Updated November 8, 2018
While substantive regulatory guidance on most tax reform provisions affecting colleges and universities has yet to be published by the U.S. Treasury Department and the IRS, a few issues have been addressed and published for community response.
The IRS issued Notice 2018-67 on August 21, which addresses the new requirement in the Tax Cuts and Jobs Act (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. Comments are due to the IRS by December 3.
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 Tax Cuts and Jobs Act, 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, the IRS responded to college and university concerns on the net investment income excise tax) when it announced that it intends 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 and Executive Compensation
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.”
- 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. NACUBO encourages institutions to file comments on the form with the IRS. Comments may be submitted here.
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.