ISSUE

The “Tax Cuts and Jobs Act” contains a much-publicized “decrease” in the corporate tax rate to 21%.  This may actually result in a tax increase for some organizations – and sooner than you might think.

 

SITUATION

Saltwater Christian College (SCC) is a private college exempt under Internal Revenue Code section 501(c)(3) and section 170(b)(1)(A)(ii).  SCC has unrelated business income from three sources: 1) sales of logo apparel to the general public, 2) unrelated business income from partnership Schedule K-1’s, and 3) rental income from a free-standing communications tower they own.

For their tax year ended June 30, 2017, SCC had net unrelated business income of $40,000 and reported this on Form 990-T.  The tax due for that year was $6,000 ($40,000 x 15%).

If the same set of facts/amounts were to occur for the year ended June 30, 2018, SCC would have a tax increase of approximately $1,200.  ($40,000 x 15% x (184/365, 2017) + $40,000 x 21% x  (181/365, 2018)) = $7,190.

When we call SCC’s CFO to talk about this, he says, “Hold on.  I thought the 21% flat rate went into effect for ‘years after December 31, 2017.’  Wouldn’t that mean that we don’t see the increase until next year?  June 30, 2019?”

We respond that there is an Internal Revenue Code section that provides for a “blended” rate for fiscal year organizations in years when the tax rates change as of a specified date.  Thus, SCC will see a tax increase for the year ended June 30, 2018.

 

RULES

From Internal Revenue Code Section 15:

(a) General rule.

If any rate of tax imposed by this chapter changes, and if the taxable year includes the effective date of the change (unless that date is the first day of the taxable year), then-

(1) tentative taxes shall be computed by applying the rate for the period before the effective date of the change, and the rate for the period on and after such date, to the taxable income for the entire taxable year; and

(2) the tax for such taxable year shall be the sum of that proportion of each tentative tax which the number of days in each period bears to the number of days in the entire taxable year.

 

BOTTOM LINE

• The IRS is increasing their enforcement of the unrelated business income tax rules.
• If your institution’s net UBI has historically been under $50,000, you may see a tax increase on future Form 990-T filings.
• You should carefully review your UBI calculations for needed changes to your federal estimated payments.
• Be aware that the 21% flat tax rate has become effective for periods after December 31, 2017 – even if you have a fiscal tax year.

Specific questions? Email Dave Moja

The information provided herein presents general information and should not be relied on as accounting, tax, or legal advice when analyzing and resolving a specific tax issue. If you have specific questions regarding a particular fact situation, please consult with competent accounting, tax, and/or legal counsel about the facts and laws that apply.