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Nonprofit Knowledge: How the Nonprofit Landscape Will Change in 2019

L ast year was an eventful year for nonprofit organizations in the United States, due to the passage and implementation of several federal and state laws, notably the Tax Cuts and Jobs Act (TCJA). Legal teams will need to be mindful of the potential upcoming guidance relating to these new laws and requirements. Below is a high-level overview of some key issues that will impact nonprofit legal departments this year.

1. Tax Cuts and Jobs Act (TCJA)

The TCJA, which was signed at the end of 2017, created multiple changes for nonprofits to watch.  Although some of the implementing regulations are evolving, and nonprofit groups and other continue to seek clarity or changes to the rules, they will be implemented at the federal level in 2019.

The new rules affect Unrelated Business Income Tax (UBIT) and also impose excise taxes on certain executive pay and endowment income. Some changes, like those involving qualified fringe benefits and the executive compensation excise tax, were intended to create parity between nonprofit organizations and their for-profit counterparts.  

Unrelated Business Income Tax  

One provision of the TJCA changes how employers treat qualified fringe benefits and disallows corporate business deductions for such. The result is that tax-exempt employers will likely need to treat the value of such benefits as subject to unrelated business income tax. The new rules relating to qualified fringe do not appear to directly affect employees.

A separate provision of the TJCA impacts how UBIT is calculated, requiring organizations to segregate UBIT generated from different trades or business.

Excise Tax on Executive Compensation

Inclusion of an excise tax (currently 21 percent) on tax-exempt organizations that pay remuneration in excess of US$1 million or any excess parachute payment to one of its top five highest-compensated employees.  

On December 31, 2018, the Internal Revenue Service (IRS) issued Notice 2019-09 to provide interim guidance the executive compensation excise tax.

Excise tax on colleges and universities

This update includes a 1.4 percent excise tax on the net investment income of certain private colleges or universities with at least 500 full-time tuition-paying students that have endowments of at least US$500,000 per student.   

The IRS has provided guidance to allow a stepped-up basis that would reduce the gain subject to the new tax.  

2. Privacy

Trends in the privacy landscape have also affected and will continue to affect tax-exempt organizations.

Donor disclosures on 990 Schedule B

501(a) organizations will no longer have to disclose donor names and addresses on Schedule B of the 990 or 990-EZ. Organizations must maintain the information in their books and records and make it available to the IRS upon request.  Note that this does not impact whether states will require such information directly from charities.

General Data Protection Regulation (GDPR)

The European Privacy Directive, GDPR, impacts nonprofit organizations, as previously discussed. Organizations should continue to manage their compliance with the new rules and keep abreast of implementation and enforcement actions.

California Consumer Privacy Act (CCPA)

California passed comprehensive privacy legislation in 2018. This legislation does not appear to apply to nonprofit corporations, as it defines its application to “for-profit businesses.”  However, it is currently unclear how the law will apply to nonprofit organizations with for-profit affiliated entities.

3. IRS TE/GE Program Compliance Division priorities

The Tax-Exempt and Government Entities (TE/GE) Division is the group at the IRS that oversees federal tax regulation of tax-exempt organizations. The TE/GE Division also helps organizations better understand and manage their tax-exempt status. They recently released a program letter communication outlining their 2019 priorities,  including:

  • TCJA implementation;
  • 501(c)(7) entities;
  • 501(c)(3) entities that were formerly for-profits;
  • Private benefit and inurement, including private foundation loans to disinterested persons; and
  • Identifying returns of exempt organization with highest-risk of employment tax non-compliance.

4. US state law changes

In addition to the CCPA, other states passed laws that affect nonprofits in 2019:

  • Kentucky passed a law in 2017 that requires tax-exempt organizations to collect sales tax on some nonprofit services that they offer, after a ruling by the Kentucky Supreme Court stating that the charitable exemption only applied to property taxes. This requirement was intended to take effect in mid-2018. However, the Kentucky legislature may change the new law because of its impact on local nonprofits.
  • The Washington State legislature passed the DISCLOSE Act, which requires certain disclosures by nonprofits that spend over US$25,000 on ballot initiatives. Specifically, the new law mandates that all nonprofits that spend over US$25,000 on ballot measure campaigns, or independent political expenditures in some cases, must register as an “incidental committee” with the Public Disclosure Commission. Further, Incidental Committees must disclose their top 10 donors who give above US$10,000 to the Public Disclosure Commission. Contributions to nonprofits from private foundations are exempt.
  • Beginning on January 1, 2019, the District of Columbia Office of Tax and Revenue (OTR) is implementing a new 5-year reapplication requirement for DC nonprofits that claim exemption from tax in DC.  The DC OTR is sending notices about this update to these nonprofits.

For more information, the Council of Nonprofits has summarized many of the TCJA changes and their impact on nonprofits here.

About the Author

Lakshmi Sarma Ramani Lakshmi Sarma Ramani was the general counsel of the National Association for the Education of Young Children and senior attorney at The Nature Conservancy. She is currently a member of the firm at Outside GC LLC where she is the outside general counsel to multiple nonprofit organizations.

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