The Tax Cuts and Jobs Act of 2017 (TCJA) includes new provisions that directly impact nonprofits and other tax-exempt organizations. Although nonprofits are mostly exempt from federal income taxation, a few new provisions require nonprofits to either pay new taxes or expand the applicability of existing taxes.
TCJA made several changes affecting unrelated business income taxation (UBIT), which currently applies to nonprofits' activities to generate revenue that are unrelated to their charitable missions. Visit our FAQ for more information on activities subject to UBIT in general.
Although these new provisions related to UBIT took effect on January 1, 2018, The Internal Revenue Service (IRS) and the Treasury have not offered final guidance yet on how nonprofits should comply with this aspect of the new tax code, which has caused confusion and concern in the nonprofit community.
UBIT on each separate trade or business
TCJA requires calculation of UBIT liability for each trade or business separately. Previously, nonprofits could aggregate reporting of all such activities when calculating UBIT. Now, losses from one business activity may not be used to offset taxable income from other business activities. It is essential that nonprofits track each unrelated business activity carefully and separately to the extent possible. However, the IRS has not provided any definitions yet about what constitutes a separate trade or business.
IRS Transitional Rules
On August 21, the IRS issued a notice with a request for comments on proposed interim and transitional rules for interpreting what is separate trade or business for purposes of determining UBIT liability. The request does not offer a definition or a facts and circumstances test for determining a separate trade or business.
Until further regulations are issued, nonprofits may rely on a reasonable, good faith interpretation when determining whether they have more than one unrelated trade or business. Nonprofits may rely on using the North American Industry Classification System (NAICS) 6 digit codes for a reasonable, good faith interpretation. The notice gives the example of NAICS code for income from advertising, indicating that all such advertising acitivity might be considered one unrelated trade or business activity.
Input for nonprofits can help inform whether the IRS can rely on NAICS codes to define activities within the same trade or business. Our colleagues at the National Council of Nonprofits give the example of different NAICS codes for rental income from banquet hall and rental income from a vacant lot used for an outdoor banquet.
The notice also addresses when to treat various investments as a single trade or business or several. This includes partnerships that may engage in multiple lines of business. In the interim, the IRS proposes treating revenue from a partnership as a single trade or business if one of two tests is satisfied. There is a de minimis test, where the nonprofit's ownership interest is 2 percent or less, and a control test where the nonprofit has no more than 20 percent ownership interest and no control over the partnership's operations. This rule applies between August 21, 2018 and 2019.
The notice also addresses treatment of debt-financed income, application of net operating losses, and other substantive issues of concern to various members of the nonprofit community.
The National Council of Nonprofits submitted comments in response to the rulemaking
Transportation fringe benefits
TCJA requires payment of UBIT on particular expenses for employee fringe benefits. Previously, for-profit businesses could deduct expenses for employee fringe benefits. In most cases, these activities were not subject to taxation for tax-exempt organizations and no deduction would be necessary. However, TCJA applies the same rules to fringe benefits for nonprofit and for-profit companies. As a result, for-profit companies are no longer allowed to deduct these expenses and nonprofits are now taxed for these benefits.
Taxed benefits may include paying for employees' bus or transit passes. This seems to apply to both payments made by employers and funds deducted from employees' paychecks into pre-tax qualified plans. Employers that pay for parking lots or parking spaces for employees may also have to pay UBIT on those benefits. Even though they are not required for file Form 990 in general, churches are required to file Form 990-T and pay taxes on any of these benefits they provide to employees.
IRS Temporary Guidance
As requested by nonprofit sector leaders, the IRS has issued temporary guidance (see Notice 2018-99 and Notice 2018-100) on the previously mentioned transportation tax established by the 2017 tax law:
- Nonprofits are exempt from filing Form 990-T if they have less than $1,000 of tax liability attributable to transportation fringe benefits for employees.
- 2018 tax penalties will be waived for nonprofits that did not submit quarterly estimated tax payments for transportation benefits. Taxes will still be due when nonprofits file their next Form 990 (or when nonprofits submit UBIT payments at the end of the fiscal or calendar year);
- Parking spaces that are reserved for employees are taxed but nonprofits may remove reserved parking signs by March 31, 2019 to avoid taxes retroactive to January 1, 2018;
- If the public uses more than 50% of parking spaces available to both employees and the public, then expenses for the whole lot are exempt.
- The guidance does not address how to calculate taxes on nonprofits that pay for employees’ transit passes.
The IRS will accept public comments on this guidance between December 24 and February 22, 2018.
Actions you can take
Advocate for legislation to repeal the transportaton tax. Several bills have been introduced to address either the separate trade or business UBIT provision, fringe benefits, or both. It's unclear whether Congress will try to make changes that modify provisions of TCJA in 2018.
- Nonprofits Support Act (H.R. 6037)- repeals both provisions
- Lessen Impediments from Taxes for Charities (LIFT) Act (H.R. 6460/S.3332)- repeals the fringe benefit provision. Congressman Lamborn has co-sponsored the bill.
- Stop the Tax Hike on Charities and Places of Worship Act (H.R. 6504)- repeals the fringe benefit provisions. Increases the corporate tax rate from 21 to 22 percent.
For more information on this issue, also check out the following resources: