Tax Tips for Higher Education

ISSUE
Form 990, Schedule E (Form 990) – Schools contains some potential traps to be aware of.

SITUATION
Marathon Bible College (MBC) is a public charity and a school under I.R.C. sections 501(c)(3) and 170(b)(1)(A)(ii). Per requirements, MBC has a racially nondiscriminatory policy. As we are finalizing their Form 990 for the year ended June 30, they have some questions about Schedule E (Form 990), Lines 3 and 4.

Schedule E, Line 3 states, “Has the organization publicized its racially nondiscriminatory policy through newspaper or broadcast media during the period of solicitation for students, or during the registration period if it has no solicitation program, in a way that makes the policy known to all parts of the general community it serves? If “Yes,” please describe. If “No,” please explain. If you need more space, use Part II.”

Schedule E, Lines 4a – 4d specifically ask questions about whether the filing institution complies with rules related to maintaining various required records and copies.

Yes answers to these line items are important.

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.

ISSUE

Although changes were proposed, the ban on political activity for 501(c)(3) organizations remains.  However, “issue advocacy” is allowable.

SITUATION
Marathon Bible College (MBC) is a private college exempt under Internal Revenue Code section 501(c)(3) and section 170(b)(1)(A)(ii).  They are required to file Form 990 annually.

MBC’s Controller calls to ask, “What ended up happening to the provision in the tax reform bill about letting colleges participate in political activities?”

We answer that it did not make it into the final “Tax Cuts and Jobs Act,” so the “ban” still stands.  However, discussion in Congress continues.

“Well,” he says, “we are looking at taking out an ad in the Miami Herald urging Floridians to contact our Senators about voting for an education bill that we favor and is about to come before them.  We are naming the Senators and stating their positions on the issue, even though one of them is up for election in the primaries next month.  Is that political activity?”

ISSUE
March 15 is the annual filing deadline for those schools required to file Form 1042-S for payments to foreign students in amounts that are not QTREs. Do you know how to extend these filings, if necessary?

SITUATION
Denali Christian College (DCC) is a private college exempt under Internal Revenue Code section 501(c)(3) and section 170(b)(1)(A)(ii). They are required to file Form 990 annually.

DCC’s CFO calls us to say that they have made their IRS EFTPS payments during the year for the required withholding from “Form 1042-S” (non-“qualified tuition and related expenses”) scholarship payments to foreign students from non-U.S. Tax Treaty countries. (How’s that for a tangle?)

Now, the accounting team at DCC is wondering what to file for 2017 with the IRS and what to give to the various students.

We answer that, because they are filing fewer than 250 Forms 1042-S, they may file their Forms 1042-S in paper form with Form 1042-T (Annual Summary and Transmittal of Forms 1042-S) with the IRS by March 15 (unless extended). In addition, they must file Form 1042, “Annual Withholding Tax Return for U.S. Source Income of Foreign Persons” by March 15 (unless extended separately). Also, copies of Form 1042-S must be given to the “recipients” (students, scholars, etc.)

ISSUE
When reporting transactions with interested persons on Form 990, beware the “new” concept of “substantial contributors.”

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).  They are required to file Form 990 annually.

As we are working with SCC to complete their Form 990, a question arose with respect to “substantial contributors” and reporting on Schedule L.

“So, in Schedule L, Part IV, we are required to report on certain business transactions with entities that are controlled – 35% or more – by any of our substantial contributors.  Two questions.  First, who are ‘substantial contributors?’  Second, how do we gather this information?”