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When President Trump at the end of 2017 signed a Republican-backed tax-reform package into law that included significant changes for colleges and universities, higher ed leaders were left waiting for answers.

They wondered about rules for calculating a new tax on endowments. They sought guidance regarding a tax on parking and transportation benefits for employees. Questions circulated about a new tax on highly compensated nonprofit employees that had drawn criticism while the tax law was still being drafted.

And leaders also wondered about the tax law’s effects on human behavior. For instance, how would an increase in the standard deduction affect donor behavior? Would alumni newly covered by the larger standard deduction be less likely to give to colleges and universities because they wouldn’t be itemizing their taxes?

About a year later, some answers have become clearer, while others remain clear as mud -- and still others can be addressed by mucking around with pages of guidance from the Internal Revenue Service.

The Treasury Department and IRS have been rolling out interim guidance giving colleges an idea of how to handle technical issues like how to group separate lines of business subject to a new unrelated business income tax or how to handle parking and transportation benefits subject to taxation.

Broadly, experts say the guidance is in many cases helpful, even though it hasn't addressed every question raised. So it is possible today to take stock of key developments on tax reform issues that captured attention.

The guidance issued so far could also prompt some interesting behavior and unexpected effects. For instance, don’t be surprised if some colleges pull up signs designating parking spots for employees or redraw the lines in lots in order to dodge the parking tax.

In some cases, though, college leaders still have little choice but to wait for more information.

“It’s still early days,” said David Shapiro, a partner and tax chair at the law firm Saul Ewing Arnstein & Lehr in Philadelphia. “We won’t really see how it shakes out until we’re through at least one fiscal year.”

Below are brief discussions about some of the major tax reform issues and how they have changed over the last year.

Excise Tax on High Compensation

As 2018 ticked toward its close, new interim guidance came out on a 21 percent excise tax that tax-exempt entities and their related organizations must pay on employee compensation of more than $1 million, spelling out what wages and benefits count toward the tax trigger. Experts are still digesting the guidance but flagged some notable developments.

Related organizations share the costs of an excise tax. So if a university and its foundation both pay a president who earns more than $1 million, they would each pay some tax.

An example given in the guidance document has one organization paying an employee $1.2 million, or 60 percent of his or her total compensation, and another paying $800,000, or 40 percent of total compensation. The total excise tax would be $210,000, or 21 percent of the compensation in excess of the $1 million tax trigger. The first organization would pay 60 percent of the tax bill and the second would pay 40 percent.

That’s important because highly paid university employees sometimes receive compensation from more than one related entity. Think, for instance, of football coaches.

“It’s not always the university president who’s going to be affected here,” said James Finkelstein, a professor emeritus of public policy at George Mason University who studies presidential compensation. “It may be the vice president of the medical center or the dean of the medical school. It could be the athletic director or football coach or basketball coach.”

The new guidance also spells out that licensed medical professionals’ compensation is not subject to the excise tax when it covers “direct performance” of medical services, nursing services or veterinary services. But compensation for other duties they perform, like administrative, research, teaching and management duties, generally is subject to the tax.

Some public colleges and universities have been recognized as 501(c)3 organizations, and some have not. Those not set up as 501(c)3s are not subject to the excise tax on compensation, and those that do have 501(c)3 status may relinquish it so the tax does not cover them.

“My guess is you’re going to have public institutions that have at some time in the past elected to get their 501(c)3 status get rid of it,” said Dan Romano, partner in charge of tax services, not-for-profit and higher education at the consulting firm Grant Thornton.

But 501(c)3 status comes with some benefits for institutions. For instance, giving money to a college from a donor-advised fund is easy to do if the institution has the status and is listed in the IRS master file. It’s harder and requires more due diligence for others.

Also of interest, it appears institutions will need to track their five highest-paid employees regardless of whether they owe one cent under the excise tax on compensation -- and they will need to continue tracking those employees, plus anyone who displaces them in the top five, into the future. “Those employees continue [to] be covered employees in all future years and may be paid excess remuneration or excess parachute payments in a future year,” according to the guidance.

The excise tax could leave some institutions with an unexpected tax bill for employees who receive “parachute payments” when they are terminated, experts say. Some also take issue with the fact that the tax allows for no grandfathering of employee contracts signed before it was passed into law. It is hard to plan for possible future tax payments when you don't know the rules under which those payments will be due, they point out.

Many think the excise tax will become just another cost of doing business, though. It will be folded into the already high cost of hiring top employees, along with search fees, salaries and benefits packages.

Parking and Transportation Benefits

Also in December, interim guidance addressed some key questions about parking and transportation benefits and costs that are being taxed as unrelated business income. Taxed parking benefits have received particular attention after reports emerged last year that churches and other tax-exempt organizations would have to pay a 21 percent tax on such fringe benefits to employees.

Notable among the new guidance were steps employers can use toward measuring employee parking expenses at lots colleges and universities own or lease. The first is determining the number of spots reserved for employees as a percentage of total parking spaces, according to the National Association of College and University Business Officers. That percentage is considered for unrelated business income that is taxable.

The second step is to count the remaining spots. If more than half of spots can be used by the public, none of the parking facility's expenses are taxable income. The third step is to count spots reserved for customers and other nonemployees, which are also not taxable.

Finally, spots left over after the first three steps must be checked for “employee use during normal business hours on a normal day.”

Employers with reserved employee spots still have time to remove them before the tax kicks in. They have until March 31 of this year to remove the reservation and have the change be retroactive until Jan. 1 of 2018.

Experts hope Congress will pass legislation removing the parking tax entirely. In the meantime, they say institutions are likely to take action to avoid having to pay the tax at all. Some have joked that colleges will redraw lot lines to add more spaces.

