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Friday September 21, 2018

Washington News

Washington Hotline

"Almost a Postcard" Tax Return

In the fall of 2017, House Ways and Means Chairman Kevin Brady (R-TX) was encouraging Congress to move forward with the Tax Cuts and Jobs Act (TCJA). One of the promised benefits of the TCJA was a "Postcard Tax Return."

On June 29, the IRS published a draft of the new Form 1040. It is similar to an oversized postcard.

The IRS press release states, "This new approach will simplify the 1040 so that all 150 million taxpayers can use the same form. The new form consolidates the three versions of the 1040 into one simple form. At the same time, the IRS will still obtain the information from each taxpayer needed to determine their tax liability or refund."

The new form reduces the 79 lines of the 2017 Form 1040 down to 23 lines. If the taxpayer takes the 2018 standard deduction ($12,000 for single taxpayers and $24,000 for married couples) and does not itemize, the new "Postcard Tax Return" may be sufficient.

However, many taxpayers will still need to use added schedules. There are six new tax schedules for reporting other income, funding a health savings account, claiming tax credits and calculating Social Security, Medicare and self-employment taxes.

Howard Gleckman is a senior fellow at the nonpartisan Tax Policy Center. He observed that the higher standard deductions "will simplify filing for millions of people."

While this simplicity in tax filing is good, Gleckman thought the "Postcard Return" will not be frequently used. He noted, "More than 90% of us file our tax returns electronically, and I suspect if you ask most 30-year-olds about postcards, they will not even know what you are talking about."

Editor's Note: This new IRS Form 1040 is a draft of the "Postcard Tax Return." The IRS expects to make multiple changes before the final form is released.

Parking Benefit UBIT Problems

On July 2, Michigan Council of Foundations President Rob Collier sent a request to the Department of Treasury for a one-year delay in implementation of Sec. 512(a)(7). This Section states, "Unrelated business taxable income of an organization shall be increased by any amount for which a deduction is not allowable under this chapter by reason of Section 274 and which is paid or incurred by such organization for any qualified transportation fringe (as defined in Section 132(f)), any parking facility used in connection with qualified parking (as defined in Section 132(f)(5)(C)), or any on-premises athletic facility (as defined in Section 132(j)(4)(B)).

Section 512(a)(7) will cause hundreds of thousands of nonprofits to pay unrelated business income tax (UBIT).

Collier offered two examples to explain the negative impact of this "Parking Lot UBIT." The first is a Michigan university with 800 employees, over 12,000 students and campuses in 12 locations. The university will file IRS Form 990T on January 15, 2019. It must calculate the correct tax on the parking lots in its 12 different locations.

The university example raises multiple questions. How should the university treat the different depreciated parking lot values? Should the parking lot cost be allocated to just the 800 employees or to all 12,000 students? Do online students affect the calculation? Without IRS guidance, how can the university reprogram its accounting software? Will the IRS guidance be available in time to take appropriate actions before the January 15, 2019 filing date for Form 990T?

The second example is a smaller nonprofit in Northern Michigan with seven employees. It pays $2,400 each year to lease a parking lot for the employees. There is also a second parking lot used by donors and community members that is part of the lease agreement for its building. Under Sec. 512(a)(7), the community foundation would report UBIT of $4,800 and pay tax of $1,000. This community foundation will have $1,000 less to distribute for community grants that year.

Collier concludes, "We hope Treasury can issue a year delay from the day guidance is issued. And we will share with Congress with the hope that this Section can be repealed."

Church Alliance Requests Transition Relief

The Church Alliance ("Alliance") is a coalition of CEOs from 38 church benefits nonprofits. It includes Mainline and Evangelical Protestant organizations, Jewish charities and Catholic nonprofits. The Alliance "respectfully requests that the Treasury and Internal Revenue Service provide transitional relief from the implementation of Section 512(a)(6) and (7) of the Internal Revenue Code until tax years beginning after final regulations are issued, so that stakeholders have had a reasonable time to develop systems to comply with the regulations."

Sec. 512(a)(6) requires nonprofits to track gains and losses for "separate" trades or businesses. Alliance boards invest billions of dollars in thousands of corporations, partnerships and other alternative investment vehicles. As the American Institute of CPAs (AICPA) has noted, "Absent specific guidance, it is not possible to determine whether a tax-exempt organization that receives, for example, 100 Schedules K-1, Partners Share of Income, Deductions, Credits, etc., is required to track and report each Schedule K-1, or each line of income on each Schedule K-1, as a separate trade or business." The AICPA explains that there could be a requirement to separately track thousands of different investments. The IRS must provide guidance so that nonprofits are able to update their accounting software.

The Alliance urges the IRS to delay implementation of the "separate entity" rules. If the IRS does not delay and promptly issue guidance, the Alliance notes, "Our member organizations and the institutions they serve will not be able to ascertain whether they are in compliance, or otherwise carrying out the intent of the provision."

The Sec. 512(a)(7) parking UBIT rules also create major problems for the Alliance, which includes 155,000 churches, synagogues and related organizations. Over 10,000 treasurers of houses of worship will, for the first time, be required to file IRS Form 990T and pay tax on their organizations' parking lot value.

Therefore, the Alliance requests transitional relief until final regulations are published by the IRS.

Applicable Federal Rate of 3.4% for July -- Rev. Rul. 2018-19 ; 2018-27 IRB 1 (17 June 2018)

The IRS has announced the Applicable Federal Rate (AFR) for July of 2018. The AFR under Section 7520 for the month of July is 3.4%. The rates for June of 3.4% or May of 3.2% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2018, pooled income funds in existence less than three tax years must use a 1.4% deemed rate of return.

Published July 6, 2018
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