Implementing the Tax Cuts and Jobs Act: A Summary of IRS Guidance

 Implementing the Tax Cuts and Jobs Act A Summary of IRS Guidance

 Updated January 30, 2020

Tax on Employee Transportation Fringe Benefits:  REPEALED

Enacted as part of the Tax Cuts and Jobs Act of 2017, IRC section 512(a)(7) imposed a 21-percent tax on any employer costs incurred to provide parking and transit benefits to employees. This controversial tax was retroactively repealed in December as a part of a comprehensive spending deal, and the IRS has issued guidance to obtain refunds for taxes already paid. 

Colleges, universities, and other tax-exempt organizations seeking refunds, credits, or adjustments for unrelated business income tax paid and reported on Forms 990-T for 2017 and 2018 should file an amended Form 990-T.

UBIT Basketing

 The IRS issued Notice 2018-67 on August 21, 2018, which addresses the new requirement in the TCJA for exempt organizations, including colleges and universities, to calculate unrelated business income by separate lines of business rather than in the aggregate. The guidance attempts to clarify certain issues related to the new “basketing” rule and may alleviate some of the burden of the new unrelated business income tax (UBIT) on parking benefits provided to employees.

The IRS has published a draft version of the 2018 Form 990-T, Exempt Organization Business Income Tax Return, along with draft instructions. This updated form reflects provisions from the TCJA, including the requirement for exempt organizations with more than one trade or business to calculate unrelated business taxable income separately for each activity, rather than in the aggregate.

Line H of the draft form asks organizations to “describe the only (or first) unrelated trade or business,” and if there are any additional trade or businesses, to complete Schedule M. It is anticipated that Schedule M and its instructions will be published in the coming weeks and will be the part of the form where institutions will basket income or losses from their unrelated trades or businesses. Comments on the draft form and instructions may be submitted at IRS.gov/FormsComments.

The IRS has also published a draft of Schedule M which should accompany the 2018 version of the Form 990-T.  It is anticipated that this draft version of Schedule M will be modified to reflect any forthcoming guidance related to UBIT “basketing”.  According to the draft Form 990-T instructions, a schedule M needs to be completed for each additional unrelated trade or business of the institution/organization as well as completed statements including information required by Schedules A-K of the 990-T as necessary.

Initial Basis Step-Up for Calculating Net Investment Income Gain

In early June 2018, the IRS responded to college and university concerns on the net investment income excise tax when it announced its intent to issue proposed regulations providing that the basis of property for determining gain will generally not be less than its fair market value on December 31, 2017. IRS Notice 2018-55 states that the IRS and Treasury Department intend to issue regulations that will provide for an initial basis step-up for purposes of determining gain; however, educational institutions are permitted to rely on this part of the notice before regulations are issued. 

Excise Taxes on Endowments

The IRS has released the draft of revised Form 4720, Return of Certain Excise Taxes Under Chapters 4 and 42 of the Internal Revenue Code, and its instructions, which colleges and universities will use to calculate and pay excise taxes on endowment investment income and executive compensation.

• New Schedule O of Form 4720 provides line-by-line instructions on how to compute the endowment excise tax. An institution is subject to the excise tax if it meets the following threshold tests:

  ((1) The institution has at least 500 tuition-paying students, based upon a daily average student count, during the preceding tax year;

  (2) More than 50 percent of those students must have been located in the United States; and

  (3) At the end of the preceding tax year, the aggregate fair market value of the assets that are not used directly in carrying out the institution’s exempt purpose and are held by the institution and related organizations must be at least $500,000 per student.
  
  The instructions to the draft 2018 Form 990 contain a worksheet (p. 19) with line-by-line instructions that organizations will use to determine whether they meet the thresholds.

  A November 7, 2018 notice of proposed rulemaking addressed the timing of payments related to the new excise tax on private university endowments. The proposal does not offer any substantial guidance but instead simply states: “Filers must use Form 4720 and the deadline for filing a Form 4720 is the 15th day of the fifth month after the end of the person's taxable year during which the excise tax liability was incurred.”

Excise Tax on Executive Compensation

Notice 2019-09, published by the IRS on December 31, 2018, addresses the new 21 percent excise tax on compensation above $1 million paid by tax-exempt employers. The tax, enacted as part of the TCJA and effective for tax years beginning after 2017, affects the five most highly paid employees at tax-exempt organizations. 

The 92-page notice offers many details to help employers implement the new provision, including the definition of key terms and their applications, illustrated by examples. The notice also explains how to compute, report, and pay the excise tax. Until proposed regulations are published, organizations may use a “good faith, reasonable interpretation of the statute” to comply, according to the notice.

The IRS accepted comments from the regulated community through April 2, 2019.

• New Schedule N of Form 4720 will be used for reporting and paying the excise tax imposed on executive compensation to certain employees. The TCJA imposes an excise tax equal to 21 percent of the sum of the compensation exceeding $1 million for the taxable year with respect to any covered employee and any excess parachute payment paid by the organization to any covered employee. Until now, Form 4720 has been chiefly used to report excise taxes on private foundations. It therefore may be unfamiliar to colleges and universities that now must use it to pay excise taxes on excessive executive compensation. Additionally, the lack of opportunity to describe how the related entities have allocated Section 4960 tax liabilities could be confusing to users of Form 4720. If implemented in its current form, draft Form 4720 could create administrative burdens for both taxpayers and the IRS.

Moving Expenses

The TCJA removed the tax-free treatment of employer-reimbursed moving expenses, beginning January 1, 2018. On September 24, the IRS published Notice 2018-75, clarifying that employer reimbursements paid in 2018 for employee moves that occurred in 2017 may be excluded from the employee’s 2018 gross income.

Business Meals and Entertainment

The TJCA eliminated the deduction for any expenses related to activities considered entertainment, amusement, or recreation, but did not specifically address business meals. Notice 2018-76 provides that taxpayers may continue to deduct 50 percent of the cost of business meals if a representative of the organization is present and the food or beverages are not considered lavish or extravagant. For colleges and universities, this would apply in the case of meals provided as part of an unrelated business activity.

NACUBO Comments to IRS and Treasury

NACUBO has submitted comment letters to IRS and Treasury regarding the implementation of TCJA. First was an April 16, 2018 letter, making recommendations to policymakers in three areas: the new taxes on employer costs for parking facilities and parking and transit benefits; the new requirement to compute UBTI separately for each activity (basketing); and the new excise tax on executive compensation. A second letter, submitted November 30, 2018, offered comments on behalf of the higher education community in response to IRS Notice 2018-67, which addressed the new basketing requirement. A third letter, submitted October 1, 2019 and endorsed by 10 other higher education associations, made recommendations to the July 3 Notice of Proposed Rulemaking (NPRM) implementing the 1.4 excise tax on the net investment income of certain private institutions. In addition, a coalition of institutions subject to the tax (or who expect to be in the future) also submitted an expansive letter to the Treasury and the IRS with detailed analysis and comprehensive comments on the July 3 NPRM.