MIT Responds to New Tax Legislation
The recently-enacted and far-reaching Tax Cuts and Jobs Act is generally effective for taxable years beginning after December 31, 2017. Individual taxpayers are thus already subject to these new rules, including a doubled “standard deduction,” somewhat reduced tax rates, and new limitations on expenses than can be deducted. The effective date for MIT is generally its fiscal year beginning July 1, 2018, although certain aspects of the legislation are already effective for MIT.
The Office of General Counsel, working closely with Office of the Executive Vice-President and Treasurer, has been analyzing and helping to implement this highly complex legislation. Some highlights:
1.4% excise tax on “net investment income.”
This tax, which only applies to roughly 30 colleges and universities presently, is generally thought of as a tax on the income of a university’s endowment. In fact, the tax is much broader and includes other forms of investment income, including the income of organizations “related” to a college or university. There are a host of interpretive issues here and MIT is working with other potentially affected schools to understand those issues and to advise the IRS as to the interpretation and implementation of the tax.
21% excise tax on certain forms of compensation
This new excise tax is imposed on tax-exempt organizations if (and to the extent) they pay an employee in excess of $1 million of compensation in a year or make a “parachute payment” tied to termination of employment.
New rules regarding unrelated business taxable income
Under old law, losses from a business activity unrelated to an organization’s tax-exempt purposes could be used to offset taxable income from other unrelated businesses. Under a new rule, losses from one unrelated business activity can only be used to offset income from the same category of business activity. Hence if a university rents out a conference facility at a loss, it will not be able to use that loss to reduce taxable income from the operation of a commercial testing service (assuming both activities are unrelated to the tax exempt purpose of the university). Again, there are many complex interpretive issues presented by this new rule and MIT is working with other schools to advise the IRS regarding some of these issues.
Unrelated business taxable income generated by certain fringe benefits
In an oddly-worded provision of the new law, certain fringe benefits that are provided on a tax-free basis by a tax-exempt organization to its employees (e.g. parking and transit passes) generate unrelated business taxable income to the organization. The parameters of this new rule are unclear, but we believe this is the first example in the tax law of an expense being defined as income. MIT is working with other schools to better understand the practical implications of this new rule.