Exempt Organizations Excise Tax & UBTI

There are indeed many ways US Tax Laws change up the social fabric of our society one of which is how the code addresses exempt organizations excise tax and UBTI. This post reminds us of 2 excise taxes and clarifies UBTI reporting.

1 – Excise tax on exempt organization’s excessive compensation. The new law adds a 21% excise tax imposed on compensation in excess of $1 million paid by an exempt organization to a “covered” employee.

  • Compensation for these purposes is the sum of: (1) remuneration (other than an excess parachute payment) over $1 million paid to a covered employee by a tax-exempt organization for a tax year; plus (2) any excess parachute payment paid by the organization to a covered employee.
  • A covered employee is an employee or former employee of the organization who is one of its five highest compensated employees for the tax year, or was a covered employee of the organization or its predecessor for any preceding tax year beginning after 2016.
  • Remuneration is treated as paid when there is no substantial risk of forfeiture of the rights to the remuneration.

2 – Excise tax on private college’s investment income. The new law imposes a 1.4% excise tax on the net investment income of private colleges and universities with at least 500 students, more than half of whom are in the U.S., and with assets of at least $500,000 per student.

  • For this purpose, assets used directly in carrying out the institution’s exempt purpose are not counted.
  • The number of students is based on a daily average of “full-time equivalent” students, i.e., two students carrying half loads would count as a single full-time equivalent student.
  • For purposes of the excise tax, net investment income is the institution’s gross investment income minus expenses incurred to produce it, but without the use of accelerated depreciation or percentage depletion.

3 – Exempt organization’s Unrelated Business Taxable Income or UBTI computed separately for separate businesses. Under the new law, an exempt organization cannot use losses from one unrelated trade or business to offset income from another one. Gains and losses are calculated and applied to each unrelated trade or business separately.

  • There is an exception for net operating losses from pre-2018 tax years that are carried forward.
  • Exempt organization’s UBTI to include disallowed fringe benefit costs.
  • Under the new law, an exempt organization’s unrelated business taxable income (UBTI) is to include any nondeductible entertainment expenses, and costs incurred for any qualified transportation fringe, parking facility used in connection with qualified parking, or any on-premises athletic facility.
  • However, UBTI is not to include any such amount to the extent it is directly connected with an unrelated trade or business regularly carried on by the organization.

If you are part of a non-profit and would like to drill down into any of these or other topics, please feel welcome to contact me anytime.