The Tax Cuts and Jobs Act of 2017 significantly changed the landscape for everyone including nonprofit organizations. To help these organizations navigate the key provisions affecting nonprofits, we’ve highlighted three key considerations below:
Imposes an excise tax equal to the corporate tax rate (set at 21% by the legislation) on compensation plus any parachute payment in excess of $1,000,000 paid to any of a tax-exempt organization’s five highest compensated employees or covered persons for the tax year (including any employee who was one of the organization’s five highest paid employees in any tax year beginning after 2016). The tax applies to all remuneration (including non-cash benefits) except for payments to tax-qualified retirement plans and amounts that are excludible from the executive’s gross income. Certain rules regarding the determination of when rights to compensation are no longer subject to a substantial risk of forfeiture applicable to deferred compensation plans apply in determining when compensation may be subject to the tax. In addition, payments to medical professionals (such as doctors, nurses, and veterinarians) for medical services rendered are exempted from the definition of “compensation” for purposes of the tax. The tax is effective for tax years beginning after 2017.
Excise Tax on Private Colleges & Universities
Private colleges and universities (and their related organizations) that have: (1) at least 500 students; (2) at least 50% of their students located within the United States; and (3) assets (not including assets used directly in carrying out the institution’s educational purpose) with an aggregate fair market value of at least $500,000 per full-time student at the end of the preceding year are subject to 1.4% on net investment income.. The number of students will be determined using an average daily student count (with part-time students treated on a full-time equivalent basis).
Unrelated Business Income (UBI)
Unrelated Business Income (UBI) modifies UBTI to require organizations to calculate UBTI separately for each trade or business carried on — in effect prohibiting deductions relating to one business from offsetting income derived from another business, effective for tax years beginning after 2017.
We encourage you to speak with a tax professional about specific tax changes that could affect your nonprofit. To view all the provisions that could be applicable to your financial situation, click here.
Tene’ Thomas is a licensed CPA with more than 19 years of technical experience in tax compliance and accounting services. As partner of the tax and small business solution practice, Tene’ serves a myriad of industries including nonprofit organizations. This diverse knowledge allows her to provide high quality and comprehensive services to clients with these specific tax and accounting needs.