NON PROFIT & FOUNDATION SPRING 2018

GEORGE JOHNSON & COMPANY

SPRING 2018


 

Dear Clients and Friends,

 Welcome to the Spring issue of the GJC Advisor.

 The recently passed Tax Cuts and Jobs Act (the “Act”) is important for nonprofit organizations who know that capacity-building is the key to financial sustainability. In this issue, we have outlined six tax reform issues impacting nonprofit organizations.
Read on to learn about our new Senior Tax Accountant, Danielle Moncure in our Spotlight section. Additionally, we’ve shared some photos in our Community segment honoring Dr. Martin Luther King, Jr. with a team volunteer service day at Capuchin Soup Kitchen in Detroit.
At GJC, we are committed to assist nonprofit clients in meeting their compliance obligations and contribute to their organization’s long-term success. If you have any questions regarding this issue of the GJC Advisor Nonprofit & Foundation Update, please feel free to contact us.
Sincerely,
GJC
Upcoming Events
Tuesday, May 22, 2018 from 8:00 AM to 11:30 AM, DAC (Detroit Athletic Club)
GJC will be hosting our Annual Nonprofit Organizations Update Seminar. Our speakers will be discussing the latest trends and topics including tax reform and current accounting developments affecting the Nonprofit industry. If you are interested in attending, click the link above and register online. Seating is limited so register today! Please contact Rodelyn Frijas at rfrijas@gjc-cpa.com with any questions.
Six Tax Reform Issues Impacting Nonprofit Organizations
By Laura Kalick, BDO 
  The Tax Cut and Jobs Act of 2017 (the “Act”) will have a profound impact on tax-exempt organizations.  Even those that don’t report unrelated trade or business income or pay their executives over $1 million may still be affected.

Here are the top six tax reform-related issues nonprofits will need to address:

1. Internal Revenue Code (IRC) Section 512(a)(7): Certain qualified transportation fringe benefits, including those relating to parking garages, must be reported as unrelated business income (UBI).

All tax-exempt organizations will have to include as unrelated business taxable income (UBTI) any amount paid or incurred for any qualified transportation fringe benefit or any parking facility used in connection with qualified parking.
 Read more…

2. IRC Section 4960: Tax on excess tax-exempt organization executive compensation.

Tax-exempt organizations that pay an executive considered a “covered employee” more than $1 million will be subject to a 21 percent tax on the excess amount over $1 million. A covered employee is any current or former employee of a tax-exempt organization who is either (a) one of the five highest compensated employees in the organization for the tax year, or (b) was a covered employee of the organization, or any predecessor of the organization, for any tax year after Dec. 31, 2016. So, once an individual is a covered employee, he or she is always considered a covered employee.

Read more…

3. IRC Section 512(a)(6): The losses from one unrelated trade or business activity cannot be used to offset the income from another unrelated trade or business.
Section 512(a)(6) is consistent with the position that the IRS takes on audits, which is to deny the losses of an activity if the loss occurs year after year. The IRS believes that if there were perpetual losses, there was no profit motive, which is a requirement for the existence of a trade or business. Without a trade or business, there could not be an unrelated trade or business. This was a similar approach the IRS had to “hobby losses.”

This provision is effective for tax years beginning after Dec. 31, 2017. Net operating losses arising in tax years beginning before Jan. 1, 2018 are not subject to the rule and may be used to offset income from any trade or business to the extent of 80 percent of the income from the trade or business. Any amount so limited may be carried forward to future years.

Nevertheless, many questions remain regarding this provision:

  • Will each investment in a partnership (a so-called “alternative investment”) be considered a separate trade or business, or can the alternative investments be aggregated, with each one’s income and losses offsetting the income and losses of another?
  • Will all rental activity be aggregated as one trade or business?
  • Will management of other associations be treated as one management activity or multiple businesses?
To address these questions, the IRS plans to include additional guidance on this provision in its Priority Guidance items.

4. IRC Section 4968: The endowment tax can apply to other entities with schools.

Even though IRC Section 4968 is called “Excise tax based on investment income of private colleges and universities,” large exempt organizations with post-secondary schools should also review the basic rules. The new law imposes a 1.4 percent tax on the net investment income of certain private educational institutions. These institutions must have more than 500 full-time students attending the institution, at least half of whom are in the U.S.; in addition, their non-exempt purpose assets must be at least $500,000 per student. Meanwhile, part-time students should be taken into account by proportionally adding them to the full-time equivalency.

