Let’s BOND over the Tax Act Part II - The Higher Education Edition

by Bond Schoeneck & King PLLC

Bond Schoeneck & King PLLC

In the spirit of accentuating the positive, there are a few bits of good news for colleges and universities in the Tax Act…as Mary Poppins might say, a spoonful (or three) of sugar to help the medicine go down. Unfortunately, after those very small doses of sugar go down, what follows is more like a 50 gallon drum of cod liver oil for many colleges and universities (and their respective donors). 

One very welcome point to highlight at the outset, is that several of the more unpopular provisions in the House and Senate versions failed to make the final cut. For example, the Tax Act does not change the (i) exclusion for qualified tuition reductions, (ii) exclusion for employer-provided housing, (iii) American Opportunity tax credit or Lifetime Learning credit, (iv) deduction for student loan interest, (v) deduction for qualified tuition and related expenses, (vi) exclusion for educational assistance programs, or (vii) exclusion for interest on United States savings bonds used for higher education expenses.

Below is a general overview of the major provisions of the Tax Act (and Internal Revenue Code (the “Code”)) that colleges and universities should be aware of, and that are effective (or revised), as of January 1, 2018.

  • Increase in AGI Limit on Charitable Contributions aka Spoonful of Sugar #1:
    • The 50% adjusted gross income limit on a donor’s contributions to certain charities (including colleges and universities) is increased to 60%; thus potential donors may be inclined to give more (at least those donors who will still itemize charitable contributions after December 31, 2017).
  • Lower UBI Rates aka Spoonful of Sugar #2:
    • Notwithstanding some of the other changes to unrelated business income or “UBI” discussed below, the tax on unrelated business taxable income (“UBTI”) is calculated using the corporate tax rates (reduced to 21% under the Tax Act); thus, colleges and universities will be subject to a lower tax rate with respect to their unrelated businesses.
  • Continued Ability to Utilize the Exclusion from Income for Working Condition Fringe Benefits and Certain Expenses Reimbursed Under the “Accountable Plan” Rules aka Spoonful of Sugar #3:
    • Despite the fact that individuals may no longer deduct miscellaneous itemized expenses under Code Section 67 (at least until December 31, 2025), including “unreimbursed expenses attributable to the trade or business of being an employee,” like work-related education, colleges and universities may continue to reimburse expenses that otherwise qualify as “working condition fringe benefits” under Code Section 132 and/or that satisfy the “accountable plan” rules under Code Section 62.2
      • An employee’s inability to take a deduction following the effective date of the Tax Act is not determinative with respect to whether an amount is excludable from income as a “working condition fringe benefit;” rather the test is whether the expense “could” have qualified for a deduction. 
      • Similarly, under Code Section 62, reimbursements for expenses paid or incurred by an employee in connection with his or her performance of services as an employee are generally excludable from income if all of the “accountable plan” rules set forth in Treas. Reg. Section 1.62-2 are followed. The Tax Act did not amend the “accountable plan” rules.
  • Excise Tax on Compensation in Excess of $1M AND Certain Severance and Similar Arrangements:
    • The Tax Act imposes a 21% excise tax on “compensation” in excess of $1M paid by colleges or universities to “covered employees.”3
      •  A "covered employee" is defined as one of the organization’s five highest-paid employees for the tax year or any employee who was a "covered employee" for any tax year after December 31, 2016.
      • Compensation for this purpose includes wages paid and any vested non-qualified deferred compensation (within the meaning of Code Section 457(f)(3)(B)),4  including any compensation paid by a person or entity related to the college or university (but not “excess parachute payments” described below).
        • By including the reference to Code Section 457(f)(3)(B), the Conference Committee threw in a major dose of MOVIPREP®5, now requiring compensation to be treated as being paid when it vests. As an example, if a coach who is a “covered employee” has a combined annual base salary and bonus of $500,000 and is granted a vested non-qualified deferred compensation benefit under a Code Section 457(f) plan with a present value of $800,000, the coach would be treated as having been paid $1,300,000, and as a result, the college or university would owe an excise tax of $63,000 (i.e., 21% of $300,000).
      • It is not clear at this time whether compensation paid by certain unrelated entities in connection with a covered employee’s services for a college/university will be included as “related employers” in the implementing regulations (for example, suppose a coach has a salary of $1M, but also has a separate contract with Nike for $1M; it is unclear whether the amounts will need to be aggregated, even though Nike is not technically related to the college or university employer. This question has been posed to the Internal Revenue Service (“IRS”) for clarification).
    • Also, the Tax Act imposes a 21% excise tax on severance and similar arrangements that provide for “excess parachute payments.”
      • A parachute payment is defined as compensation that (i) is contingent on the employee’s separation from employment, and (ii) exceeds three times the employee’s “base amount.”
        • The “base amount” is the average of the employee’s annualized compensation for the five most recent taxable years that end before the employee’s separation from employment.
      • The excise tax is imposed on the amount paid that exceeds the base amount.
      • Benefits payable from tax-qualified retirement plans such as a Code Section 401(k) plan, a Code Section 403(b) plan or a Code Section 457(b) eligible deferred compensation plan, are not parachute payments.
        • Curiously, although the statute itself refers to benefits payable from “457(b) plans” as being excluded from the definition of parachute payments, the Conference Committee specifically refers to a “457(b) eligible deferred compensation plan of a state or local government employer,” a more limited subset of Code Section 457(b) plans. This narrower definition could mean that benefits payable from Code Section 457(b) plans maintained by private colleges and universities would be treated as parachute payments subject to the excise tax. Although we believe (i.e., we hope) this particular disconnect between the statute and the Conference Committee Report is unintentional, we await clarification by the IRS, either in the implementing regulations or other guidance.
      • Employees who are not “highly-compensated employees” within the meaning of Code Section 414(q) (i.e., for 2018, those who earned $120,000 or less in the preceding calendar year) are exempt from this rule.
    • There are special rules for compensation paid to certain qualified and licensed medical professionals (including doctors, nurses and veterinarians), if the compensation is directly related to the performance of medical or veterinary services.
    • These new excise taxes are imposed on the college/university employers and not the affected employees.
    • The Tax Act does not provide for the grandfathering of existing agreements.
    • As an anti-abuse measure, the IRS is authorized to issue regulations necessary to prevent avoidance of the tax, including avoidance by performing services other than as an employee or by providing compensation through a pass-through entity.
  • Excise Tax on Investment Income: 
    • The Tax Act imposes a new 1.4 % excise tax on the investment income of certain “qualifying” private colleges and universities and their related organizations.
    • To be a “qualifying” private college or university, the institution must have (i) at least 500 tuition-paying students during the preceding taxable year, more than 50% of whom are located in the U.S., and (ii) investment assets with a fair market value of at least $500,000 per student as of the end of the preceding taxable year (for example: at least $250M in investment assets for a college or university with 500 students).
  • No Deduction for Donations for Seating:
    • Effective for purchases made after December 31, 2017, no charitable contribution deduction will be allowed for any payment to a college or university, if, in exchange for that payment, the donor receives the right to purchase tickets or seating at an athletic event.6
  • Changes to UBIT/UBTI:
    • The Tax Act imposes an unrelated business income tax (“UBIT”) on transportation, parking, and athletic facility fringe benefits that a college or university provides to its employees.
    • Also, under the Tax Act, tax exempt organizations that have multiple sources of UBTI will no longer be able to net the gains and losses of these different sources to reduce UBIT liability.
      • We recommend colleges and universities consider consolidation of UBTI generating activities in a subsidiary in order to net these gains and losses going forward.
  • Elimination of “Advance Refundings”:
    • The Tax Act eliminates all “advance refundings” after December 31, 2017.
      • Advance refunding is where new tax-exempt bonds are issued to refinance existing tax exempt bonds more than 90 days in advance of the redemption date or maturity date of such existing tax exempt bonds.

