The Tax Cuts and Jobs Act (“TCJA”) introduced new rules for tax-exempt organizations with very little direction. Since the enactment in December 2017, several pieces of guidance have been issued to provide clarification for some, but not all, of these provisions. This article will highlight this guidance.
Long awaited IRS Notice 2018-99 issued in December 2018 addresses the new rule to include qualified transportation fringe benefits (“QTFB”) in unrelated business income. IRS Notice 2018-67 clarifies the new rules for those tax-exempt organizations that have more than one unrelated trade or business.
The IRS also granted relief from underpayment penalties in certain situations in IRS Notice 2018-100.
Many questions on the new excise taxes on investment income of private colleges and universities and on excess tax-exempt organization executive compensation were answered in IRS Notice 2018-55 and Notice 2019-9, respectively.
QTFB Guidance – IRS Notice 2018-99
The TCJA of 2017 introduced a new law requiring tax-exempt organizations to include in unrelated trade and business taxable income (“UBTI”) the amount of qualified transportation fringe benefits and on premise athletic facility benefits provided to their employees. QTFBs include (1) transportation in a commuter highway vehicle between the employee’s residence and place of employment, (2) any transit pass, and (3) qualified parking. Qualified parking is parking provided to an employee on or near the business premises of the employer or on or near a location from which the employee commutes to work. Employees for this purpose do not include partners, 2% shareholders of an S corporation, sole proprietors, and independent contractors.
IRS Notice 2018-99 explains how to apply and calculate the parking expense inclusion. It also includes a safe harbor calculation for UBTI inclusion. For example, if an employer pays for employee parking to a third party, the cost of the payment is includible as UBTI, except when the amount exceeds the IRC §132(f)(2) monthly amount ($260 in 2018). The excess amount is included in employee compensation and is therefore, not considered UBTI. The Notice also details the type of expenses considered parking expenses for those employers that own or lease all or part of a parking facility. Total parking expenses to be considered include, but are not limited to, repairs, maintenance, utility costs, insurance, property taxes, interest, snow removal, leaf removal, trash removal, cleaning, landscape costs, parking lot attendant, security, and rent or lease payments (or portion thereof).
More than One Unrelated Trade or business – IRS Notice 2018-67
IRS Notice 2018-67 addresses how UBTI is calculated under IRC§ 512(a)(6) when a tax-exempt organization has one or more trade or businesses. The TCJA changes intended that a deduction from one trade or business for a taxable year may not be offset against income from a different unrelated trade or business for the same taxable year. In other words, net operating losses from unrelated trade or business cannot offset income from another unrelated trade or business. Net operating losses generated before 2018 are an exception to this rule.
This Notice explains methods that can be used to identify what trades and businesses are separate until proposed regulations are issued. A reasonable, good-faith interpretation, considering all the facts and circumstances can be used. This includes using the North American Industry Classification System 6-digit code. Another reasonable method is the fragmentation principle that, in the past, had only been used to separate exempt trade or business income from unrelated trade or businesses income.
The Notice does go on to explain that “investment activities” of a tax exempt organization may be considered one unrelated trade or business primarily to reduce the administrative and reporting burden on organizations trying to comply with IRC§ 512(c)(6). Partnership interests included in these investment activities should only include those where the exempt organization does not significantly participate. Section 6 of the Notice introduces the De Minimis and Control Tests in determining whether an organization can aggregate its interest in a single partnership with multiple trade or businesses, and whether all qualifying partnership interests can be aggregated as a single trade or business. There is also a transition rule for partnership interests acquired before August 21, 2018.
Notice 2018-67 also addresses whether the QTFB explained above is subject to IRC § 512(c)(6). Since the Treasury or the IRS do not consider QFTB as an unrelated trade or business, it is not subject to § 512(c)(6). This is illustrated on the Form 990-T, by reporting the QFTB included in UBTI on page 2 and not as a separate trade or business on Page 1 or Schedule M.
Penalty Relief – IRS Notice 2018-100
For exempt organizations, Notice 2018-100 waives the addition to tax under section 6655 of the Code for underpayment of estimated income tax required to be paid by December 17, 2018, to the extent that the underpayment of estimated income tax was due to changes to the tax treatment of QTFB. To be eligible for the relief an organization must not have been required to file a Form 990-T for the tax year preceding its first tax year ending after December 31, 2017. This relief is limited to tax-exempt organizations that timely file Form 990-T and timely pay the amount reported for the tax year for which relief is granted. An organization claiming the waiver should write “Notice 2018-100” on the top of its Form 990-T.
IRS Notice 2018-55 and Notice 2019-9
The depth of changes in these Notices, relating to the new excise taxes on investment income and excess compensation is beyond the scope of this article. However, one clarification for both taxes is that the tax is reported on Form 4720 and payable for calendar year tax-exempt organizations by May 15th (due date for the filing of the Form 990). The Form can be extended by filing Form 8868 and paying the tax due.
More than a year after the TCJA was enacted, we are starting to see clarification and detail on how to apply the changes affecting tax-exempt organizations. Although, more guidance is still needed. For now, these Notices should be relied upon until Treasury Regulations are issued.