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

2. 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

3. General provisions AMT repealed for Corporations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]

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

5. Unrelated business income

6. 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

7. 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.

8. IRS guidance-Notice
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

9. 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

10. 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%.

11. Fringe benefits

12. 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)

13. 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

14. IRS Guidance-notice
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”

15. 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

16. 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

17. Example-Safe Harbor Step One: Reserved Employee Spots
Total Parking spaces Total Expenses $5,000
Reserved-Employee 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

18. Estimated tax penalty relief
IRS Notice
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

19. 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

20. Executive compensation

21. 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

22. 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

23. 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

24. 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

25. General Provisions Notice 2019-09
Compliance requires “good faith reasonable interpretation of section 4960”
The guidance in Notice 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.

26. Applicable Tax Exempt Organization
Notice
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

27. Notice
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

28. 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

29. 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

30. Notice
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

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

32. 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

33. South Dakota vs. Wayfair

34. 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.”

35. 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.

36. 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

37. QUESTIONS?

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