For the previous 18 months, nonprofit coverage consultants have been busier than ordinary as they proceed to digest the 2017 Tax Cuts and Jobs Act (TCJA) and its impacts on the sector. Many adjustments had been aimed toward leveling the enjoying subject between the nonprofit and enterprise sectors relating to tax remedy (whether or not that’s even applicable is a distinct kettle of fish).
Below the TCJA, companies can now not deduct parking and transportation advantages supplied to staff, so Congress imposed unrelated enterprise earnings tax (UBIT) on these advantages at nonprofit organizations. (Despite the fact that UBIT is meant to be on earnings, not bills, however go determine.)
The TCJA additionally tightened the principles on compensation over $1 million for prime executives at public firms (non-public firms are exempt from the $1 million cap). Consequently, nonprofits now must pay a 21% excise tax on salaries they pay staff and officers over $1 million.
So far, the UBIT difficulty has been garnering way more consideration as a result of it affected most nonprofits, and plenty of of these nonprofits thought the wage their prime executives earned was effectively beneath $1 million, even when including in deferred compensation.
However, the excise tax difficulty is shortly turning into a hair-on-fire downside for a lot of company and personal foundations (PFs) throughout the nation.
We’ll clarify.
Treasury Steering Is Unexpectedly Sweeping
This new 21% excise tax on compensation over $1 million is on the PF, so it’s akin to a for-profit group that may’t deduct sure salaries over $1 million. However, right here’s the place it goes off the rails. In Discover 2019-09, Treasury requires that included in that $1 million is compensation acquired from “associated organizations.”
Many PFs assumed, wrongly, that compensation acquired from “associated organizations” meant an operationally related group, like a sister nonprofit group, and PFs usually don’t have these, so most overlooked this piece.
Nonetheless, Treasury determined to take a really expansive view of “associated organizations” and embody compensation earned from for-profit organizations below the management of PF’s staff and officers.
Right here’s a easy instance: Lucy Lavatory is the president of the Lavatory Household Basis and takes no compensation for the few hours a month she devotes to the PF. She’s additionally the founder and CEO of Lavatory, LLC, a profitable non-public firm that funds the PF. Lavatory’s compensation is $5.1 million. Treasury steerage would require the non-public firm and PF to every pay a portion of a 21% tax on Lisa’s mixed quantity over $1 million (so, a 21% tax on $5.1 million).
Take into accout, non-public firms aren’t topic to the identical guidelines that public firms have on compensation over $1 million. They're now, however provided that their leaders are philanthropic.
Company foundations, likewise, are on this mess. Substitute Lavatory Household Basis with Lavatory Company Basis and Lavatory, LLC with Lavatory, Inc. and also you get the image.
The treatment? Foundations are contemplating at the very least two choices. The primary is to cleanse their management of all ties to the enterprise enterprises that maintain them. The second is to switch basis property right into a donor-advised fund (DAF)—which has no staff or officers—and conduct charitable giving utilizing that car. Neither possibility is good.
Within the case of a PF, the primary possibility doubtlessly strips the donor—and their intent—from the PF, which for many donors, we should consider, is a nonstarter.
The second possibility, transferring basis property to a DAF, permits the donor to advocate charitable giving, however as a result of these charitable property are the property of the DAF sponsoring group, this can be lower than supreme for some foundations. We might be remiss in not mentioning the continued criticism of DAFs (no requirement to make distributions to a charity, for one factor), which might immediate Congress and/or the regulators to power some adjustments. Once more, not supreme however maybe higher than the steep tax legal responsibility.
Blunting Philanthropic Participation
What’s as regarding to us is the chilling impact this might have on enterprise leaders serving as basis executives or officers. Engagement in civil society from all People is important to our communities.
In a time when charitable participation is declining, we shouldn’t be placing up much more roadblocks.
So, What’s Subsequent?
Treasury Discover 2019-09 is step one. They’re accepting feedback on that discover, and given the gnashing of tooth at a current convening of tax legal professionals and Treasury officers, there will likely be a lot to chew on. Proposed laws will come out subsequent, hopefully considering these feedback and a number of other in-person conferences we find out about. However we don’t anticipate these laws for months. So, within the interim, taxes have to be paid and cures have to be thought by.
As a result of no good deed goes unpunished.
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