2019 Year-End Tax Guide

THE MARCUM 2019 YEAR-END TAX GUIDE | www.marcumllp.com

Tax-exempt corporations with fiscal tax years beginning in 2017 and ending in 2018 calculate their tax by blending the rates in effect before 2018 with the 2018 rate. The nonprofit would pro-rate those amounts, based on the number of days in each period relative to the total days in the tax year. The sum of those results yields a blended rate. Note, the blended rate may be greater or less than the new flat tax rate of 21 percent. UBTI AND NET OPERATING LOSSES (NOL) Pre-Act Law An NOL could be carried back up to two tax years and forward up to 20 years to offset 100% of taxable income. New Law Net operating losses generated in taxable years beginning before January 1, 2018, may be used in subsequent years with no siloing limitation, in effect grandfathering them. As a result, since UBTI must now be calculated separately for each trade or business before calculating the total UBTI for years after January 1, 2018, NOLs should be calculated post-2017 and taken before pre-2018 NOL carryovers are taken. Any losses from a specific activity in a tax year beginning after 2017 can be carried forward and used to offset current-year income up to 80 percent of UBTI, but only for that specific activity. UBTI AND EMPLOYEE FRINGE BENEFITS: QUALIFIED TRANSPORTATION COSTS Pre-Act Law Certain transportation benefits previously were treated as tax-exempt to employees and tax deductible to employers. New Law TCJA denies employers a deduction for expenses paid or incurred to provide employees certain transportation and commuting fringe benefits after December 31, 2017. To create parity between taxable and tax-exempt organizations, the Act requires tax-exempt organizations to increase their UBTI by the amount of qualified transportation fringe benefits (“QTF”) that would be nondeductible if they were subject to the same deduction disallowance rules as taxable entities. So in effect, tax-exempt entities now must pay tax of up to 21% on the amount of any disallowed fringe benefit expenses.

Updated Law The Internal Revenue Service issued interim guidance regarding the treatment of QTF benefit expenses paid or incurred after December 31, 2017. The new rules assist tax-exempt organizations in determining the amount of parking expenses that are no longer tax deductible. Section 512(a)(7) states that “unrelated business income shall be increased by any amount for which a deduction is not allowed under IRC 274 and which is incurred by such organization for any qualified transportation fringe parking benefit up to a value of $260 per month indexed for inflation.” So any QTF over this amount is considered taxable compensation. Determining the portion of parking that is taxable will depend on whether the nonprofit entity pays a third party for employee parking, or if it owns or leases its own facilities. Therefore: n If the nonprofit pays a third party for employee parking spaces, the amount paid will be subject to tax to the extent it is not included in employee compensation. n If employee parking is provided on space owned or leased by the nonprofit, a four-step process and reasonable allocations will need to be applied. The updated guidance specifically states that costs, not value, must be used in determining the unrelated income associated with parking benefits. Costs to be considered are rent, maintenance, snow removal, security, insurance, repairs, taxes, interest, utilities, leaf and trash removal, but not depreciation. The four step process is as follows: Step 1- Determine the parking spots that are reserved for employees. Reserved spots can be designated with signage or located in a separate facility, not open to the public. Taxpayers had until March 31, 2019, to remove any signage or other restrictions, and doing so was considered retroactive to January 1, 2018. If there are reserved employee spaces, the percentage of these spots relative to total parking spots should be multiplied by total parking costs. The result will be considered unrelated business income. Step 2- Determine the primary use of the remaining parking spots. If it can be determined that the primary use, or greater than 50%, of the remaining spots is for the general public, then no amount needs to be allocated to employee parking for this portion of the parking lot. Primary use must be tested during regular business hours on a typical business day. However, if usage varies significantly from day-to-day, an average or other reasonable method can be used. For purposes of this calculation, the general public includes patrons, visitors, patients, students, congregants or delivery persons. Employees, partners or independent contractors are not to be considered part of the general public. Volunteers were not addressed in the update. (Continued)

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