Not For Profit/Exempt Organizations Blog

10 Keys to Excise Tax on Executive Compensation Paid by Tax-Exempt Organizations

Proposed Regulations under Section 4960 of the Internal Revenue Code provide important guidance for tax-exempt organizations and their affiliates regarding an excise tax on certain executive compensation.  The U.S. Department of the Treasury (“Treasury”) and Internal Revenue Service (the “IRS”) are accepting comments until August 10, 2020.  (Throughout this post, “Sections” refer to sections of the Internal Revenue Code.)

As a refresher, Section 4960 was enacted as part of the 2017 Tax Cuts and Jobs Act (the “TCJA”).  Effective for taxable years beginning after December 31, 2017, Section 4960 imposes an excise tax at the corporate tax rate (currently at 21%) on certain remuneration in excess of $1 million and on certain separation pay (“excess parachute payments”).  The excise tax falls on “applicable tax-exempt entities” (“ATEOs”) and related organizations.  It is intended to have the same economic effect as a for-profit corporation losing a tax deduction.

The Proposed Regulations are generally consistent with the IRS’s interim guidance under Notice 2019-09 (the “Notice”), which is discussed here and here.  But the Proposed Regulations elaborate on certain points and include some helpful changes in response to comments.

If finalized, the Proposed Regulations will apply for tax years beginning on or after the final regulations are published in the Federal Register.  Until then, tax-exempt organizations may apply a “reasonable, good faith” interpretation of the statute.  For this purpose, tax-exempt organizations may rely on the Proposed Regulations or the Notice.  Although the Proposed Regulations are not binding, they include a list of positions that the IRS considers to be an unreasonable interpretation of the statute.

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IRS Issues Final Regulations on Nonprofit Donor Disclosure Requirements

On May 26, the Internal Revenue Service (“IRS”) and the U.S. Department of the Treasury issued final regulations (the “Final Regulations”) relaxing nonprofit donor disclosure requirements under section 6033[1] of the Internal Revenue Code (the “Code”) for many non-charitable tax-exempt organizations. Stated generally, section 6033 requires organizations exempt from taxation under section 501(a) (including section 527 political organizations) to file an annual information return with the IRS, such as a Form 990, Form 990-EZ, or Form 990-N. Section 6033 and the regulations thereunder grant the IRS discretionary authority to determine what information must be reported on such return in light of the efficient administration of the internal revenue laws.

The Final Regulations largely adhere to the proposed regulations issued in September 2019 (the “Proposed Regulations”) and provide that tax-exempt organizations other than section 501(c)(3) charitable organizations, such as section 501(c)(4) social welfare organizations and section 501(c)(6) trade associations, are no longer required to annually disclose the names and addresses of “substantial contributors” (those contributing $5,000 or more) on Schedule B of their Forms 990 or 990-EZ. The Final Regulations confirm, however, that all tax-exempt organizations must continue to report the amounts of contributions from each substantial contributor and maintain the names and addresses of such contributors in their books and records, should the IRS request this information at a later date. Moreover, the revised disclosure rule does not extend to section 501(c)(3) charitable organizations or section 527 political organizations, and such organizations must continue to disclose the names and addresses of substantial donors on annual information returns.

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Proposed Regulations on UBTI Provide Guidance to Tax-Exempt Organizations Making Fund Investments

On April 23, 2020, the Treasury Department and the Internal Revenue Service (the “IRS”) issued proposed regulations (the “Proposed Regulations”) under Section 512(a)(6) of the Internal Revenue Code (the “Code”).  Section 512(a)(6) was enacted as part of the 2017 Tax Cut and Jobs Act (the “TCJA”) and requires exempt organizations (including individual retirement accounts) to calculate unrelated business taxable income (“UBTI”) separately with respect to each of their unrelated trades or businesses, thereby limiting the ability to use losses from one business to offset income or gain from another.

Read the full post on our Tax Talks blog.