“In the university world, unless it’s a small institution with a limited number of students, they should have ample spots to prove it’s primarily for student and other use,” Romano said. “It may be a matter of them doing away with reserved parking.”

NACUBO noted in December, however, that the guidance didn’t address transit benefits.

Endowment Tax

The so-called endowment tax, a 1.4 percent excise tax on net investment income at private colleges and universities with at least 500 tuition-paying students and assets of at least $500,000 per student, has generated intense pushback, particularly from the wealthy colleges most likely to have to pay it.

No one is quite sure yet how many institutions will have to pay. Estimates anticipate dozens in early years. But the tax kicks in on the first tax year that starts after Jan. 1, 2018.

“For most colleges and universities, that will be the year ending in June 2019,” said Mary Bachinger, NACUBO’s director of tax policy, in an email. Colleges and universities are in the middle of that year now.

Guidance and draft tax forms have given experts more insight into the nuts and bolts of how net assets will be measured and how the tax will be calculated. Broadly speaking, calculating assets seems to be in line with rules for private foundations, Romano said.

Colleges and universities could need to track the starting value of assets they are given. That could cause headaches and change behavior.

“If the donor doesn’t know what their basis was, that’s hard for the university,” said Alexander Reid, a partner at the law firm Morgan Lewis. “If it’s really a low-basis, high-value stock, the university is going to want to say, ‘Why don’t you give that to a donor-advised fund not subject to this tax?’ And then they’ll sell it and they don’t have to pay this tax.”

Opportunity Zones

Opportunity zones are one part of the tax law receiving plenty of attention in the business world, but not necessarily from higher education leaders.

That's because the zones are intended as an economic development tool focused on investors. They seek to attract private capital by offering significant tax benefits to those who put money into partnerships or corporations investing in the zones.

The zones have received plenty of criticism as giveaways to the wealthy or for being set up in areas that are already growing, instead of the distressed communities in need of a boost. But the fact remains that they have been set up in parts of all 50 states, and some zones could be of interest to universities.

“It’s not university specific, but there has been this trend where universities aren’t necessarily developing the areas around their campuses by themselves,” said Shapiro, at Saul Ewing Arnstein & Lehr. “They’re looking to outside funding, and a lot of universities are in or adjacent to opportunity zones. In terms of building additional student housing, expansion of research facilities and things like that, we are seeing a lot of interest around developing opportunity zone financing.”

Colleges or universities looking to take advantage of an opportunity zone wouldn't be receiving the financial benefits directly. They'd have to set up another entity to develop the property and attract investors, who would then receive the financial benefits. But doing so could attract sources of capital for a college-supported project that would have otherwise been harder to finance.

“This is really about attracting investment from the taxpaying public,” Shapiro said. “The value to the university is in their ability to attract private capital to make the investment.”

The zones won't likely allow colleges and universities to take a bad project and make it good, he added. Instead, they'll make decent projects more attractive.

Human Behavior

Donor behavior remains hard to predict. December is considered the most important month for fund-raising in part because it is at the end of donors' tax years. With the month so recently closed, no one is quite sure how last year shaped up yet.

“The verdict’s not in,” said Peter Lake, chair and director at the Center for Excellence in Higher Education Law and Policy at Stetson University. “This year is the real test year to see what might happen.”

Even after that's known, few expect to be able to say for certain how the new tax laws will warp donor behavior in the long run. Donors could tweak their plans in the future after they've evaluated the tax returns they will file by April.

“Until people start to do their tax returns and until you get a year under the new law, it’s probably a little early to draw direct dollars-and-cents effects,” said Marc Berger, national director for nonprofit tax services at BDO, a tax and financial advisory firm.

Confounding variables will also make it hard to draw a direct line between donor decisions and the tax law. Stocks' volatility to close 2018 and open the new year likely set on edge some donors who had been feeling flush during the bull market.

“The psychological impact of what is turning out to be extreme market volatility in the month of December, when people have their checkbooks out -- at the margin, it’s going to have an effect,” said Debashis Chowdhury, president of Canterbury Consulting, an investment advising firm for endowments, foundations, health care organizations and families. “If one is not feeling as wealthy as one did in, say, September, it’s likely to have a negative impact. So there’s a lot of small cuts.”

Fragile sentiment extends to college and university investment committees, he said. They are worried about both volatility and regulatory uncertainty.

The tendency is then for leaders to become paralyzed or hunker down. Canterbury's higher ed clients are small- to middle-market institutions. So the uncertainty is often an additional concern on top of mounting enrollment pressure.

If major donations stopped flowing, it could become a big problem for some institutions. Some are skeptical that the wealthiest donors will stop giving because of the new tax laws, though. They weren't taking the standard deduction before, and they still aren't taking it.

“At the higher end, the law is the same for everybody,” said Paul Roy, who is counsel to the private client and tax teams at the international law firm Withers. “The client that is $50 million or $100 million in net worth, they’re not really worried about this sort of adjusted gross income limit on deductions.”

On the margins, someone who is well-off but not wealthy is likely still interested in the tax benefits in question and may be affected by the increased standard deduction. Still, strategies are emerging that could give such donors tax benefits, like bunching their donations so they give larger sums of money less frequently than they had before.

“In the last year, there’s been a lot of creative thinking going on within the development department, the athletic department and the lawyers trying to deal with these new requirements,” said Julie Miceli, a partner with the law firm Husch Blackwell’s higher education group and former deputy general counsel for higher education and federal student aid at the U.S. Department of Education. “But it’s just been a year now of trying to get their brains wrapped around them.”

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