2019 Year-End Tax Guide

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

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Step 3- Determine the number of spots reserved for nonemployees. These spots would be designated in some manner as being visitor/customer parking areas. If there are reserved nonemployee spots, the nonprofit should determine the percentage of its parking lot that is used for this purpose. It would then multiply this percentage by its total parking costs to determine the amount of parking that will not be considered unrelated business income. Step 4- The nonprofit should use a reasonable method to allocate costs to employee parking that is not deemed to be predominantly used by the public under step 2. The Notice states that employee use should be based on normal business hours on a typical day. Based on this four-step process, it was possible for some taxpayers to eliminate or reduce any unrelated business income by removing signage related to reserved employee parking by March 31, 2019, but if the parking facilities are not used predominantly by the public, some amount of parking will still be taxed. Taxpayers will need to determine their parking costs and a reasonable percentage of employee usage. If there are multiple lots in the same geographic area, they can be aggregated to determine costs and usage percentages. Multiple lots in different geographic areas cannot be combined for the purpose of this calculation. UBTI AND TRANSITION RELIEF IRS Notice 2018-100 waives the addition to tax on unrelated business income, based on the underpayment of estimated income tax required to have been paid by December 31, 2018, to the extent that the underpayment was due to changes in the tax treatment of

n The proposed regulations also suggest that rent paid by students to live in college dormitories, rent paid by other nonprofits for use of the institution’s academic buildings for academic purposes, and royalties from intellectual property produced by university faculty may all be subject to the endowment tax. n The proposed regulations determine which private colleges and universities are subject to the excise tax by defining: v “Applicable Educational Institutions” as educational institutions with at least 500 “tuition-paying students” and with endowments of at least $500,000 per student in the immediately preceding taxable year. v “Tuition Paying Students” as students who receive full scholarships from the educational institution. In other words, colleges or universities cannot rely on government or third party aid to help defray any part of the student’s tuition. So in effect, students who obtain federal, state, or private grants, regardless of whether those students in fact pay tuition, would be

qualified transportation fringe benefits. To be eligible for this 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 and timely pay the amount reported on Form 990-T. An organization claiming the waiver must indicate “Notice 2018-100” on the top of its Form 990-T.

EXCISE TAXES FOR LARGE UNIVERSITY ENDOWMENTS Pre-Act Law

Private colleges and universities are treated as public charities and, like most nonprofits, were exempt from paying income tax on their investment income. New Law For tax years beginning after December 31, 2017, Section 4968 imposes a 1.4% excise tax on the net investment income of private colleges and universities with large endowments. Specifically, it impacts private colleges and universities with: (i) at least 500 students; (ii) more than 50% of whom are in the U.S.; (iii) investment assets of at least $500,000 per student. Updated Law An expansive interpretation of Section 4968 defines and clarifies the endowment tax as follows: n The proposed regulations would tax interest, dividends, rent, and royalties earned by a college or university from any asset it holds, including assets used in furtherance of a college or university’s educational mission.

considered tuition-paying students. Additionally, scholarship payments provided by third parties, even if administered by the educational institution, are considered payments of tuition.

Interpretations of Section 4968 set forth in the proposed regulations do not appear to be set in stone, as the IRS was accepting comments from colleges and universities until October 1, 2019.

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