February 14, 2018 IRS adds new tax-exempt organization projects to Priority Guidance Plan The IRS and Treasury have issued the second quarter update to their 2017-18 Priority Guidance Plan, adding new guidance projects related to tax-exempt organizations and other areas as a result of the changes enacted by the Tax Cuts and Jobs Act (TCJA). Background The IRS and Treasury issued the initial 2017-18 Priority Guidance Plan in October 2017. The plan gives an overview of the projects that the IRS and Treasury intend to address in the fiscal year ending June 30, 2018. As in prior years, the IRS and Treasury update the plan periodically to reflect additional guidance that they intend to publish. On December 22, 2017, the President signed into law the TCJA, enacting numerous tax changes for tax-exempt organizations, individuals and businesses. For a detailed discussion of the TCJA provisions affecting tax-exempt organizations (including those highlighted below), see Tax Alert 2017-2142. New IRS guidance projects relating to tax-exempt organizations The second quarter update to the 2017-18 Priority Guidance Plan includes 18 new guidance projects related to the implementation of the TCJA. The introduction to the plan update describes these TCJA implementation projects as "near term priorities." Two of these projects relate to TCJA provisions directly affecting exempt organizations: 1. Guidance on computing unrelated business taxable income (UBTI) for separate trades or businesses under new Section 512(a)(6) The second quarter update to the 2017-18 Priority Guidance Plan does not address two additional provisions in the TCJA that directly impact tax-exempt organizations: (1) the new Section 512(a)(7) tax on certain fringe benefit expenses; and (2) the new Section 4968 excise tax on investment income of certain private colleges and universities. Implications In general, the IRS Priority Guidance Plan provides an outline for issues that Treasury and the IRS view as important. As expected, the second quarter update to the 2017-18 Priority Guidance Plan centers on the implementation of tax reform laws. For tax-exempt organizations, the proposed new guidance may address several unresolved issues created by the TCJA. Computation of UBTI The TCJA includes a provision stating that, for tax years beginning after December 31, 2017, a tax-exempt organization with more than one unrelated trade or business shall compute its UBTI separately for each trade or business, including for purposes of determining any net operating loss deduction. Thus, UBTI for a tax-exempt organization in a given tax year becomes the sum of UBTI for each trade or business, and cannot be less than zero. Also as a result of the provision, for tax years beginning after December 31, 2017, a tax-exempt organization may only use net operating losses generated from one particular trade or business to offset UBTI generated from that same trade or business (losses incurred in tax years before an organization's tax year beginning in 2018 may still be carried forward for 20 years to offset the organization's aggregate UBTI). Neither Section 512(a)(6) nor the Section 512 or 162 regulations indicate whether or how multiple activities conducted by an exempt organization that are similar and interconnected, such as investments in different partnerships, may be considered a single "trade or business." Exempt organizations would welcome guidance from the IRS and Treasury on this issue. Excise tax on compensation New Section 4960 imposes a 21% excise tax on applicable tax-exempt organizations equal to the sum of the: (1) remuneration (other than an excess parachute payment) over $1 million paid to a "covered employee" (generally one of the five highest compensated employees of a tax-exempt organization for a given tax year) by an applicable tax-exempt organization (including related organizations of that organization) for a tax year, and (2) any excess parachute payment (which relates solely to separation pay) paid by the applicable tax-exempt organization to a covered employee. Future IRS guidance may explain how tax-exempt organizations should determine their covered employees, determine "control" for purposes of identifying related organizations, and/or determine the extent to which for-profit affiliates may be liable for the excise tax. In addition, the IRS may provide additional clarity to tax-exempt healthcare organizations regarding their excise tax liability for compensation paid to medical professionals who perform both medical care services and administrative duties. Under new Section 4960, the definition of remuneration does not include compensation paid to licensed medical professionals for the performance of medical services. However, the provision is unclear as to how tax-exempt organizations should determine Section 4960 remuneration when an employee receives compensation for performing services that are a hybrid of direct medical care services and administrative duties. Conclusion The second quarter update does not mention what form of advice the IRS will provide with respect to the guidance priorities identified in the update that are pertinent to tax-exempt organizations. As a result, tax-exempt organizations are advised to monitor further guidance as it becomes available. Although they included these two guidance priorities in the second quarter update to the 2017-18 Priority Guidance Plan, the IRS and Treasury failed to address two other provisions in the TCJA that will significantly affect tax-exempt organizations: (1) new Section 512(a)(7), which now treats expenses incurred by tax-exempt organizations for certain fringe benefit programs as UBTI, and (2) new Section 4968, which imposes a 1.4% excise tax on the net investment income earned by certain educational institutions. At this point in time, it is unclear when the IRS will provide additional guidance for tax-exempt organizations on the rules associated with these provisions. Please contact your Ernst & Young LLP professional for further information. ——————————————— — For more information about EY's Exempt Organization Tax Services group, visit us at www.ey.com/ExemptOrg ———————————————
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