32 | RKL 2018 Year-End Tax Planning Guide RKL 2018 Year-End Tax Planning Guide | 33 TAX REFORM’S IMPACT ON NONPROFITS Since most of the tax reform headlines focus on the individual and for-profit business provisions, nonprofit leaders may wonder how the new law will affect their finances and operations. In fact, there are a number of impacts for which tax-exempt organizations must prepare. Below, we outline key areas and offer action items to help nonprofit leaders adjust to the new tax landscape. Your RKL tax advisor can demonstrate the pros and cons of each planning idea within the context of your nonprofit’s unique circumstances. Unrelated Business Taxable Income Under tax reform, unrelated business taxable income (UBTI) will now be taxed at the new corporate rate of 21 percent, instead of the previous multi-level rate schedule. The financial impact of this rate change depends on the level of unrelated taxable income. Organizations with less than $90,000 of taxable income will now pay more tax due to the switch, while organizations with taxable income over $90,000 may see a smaller tax burden. Tax reform also changes how UBTI is calculated and taxed. Starting in 2018, nonprofits must calculate UBTI on each trade or business individually, rather than the previous aggregated method. Therefore, it is expected that incomes/losses from individual business activities will need to be reported separately, and losses from one may not be used to offset income from other business activities. In late August 2018, the IRS issued interim guidance that reliance on the use of NAICS six-digit codes will be considered a reasonable interpretation until proposed regulations are published. Interim guidance was also issued regarding income from partnership interests. A nonprofit is permitted to aggregate its UBTI from its interest in a single partnership with multiple trades or businesses as long as it passes either the de minimis or control test. A nonprofit meets the de minimis test if it directly holds no more than two percent of the capital interest and no more than two percent of the profits interest in a partnership. A nonprofit meets the control test if its partnership interest does not exceed 20 percent of the capital interest and it has control or influence over the partnership. Information on Schedule K-1 may be used to determine if the nonprofit meets one or both of these tests. This interim guidance also provides a transition rule to allow the aggregation of income within each direct partnership interest acquired before August 21, 2018. Ways to prepare: • Review estimated taxes and safe harbor status in light of the rate changes. • Evaluate control issues and interests for all partnership holdings. • Allocate the appropriate general or shared expenses to each trade or business to maximize benefit and minimize tax burden. • Move multiple taxable trade or business activities into a wholly owned corporation to offset profitable activities with loss activities (consider with the consultation of a tax advisor). Net Operating Losses Tax reform sets new rules for net operating losses (NOL) carryforwards at 80 percent of taxable income. It eliminates carryback of NOLs and allows carryforwards indefinitely. Keep in mind, all new NOLs must be calculated by trade or business and can no longer “cross pollinate.” The IRS late August 2018 guidance sets ordering rules for how pre-2018 and post-2018 NOLs can be used. Congress does allow for a transition period that allows carryover of any NOL occurring in a taxable year before 2018. Ways to prepare: • Review ongoing loss activities to determine whether or not they should be continued by your organization. • Track NOLs by activity/business for carryforward purposes. RKL 2018 Year-End Tax Planning Guide | 33