Budget Act revives exempt organization provisions | KPMG | GLOBAL

Budget Act revives exempt organization provisions dropped during tax reform

Budget Act revives exempt organization provisions

The recently enacted Bipartisan Budget Act of 2018 (BBA) includes provisions that affect exempt organizations.

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The president on February 9, 2018, signed into law a short-term government spending and budget bill—the Bipartisan Budget Act of 2018. Read TaxNewsFlash-Legislative Updates

Among other things in the BBA, there are two provisions that directly affect exempt organizations: 

  • A requirement that students be “tuition paying” in order for the private college or university endowment excise tax to apply
  • An exception to the private foundation excess business-holding rules for independently operated philanthropic businesses

Both provisions were considered during the tax reform process in late 2017; however, neither provision was included in the final, enacted version of the new tax law (Pub. L. No. 115-97, enacted December 22, 2017).

Clarification regarding excise tax based on investment income of private colleges and universities

The BBA includes a measure that amends section 4968 to provide that, in determining whether a college or university has at least 500 students of which more than 50% are located in the United States, only “tuition-paying” students are counted. 

Prior to the amendment, the 1.4% excise tax imposed on the net investment income of private colleges and universities applied to schools with at least 500 students (more than 50% of which are located in the United States) and non-exempt use assets with a value at the close of the preceding tax year of at least $500,000 per full-time student. There was no requirement that the students be “tuition-paying.” 

For additional analysis of section 4968, read KPMG’s report about provisions in the new tax law of particular interest to exempt organizations and their donors: Tax reform: Issues for exempt organizations (Pub. L. 115-97) [PDF 316 KB].

Exception from private foundation excess business-holding tax for independently operated philanthropic business holdings

The BBA amends section 4943 by creating an exception to the excise tax applicable to a private foundation’s ownership (generally more than 20%) in a for-profit business. To meet the exception, the private foundation must satisfy the following conditions:

  • It holds all voting stock in the for-profit business;
  • It acquired all of its interests in the for-profit business other than by purchase (e.g., by inter vivos gift or bequest);
  • It distributes all of its net operating income (less a reasonable reserve) in any given tax year to the private foundation;
  • No substantial contributor (or family member) of the private foundation is a director, officer, trustee, manager, employee, or contractor of the for-profit business;
  • At least a majority of the private foundation’s board of directors does not consist of directors or officers of the for-profit business or members of a substantial contributor’s family; and 
  • There is no loan outstanding from the for-profit business to a substantial contributor (or family member).

This new exception permits a private foundation to own a business enterprise that is unrelated to the private foundation’s exempt purposes if the business is independently operated and its profits are dedicated to the foundation. It also allows the business to retain a reasonable reserve for working capital and other business needs.

Although section 4943 also applies to donor advised funds, non-functionally integrated Type III supporting organizations, and certain trusts, these entities are ineligible for this exception.

 

For more information, contact a tax professional with KPMG’s Washington National Tax practice:

Greg Goller | +1 703 286 8391 | greggoller@kpmg.com

Alexandra Mitchell | +1 202 533 6078 | aomitchell@kpmg.com

Preston Quesenberry | +1 202 533 3985 | pquesenberry@kpmg.com 

Randall Thomas | +1 202 533 3786 | randallthomas@kpmg.com

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