated for Each Trade or Business
Tax Reform – Highlights for Higher Education
UBTI Separately Calculated for Each Trade or Business
UBTI Separately Calculated for Each Trade or Business Activity
For tax-exempt organizations that carry on more than one unrelated trade or business activity:
Unrelated business taxable income must be calculated separately for each unrelated trade or business activity,
Losses from one unrelated trade or business activity may not be used to offset income derived from another unrelated trade or business activity,
NOLs arising from an unrelated trade or business activity may only offset income from the trade or business activity from which it arose in subsequent years.
This change does not apply to any NOLs arising in a tax year beginning before January 1, 2018, and such NOLs may be applied to reduce aggregate UBTI arising from all unrelated businesses.

14. General Tax Reform Items (for tax years beginning after 12/31/2017)
Tax Reform – Highlights for Higher Education
General Tax Reform Items (for tax years beginning after 12/31/2017)
Tax Rate:
Corporate (and unrelated business income tax (UBIT) for corporations) rate reduced to flat 21% rate.
Note: effective date of rate change will result in application of a “blended” rate for certain fiscal year taxpayers.
Alternative Minimum Tax (AMT):
Corporate AMT repealed.
AMT credit carryforwards in excess of regular tax liability partially refundable in years ; fully refundable in 2021.
Net Operating Losses (NOL) – General – for NOLs arising in tax years ending after 12/31/2017:
NOL deduction limited to 80% of taxable income.
NOL carrybacks generally repealed.
Indefinite NOL carryforward, not indexed for inflation.

15. Tax Reform – Highlights for Higher Education
Modification of Deduction for Contributions in Exchange for Athletic Seating Rights
Sec. 170(l) Modification
Pre-Tax Reform:
Special rules applied for certain payments to or for the benefit of colleges and universities, allowing an 80% deduction for contributions made in exchange for the right to purchase tickets or seating at an athletic event in an athletic stadium of such institution.
Tax Reform:
No charitable deduction is allowed for any payment to or for the benefit of a college and university in exchange for the right to purchase tickets or seating at an athletic event in an athletic stadium of such institution.
For contributions made in tax years beginning after Dec. 31, 2017.

16. Individual Tax Reform and Potential Impact on Donor Activity
Tax Reform – Highlights for Higher Education
Individual Tax Reform and Potential Impact on Donor Activity
Changes to Individual Taxation:
Seven individual income tax rates (10%, 12%, 22%, 24%, 32%, 35%, 37%).
Standard deduction is increased to:
$24,000 for married individuals filing a joint return,
$18,000 for head-of-household filers, and
$12,000 for all other taxpayers, adjusted for inflation in tax years beginning after 2018.
AGI limitation increased for charitable contributions
50% limitation for cash contributions to public charities and certain private foundations is increased to 60%,
contributions exceeding the 60% limitation can generally be carried forward and deducted for up to five years, subject to the later year's ceiling.
Limitation (“Pease limitation”) on total itemized deductions suspended.
For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026.

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