Proposed Regulations Provide Guidance to Exempt Organizations on Identifying Separate Unrelated Trade or Businesses

On April 23, the Treasury Department and the Internal Revenue Service (the “IRS”) issued helpful proposed regulations under section 512(a)(6) of the Internal Revenue Code (the “proposed regulations”).  Section 512(a)(6) was enacted as part of the 2017 Tax Cut and Jobs Act (the “TCJA”) and requires exempt organizations (including individual retirement accounts) to calculate unrelated business taxable income (“UBTI”) separately with respect to each of their unrelated trades or businesses, thereby limiting the ability to use losses from one business to offset income or gain from another.[1]  In August 2018, the Treasury Department and the IRS issued Notice 2018-67 (the “Notice”), which provided interim guidance on the application of section 512(a)(6).  The proposed regulations liberalize and simplify the initial guidance in the Notice.  In short:

  1. Very helpfully, the proposed regulations use the two-digit North American Industry Classification System (“NAICS”) codes as the primary method of identifying separate trades or businesses, rather than the six-digit codes suggested in the Notice. This reduces the numbers of trades or businesses from over 1,050 under the Notice to twenty under the proposed regulations, which will greatly reduce the compliance burden for many tax-exempt entities and enhance their ability to use losses.
  2. The proposed regulations helpfully liberalize the rules contained in the Notice that allow tax-exempt entities to treat investment activities (including, in particular, “qualifying partnership interests” (“QPIs”)) as a single trade or business (and thereby aggregate net income and gains and losses from those investment activities). However, the proposed regulations should clarify that traditional minority rights that may be held by a tax-exempt entity in an investment partnership do not disqualify an interest in that partnership from being a QPI.

The proposed regulations will apply to taxable years beginning on or after the date the regulations are published as final; however, taxpayers may rely on the proposed regulations before they are finalized.  In addition, until the proposed regulations are finalized, exempt organizations may rely on a reasonable, good-faith interpretation of what constitutes a separate trade or business under current law or the methods described in the Notice for aggregating or identifying separate trades or businesses.

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The FFCRA and CARES Act: Key Provisions Affecting Nonprofit Organizations

On March 18, 2020, President Trump signed into law the Families First Coronavirus Response Act (“FFCRA”) (H.R. 6201), and on March 27, 2020, he signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) (H.R. 748). This alert summarizes certain loan and tax-related provisions of these new laws that are most relevant to nonprofit organizations.

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IRS Issues New Guidance for Virtual Currency Donations

The U.S. Internal Revenue Service (IRS) quietly added two new questions and answers regarding virtual currency donations to its answers to Frequently Asked Questions on Virtual Currency Transactions (FAQs) on December 26, 2019.  The two new answers address the responsibilities of charitable organizations when accepting donations of virtual currency, including cryptocurrency.

For a discussion of this new guidance, please see the post on Proskauer’s Blockchain and the Law blog.

IRS Provides Guidance on Unrelated Business Income Tax Refunds

On Friday, December 20, 2019, President Trump signed into law government funding legislation for the 2020 fiscal year that includes a provision repealing Section 512(a)(7), commonly referred to as the “parking tax,” with retroactive effect to the date of its enactment.[1]  Section 512(a)(7) was enacted pursuant to the 2017 U.S. tax legislation known as the “Tax Cuts and Jobs Act” and required tax-exempt employers to increase their unrelated business taxable income (“UBTI”) by amounts paid or incurred for qualified transportation fringe benefits provided to employees, including the provision of parking and public transportation benefits.  In connection with the repeal of this provision, tax-exempt organizations can file an amended Form 990-T (Exempt Organization Business Income Tax Return) to claim a refund for any taxes paid related to such qualified transportation fringe benefits.

In response to the urging of House Ways and Means Committee Chair Richard E. Neal (D-Mass) and Ways and Means Oversight Subcommittee Chair John Lewis (D-Ga) for an expedited refund process and guidance with respect to the repealed tax, the Internal Revenue Service (the “IRS”) posted specific instructions on its website on January 21, 2020 describing how to apply for such refund:

  • Write “Amended Return” at the top of Form 990-T. If the amended return is being filed only to claim a refund, credit, or adjust information due to the repeal of Section 512(a)(7), the organization should write “Amended Return – Section 512(a)(7) Repeal.”
  • Complete the Form 990-T as done originally, with certain specific modifications depending on whether the Form 990-T is for the 2017 or 2018 taxable year, as detailed in the IRS instructions.
  • Attach a statement indicating the line numbers on the original return that were changed and the reason for each such change (e., stating “repeal of Section 512(a)(7)”).

