Summer time has been a fairly busy time in the area of tax-exempt organizations, with the IRS and federal lawmakers moving forward on several items added by the earlier Tax Cuts and Jobs Act (“TCJA”):
State tax credits. The IRS caused a stir last summer when it proposed regulations stating that a taxpayer making payments to an entity eligible to receive tax-deductible contributions must reduce the federal charitable contribution deduction by the amount of any state or local tax credit that the taxpayer receives or expects to receive in return. The proposed change arose after the TCJA reduced the amount of the state and local tax deduction to $10,000 but did not limit the amount of the charitable deduction. We blogged about this at that time, and voiced concerns about potential harm to longstanding programs like Colorado’s enterprise zone tax credit.
Recently, the IRS issued final regulations that largely adopt the rules in the proposed regulations. There is an exception for dollar-for-dollar state tax deductions, and for tax credits of no more than 15 percent of the contributed amount. Unfortunately, there is no exception for longstanding state tax credit programs that pre-date the changes to SALT deduction amounts in the TCJA—although more recent “workaround” state ideas were cited as the impetus for the change.
Private university excise tax. The IRS has issued proposed regulations explaining how covered private universities should apply the excise tax of 1.4 percent that was added by the TCJA. The tax applies to private colleges and universities and their related organizations—those that have more than 500 full-time tuition paying students and assets are valued at $500,000 per student.
Under the proposed regulations, a student must be both enrolled at and attending the applicable educational institution. Students must be enrolled or accepted for enrollment in a degree, certification, or other program (including a program of study abroad approved for credit by the student’s “home” institution) leading to a recognized educational credential. Determinations of full-time students, part-time students, full-time student equivalents, and daily average number of students attending the institution may be made by the institution as long as the determinations are consistent with the institution’s practices in determining full-time and part-time status for other purposes.
The proposed regulations also clarify that fair market value of assets per student is based upon the total number of all students attending the institution, not just the number of tuition-paying students. They also closely track the private foundation rules in defining net investment income and exempt purpose assets.
Tax on transportation fringe. Another unpopular change stemming from the TCJA is the taxation of any qualified transportation fringe benefit as unrelated business taxable income. Essentially this means that providing benefits such as free parking and mass transit passes will subject tax-exempt organizations to taxation—many of which are unfamiliar with the UBIT landscape. However, efforts to repeal this tax have gotten some traction, clearing the House Ways and Means Committee as part of the Economic Mobility Act and having been introduced to the House.
Donor disclosure changes. In 2018, the IRS reversed longstanding policy when it stopped requiring exempt organizations other than 501(c)(3)s to report their donors on Schedule B. This was met with some criticism at the time, and just last week two members of the Senate Finance Committee wrote a letter to the IRS commissioner questioning the change and its potential impact on uncovering illegal or criminal activity.
Leaffer Law Group will continue to monitor and report on developments.