34 | RKL 2018 Year-End Tax Planning Guide RKL 2018 Year-End Tax Planning Guide | 35 Fringe Benefits Tax reform also expands the definition of UBTI to include certain fringe benefits offered to employees, like on-premise athletic facilities and qualified transportation or parking, which can be on-premise or off. Before December 2017, an employee could exclude up to $255 per month of employer-provided parking as a qualified transportation benefit and the employer could deduct 100 percent of that expense. Starting in 2018, an employee may still exclude up to $260 per month of employer-provided parking as a qualified transportation benefit, but employers may no longer deduct any of the expense. Instead, nonprofits must report that fringe benefit expense as UBTI. Ways to prepare: • Renegotiate parking lease (if rented from same landlord as office space) to increase office rent and include free parking, which permits 100 percent deduction of office rent and avoids UBTI classification. • Increase wages and leave it to employees to cover their own parking expenses. Excise Tax on Excessive Executive Compensation The Tax Cuts and Jobs Act created a brand-new section of tax code, Section 4960, to impose an excise tax on excessive compensation for nonprofit executives, with the intent of bringing nonprofit pay in line with public company compensation rules. This tax is paid by the nonprofit, not the individual employee, and is here to stay: Section 4960 will not sunset after December 31, 2025, unlike other provisions of the Tax Cuts and Jobs Act. The new 21 percent excise tax is applied to annual compensation of $1 million or higher to an organization’s top five highest compensated employees. Section 4960 defines as covered employees both current and former employees who are among the top five highest compensated employees for the year since 2016. The $1 million limit only applies to federal withholding wages, not separation or parachute payments, which are calculated differently as explained later in this section. Wages from a related party or organization paid to a covered employee, however, do count toward the $1 million limit. Other notable exclusions from the $1 million limit are Roth contributions to a 401(k) plan and compensation paid to licensed medical professionals, like doctors, nurses and veterinarians, for medical services. Compensation for non-medical services must still be figured into the excise tax calculation. The 21 percent excise tax is also levied on certain separation pay packages, commonly referred to as “golden parachutes,” that are greater than or equal to three times the departing executive’s base salary. Three times base salary is the point at which the payment becomes taxable, but the excise tax is not levied on the excess of the base salary times three. Instead, it is levied on the difference between the base salary and the separation payment. Example: A nonprofit provides a departing executive with a lump-sum payment of $700,000 on the date of separation. The executive’s base salary was $225,000, so the separation payment is more than three times the base. So only the difference between the separation payment and the base salary, which equals $475,000, is considered excess. Thus, the 21 percent excise tax owed is $99,750, or 21 percent of $475,000. To continually assess the annual impact of the compensation excise tax, nonprofit leaders should keep close track of covered employees and remuneration from related entities to determine liability and discuss the exposure mitigation tactics outlined below with their RKL advisor. Ways to prepare • Shift income from bonus/salary to involuntary separation pay, or vice versa (must be conducted in compliance with Sections 457(f) and 409A regulations). • Replace parachute payments with a phased retirement program eliminates the separation pay and benefits that trigger the excise tax. This could impact on provision of service or medical benefit eligibility so vet thoroughly before implementing. • Extend vesting schedules for employee compensation. Spreading payments over several years can prevent any single year from exceeding the $1 million threshold.