As with most new legislation, each of these provisions will likely be fleshed-out in greater detail in the form of implementing regulations or other IRS guidance, which, with any luck, will come sooner rather than later.

1 The official name of the new law is the “Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for the fiscal year 2018.”  Instead of that tongue-twister, we will refer to the new law by the catchier unofficial name i.e., the Tax Cuts and Jobs Act of 2017 (the “Tax Act”).  Our dedicated tax team is hard at work to bring you an easy to follow series of informational memos explaining how the Tax Act will affect our clients. See Part I in our series: The Times They Are A–Changin’: Estate and Gift Tax Exemption Amount Doubles.
2  Property or services provided to an employee by an employer generally will qualify as a “working condition fringe benefit” if, among other things, the cost of the property or the service is a cost that would have been deductible under Code Sections 162 or 167 if incurred by the employee.
3 Generally, this will most likely impact coaches, athletic directors, and presidents/chancellors.
4 In other words, vested non-qualified deferred compensation is included in this calculation regardless of whether it has been paid!
5 For those of you who have not had the pleasure, MOVIPREP  is a common colonoscopy preparation medication.
6 For purchases made on or before December 31, 2017, up to 80% of any such payment generally was allowed as a charitable deduction.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Bond Schoeneck & King PLLC | Attorney Advertising

Written by:

Bond Schoeneck & King PLLC

Bond Schoeneck & King PLLC on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.