The rationale behind this provision is to tax college and university endowments in the same manner as private foundations. In fact, net investment income is defined by the private foundation provisions of IRC 4940 and generally includes interest, dividends, rents, royalties, and capital gain net income, and is reduced by expenses incurred to earn this income. In reaching the asset threshold, the assets of related organizations are considered.

Many initially thought the provision would only impact between 30 and 60 colleges and universities. However, large healthcare systems and other exempt groups may have nursing schools or other schools that could be impacted when the assets of the related entities are considered. The rules are effective for tax years beginning after Dec. 31, 2017, so there may be opportunities to make the educational institution independent of the other entities so that the asset test is not met.

5. IRC Section 162: New lobbying rule.

Tax-exempt organizations, such as 501(c)(6) organizations that lobby, must either notify their members as to how much of their dues are nondeductible because they’re spent on lobbying or pay a proxy tax at the highest corporate rate. Under the previous tax policy, an exception to the definition of lobbying existed when the lobbying amounts were paid or incurred to local councils or similar governing bodies, including Indian tribal governments. However, the new law repeals the exception for such amounts paid or incurred after the law’s enactment date.

Nevertheless, this change does not impact section 501(c)(3) organizations. This is because the definition of lobbying-for purposes of whether a substantial part of an organization’s activities includes influencing legislation-already included attempts to influence the actions of any local council or similar governing body.

6. Various new tax provisions will change charitable giving.

With the increase in the standard deduction and the limitation on deducting state and local taxes, fewer people will likely itemize their deductions on their 2018 returns, thus decreasing the tax incentive to make charitable gifts. In addition, the estate and gift tax exclusions were also doubled, which may lessen the incentive to make bequests to charities. These changes may lead to an estimated $12 to $20 billion  decline  in overall charitable giving, according to the Tax Policy Center.
Looking Ahead
The tax law is constantly changing. For example, the Philanthropic Enterprise Act of 2017, which was part of the Budget Reconciliation Act, was signed into law on Feb. 9, 2018. The law amends the “excess business holding” rules imposed on private foundations and allows them to own all (100 percent) of a business under certain conditions (without the law, the foundation would have had to divest itself of 80 percent of the stock). The bill was led by Newman’s Own Foundation, which owns a hundred percent of the entity that sells salad dressing and spaghetti sauce. The new law allows a foundation to own a hundred percent of a company if the company is operated independently and all its profits go to charity. This law also provides new charitable giving opportunities.

Thus, it’s important that organizations stay tuned for guidance on the new and upcoming rules.

SPOTLIGHT

Join GJC in welcoming our new Senior Tax Accountant, Danielle Moncure.

Danielle is a certified public accountant who comes to us with over 5 years of related tax accounting experience. She graduated from the University of Michigan with a Bachelor of Arts, then continued on to Walsh College of Accounting and Business, earning a Masters of Science in Accountancy.
Her memberships include:
● American Institute of Certified Public Accountants
● National Association of Black Accountants – Detroit Chapter
● Michigan Association of Certified Public Accountants
● Michigan Women’s Tax Association
● American Society of Professional Estimators
● National Association of Black Women in Construction – Detroit Chapter
● National Association of Women in Construction
Travel is a hobby of Danielle’s. She considers herself a foodie who enjoys trying new cuisine out and about during her travel experiences. She is currently putting her Italian fluency into practice as she travels through Italy.
Welcome Danielle!

Coming together is a beginning.

Keeping together is progress.
Working together is success. 
                                       – James Crook

Danielle Moncure,

CPA Senior Tax Accountant

COMMUNITY

Martin Luther King, Jr. Volunteer Service Day 2018

It has always been an important part of GJC’s social responsibility to continue our strong commitment to community service. We encourage our team members to volunteer and participate in events that serve a positive purpose within the community. Each year, our largest volunteer event honors the life and legacy of Dr. Martin Luther King, Jr.

In January, our team volunteered at the Detroit Capuchin Soup Kitchen for the meal program. Since 1929, the Capuchin Soup Kitchen has served Metro Detroit by providing food, clothing, and human development programs to the people.

 Our day consisted of helping serve a full-course, nutritious meal to hundreds of men, women and children.

The GJC Team at Capuchin Soup Kitchen, Detroit