The 2017 Tax Cuts and Jobs Act brought many changes to the tax code, including how unrelated business taxable income (referred to by the IRS as UBTI or commonly known as UBIT) affects nonprofits. Transportation benefits (such as transit or parking subsidies) that nonprofits provide to their employees are now subject to UBIT (21 percent) and the structure of the tax now prevents charities from offsetting a loss from one unrelated business area with profits from another area. This affects a wide range of organizations who will be spending more money on taxes and less on their communities.
Effective January 1st, 2018, any charity that provides parking or transportation benefits to employees became liable for UBIT on these benefits and the taxes will be due at the end of the 2018 tax-filing season. On December 10th, the Treasury and IRS issued Notice 2018-99 to provide interim guidance to charities for calculating UBIT on parking and transportation benefits. This is helpful given that organizations are obligated to comply, regardless of the uncertainty surrounding the implementation of these new UBIT policies. There have been efforts on both a federal and state level to repeal or re-work these changes.
Outgoing House Ways and Means Committee Chairman, Kevin Brady (R-Texas) introduced legislation late last year that would fully repeal the UBIT on qualified transportation and parking benefits for employees of tax exempt organizations, but section 407 would effectively repeal the longstanding Johnson Amendment which has protected nonprofit and philanthropic organizations for decades and enabled them to be effective, nonpartisan problem solvers in their communities. This has made gaining support for this legislation difficult and is a challenge to those in the charitable sector who are invested in both issues. However, plans to fully repeal UBIT stymied in the 115th Congress. States have been working diligently to address working with new UBIT policies as well.
New York State is a prime example of the power of nonprofit and philanthropic leaders. The changes to the tax code have sparked an outcry, and New York has addressed its linked UBIT tax through legislation. Currently, the state imposes an additional UBIT whenever the federal government does so, but this will change with the new legislation. It unfortunately does not address the 21% tax on commuter benefits introduced by the changes to UBIT, but it saves nonprofits from having to pay the additional 9% to the state, which is great news for New York nonprofits. Thankfully, Governor Cuomo signed the legislation on December 7th, 2018 that decouples New York state from federal tax law to prevent an automatic tax hike on nonprofits.
NY Funders Alliance will continue to provide information on repeal efforts going into the new Congress. Stay tuned for updates as more unfolds and be sure to check back for new content in the next edition of The Policy Blog.
Want more information on what this means for your organization? Check out this blog post from NY Funders Alliance member Harter Secrest & Emery.
Date Published: Friday, December 21st, 2018.
Update (2/8/2019): Bipartisan support for the repeal of new UBIT provisions is growing and a new report from Independent Sector highlights what nonprofits will lose as a result of these provisions.
Update (3/4/2019): UBIT is gaining traction in the 116th Congress. Two bills have been introduced to remedy the harmful effects of the changes to UBIT for tax-exempt organizations that were included in the 2017 Tax Cuts and Jobs Act.
The 2017 Tax Cuts and Jobs Act made two changes to the tax code regarding UBIT that negatively affect foundations and other tax-exempt organizations.
- The first is a requirement that tax-exempt organizations pay a new 21% tax on fringe benefits offered to their employees, such as parking and transportation benefits. Nonprofits have never been subject to such a tax before.
- The second is a requirement that tax-exempt organizations calculate unrelated revenue streams separately or “in silos.” When tax-exempt organizations earn profits through an activity unrelated to their tax-exempt status, this revenue is taxed. Under the new law, tax-exempt organizations can no longer aggregate the profits and losses of unrelated business activities, but rather must pay taxes separately for each activity. For those organizations that are affected, this change will increase their tax burdens.
Representative Mike Conaway (R-TX) introduced the Nonprofits Support Act (H.R.513) that addresses both of the issues described above. According to Bloomberg Government, the bill “modifies the requirements for determining the unrelated business taxable income of tax-exempt organizations. The bill repeals provisions that (1) require organizations with more than one unrelated trade or business to compute unrelated business taxable income separately for each trade or business; and (2) increase unrelated business taxable income by the amount of expenses paid or incurred by an organization for certain fringe benefits for which a tax deduction is not allowed, including benefits relating to transportation, parking, or an on-premises athletic facility.”
Representative Jim Clyburn (D-SC) introduced the Stop the Tax Hike on Charities and Places of Worship Act (H.R. 1223) in the House and Senator Sherrod Brown (D-OH) introduced S. 501 in the Senate to repeal the increase in unrelated business taxable income on certain fringe benefit expenses. These bills address the first issue described above (the 21% tax), but not the second issue. Representative Clyburn released a press release on the bill.
More bills are expected to follow from members of Congress who consider this a priority issue.
Update (4/15/2019): UBIT continues to be a pressing issue as new legislation is introduced once more to the House and Senate. The LIFT (Lessen Impediments From Taxes) for Charities Act was introduced by Senator James Lankford (R-OK) in the Senate as S. 632 and by Representative Mark Walker (R-NC) in the House as H.R. 1545. This bill modifies the requirements for determining the unrelated business taxable income of tax-exempt organizations and repeals a provision that requires unrelated business taxable income to be increased by the amount of expenses paid or incurred by a tax-exempt organization for certain fringe benefits for which a tax deduction is not allowed, including benefits relating to transportation, parking, or an on-premises athletic facility.
Representative Carolyn Maloney (D-NY-12) has also produced a report along with the Joint Economic Committee titled The Economic Impact on Charities of the 207 Tax Act. This report highlights the ways nonprofits are being impacted by the 2017 Tax Cuts and Jobs Act (TCJA). This report accompanied a new bill introduced by Maloney called the Nonprofit Relief Act of 2019 which would reverse the higher taxes, along with new administration and accounting costs, created by the 2017 TCJA by repealing the provision that requires nonprofits to calculate separately the taxes on each “separate” unrelated business income “trade or business”. It would also update the charitable mileage reimbursement rate and fix the unfair treatment of paid leave for nonprofit employees by extending the 2017 TCJA’s new paid family and medical leave tax credit to nonprofits.
Update (5/29/2019): Senators Ted Cruz (R-TX) and Jeanne Shaheen (D-NH) introduced the Preserve Charities and Houses of Worship Act (S. 1282). This is a companion bill to Representative Mike Conaway’s (R-TX) Nonprofits Support Act (H.R. 513). The legislation would repeal the changes to the tax code made by the Tax Cuts and Jobs Act regarding the unrelated business income tax (UBIT) that negatively affect foundations and other tax-exempt organizations.
This legislation goes further than the other UBIT bills currently introduced. S. 1282 and H.R. 513 not only would repeal the UBIT on fringe benefits, but also would repeal the requirement that tax-exempt organizations calculate unrelated revenue streams separately or “in silos.”
Update (1/29/2020): On December 20, 2019, President Trump signed into law the “Further Consolidated Appropriations Act, 2020” (H.R. 1865) which included a full, retroactive repeal of the UBIT tax on transportation fringe benefits. In January 2020 the IRS released guidelines on how to claim a refund for transportation benefit taxes paid for years 2017 and 2019.
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