Speakers: TCJA Means Treating Nonprofits More Like For-Profits

Chris Gaetano
Published Date:
Jan 17, 2019

The Tax Cuts and Jobs Act (TCJA) has a number of provisions that both directly and indirectly affect not-for-profit organizations, but tax attorneys Bernadette T. Kasnicki and Louis Vlahos—speaking at the Foundation for Accounting Education’s 41st Annual Nonprofit Conference on Jan. 17—said that the targeted provisions seem to focus on narrowing the gap between rules that govern nonprofit organizations and those that govern for-profits.

For example, Kasnicki, an associate with the firm Farrell Fritz, P.C., said that the TCJA imposes a 21 percent excise tax on nonprofits that pay compensation of $1 million or more to any of their five highest-paid employees, which applies to all forms of remuneration of a covered employee. She noted that, in the for-profit world, compensation of top executives cannot be deducted beyond the point of $1 million. She said that, by subjecting nonprofits to a similar rule, the TCJA is attempting to bring exempt organizations into parity with taxable ones. 

Vlahos, a partner at the same firm, said that it’s actually a little worse for nonprofits under the new rules. For-profit organizations have two carveouts for the deduction limit: One is if the pay is reasonable for services rendered previously, and the other is for parachute payments that represent payment for services going forward “because we’re not firing you but keeping you.” Not-for-profits, on the other hand, have no such carveouts. 

“This, again, goes into the question of parity, but parity with a vengeance,” he said.  

Along similar lines, according to Kasnicki, the TCJA seems to be harmonizing regulatory treatment between different types of nonprofits, too. Colleges and universities, she said, have traditionally been treated like public charities, but a new excise tax imposed on their endowments puts them more in line with private foundations. The new law imposes a new 1.4 percent excise tax on net investment income, which, she said, represents a big change for educational institutions. The tax kicks in when a private institution has at least 500 tuition-paying students, at least half of whom are in the United States, and the aggregate fair market value of assets minus those for an “exempt purpose” is at least $500,000 per student.  

Vlahos said that a similar tax that is imposed on private foundations is mainly a way to reward and punish, observing that tax policy, in general, tends to work this way. Foundations, he explained, tend not to be responsive to the public, since they often get most of their money from a single family or business. So the government needs “some way to modify their behavior, and we do it through these excise taxes, [such as] on investment income on noncharitable assets,” he said.

“Let’s [turn] to schools with large endowments,” he said. “[Members of Congress] equate the endowment with a private foundation. Basically, that is what Congress was thinking: ‘We’ll punish them if they don’t pay out enough; if they have so many endowment assets, we’ll hit them with a penalty.’”

Adding further evidence to the idea is the fact that if universities spend more on education, then they can get their asset-per-student ratio down, thereby avoiding the tax, and “so use it for educational purposes.” But he pointed out that this provision brings up several questions: “What is the educational purpose? What is the use? What assets will constitute charitable assets?” 

The TCJA also changed how nonprofits will handle unrelated business income, which is taxed. Under the new rules, losses from a trade or business must come from that particular trade or business in order to be deducted, and, similarly, while organizations can still carry forward, they must do that within the same trade or business in which they had that gain or loss.

Again, Vlahos pointed out that this is an example of treating nonprofits more like for-profits. In this particular case, he said, “It’s a bit of a reach, from a conceptual perspective, but that’s what’s happening.”

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