Organizations should be mindful of the time limit for filing these refund claims, which is typically the later of three years from the time the original Form 990-T was filed, or two years from the time the tax was paid.

Organizations are encouraged to consult their own tax advisors as to whether a state tax refund is available as well.[2]

[1] See Division Q of H.R. 1865, the “Further Consolidated Appropriations Act, 2020.”

[2] In New York State, amounts paid or incurred by tax-exempt organizations for qualified transportation benefits were not subject to tax, as the New York State tax code was decoupled from the changes made to the federal UBTI rules at the end of 2018.  Thus, no New York State tax would have been due with respect to these amounts.

Simplification of the Net Investment Income Tax for Private Foundations

On December 20, 2019, President Trump signed into law changes to the private foundation excise tax on net investment income under Section 4940 of the Internal Revenue Code.[1]

For purposes of Section 4940, net investment income is the excess of gross income from interest, dividends, rents and royalties (“gross investment income”), plus capital gain net income, over expenses paid or incurred in the production or collection of gross investment income or for the management of property held for the production of gross investment income.[2]  Prior to the new legislation, Section 4940 imposed an excise tax of 2% on the net investment income of most domestic tax-exempt private foundations.[3]  This tax rate could be reduced to 1% if a foundation made certain charitable distributions during the tax year equal to or greater than the sum of (a) the assets of the foundation for the tax year multiplied by its average percentage payout for the five tax years preceding that year, plus (b) 1% of the foundation’s net investment income for the tax year.  In order to qualify for the 1% rate, the foundation also could not be liable for any taxes under Section 4942 (taxes on failure to distribute income) for any of the previous five tax years. Continue Reading

Repeal of Unrelated Business Income Tax on Qualified Transportation Fringe Benefits

Late on Friday, December 20, 2019, President Trump signed into law government funding legislation for the 2020 fiscal year that includes a provision repealing Section 512(a)(7), commonly referred to as the “parking tax.”[1]

Section 512(a)(7) was enacted pursuant to the 2017 U.S. tax legislation known as the “Tax Cuts and Jobs Act.”  The provision required tax-exempt employers to increase their unrelated business taxable income (“UBTI”) by amounts paid or incurred for qualified transportation fringe benefits provided to employees, including the provision of parking and public transportation benefits.  Despite certain guidance passed at the end of 2018, the provision caused concern amongst tax-exempt organizations because of the prospect of increased tax liability, the lack of clarity for determining the taxable amount of such benefits, and the additional administrative burdens triggered for certain organizations.

Pursuant to the new legislation, Section 512(a)(7) was repealed with retroactive effect to the date of its enactment.  As a result, organizations should file an amended Form 990-T to claim a refund for any taxes paid related to such qualified transportation fringe benefits.  Organizations are encouraged to consult their own tax advisors as to whether a state tax refund is available as well.[2]

[1] See Division Q of H.R. 1865, the “Further Consolidated Appropriations Act, 2020.”

[2] In New York State, amounts paid or incurred by tax-exempt organizations for qualified transportation benefits were not subject to tax, as the New York State tax code was decoupled from the changes made to the federal UBTI rules at the end of 2018.  Thus, no New York State tax would have been due with respect to these amounts.

New York State Codifies the Johnson Amendment

On October 23, 2019, Governor Andrew M. Cuomo, signed legislation incorporating the federal Johnson Amendment into New York law. As previously described, the Johnson Amendment denies tax-exempt status under section 501(c)(3) of the Internal Revenue Code (the “Code”) to (and imposes excise taxes on) any organization that engages in political campaign activities. The new legislation amended section 1116 of New York Tax Law, which will now deny tax-exempt status for N.Y tax purposes to any organization that engages in political campaign activities, either on behalf or in opposition of any candidate for public office. Continue Reading

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