The Tax Cuts and Jobs Act of 2017 (TCJA) included provisions that directly impact nonprofits and other tax-exempt organizations. Although nonprofits are mostly exempt from federal income taxation, a few 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. Although these new provisions related to UBIT took effect on January 1, 2018, the Internal Revenue Service (IRS) and the Treasury did not offer final guidance until 2020 on how nonprofits should comply with this aspect of the new tax code.
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.
Proposed rules issued by the IRS in 2020 require nonprofits to use 2 digit North American Industry Classification System (NAICS) codes to categorize separate trades or businesses for calculation of UBIT. We submitted comments expressing support for the rules and opposition to the law.
The IRS issued final regulations on this matter on November 19, 2020.
Transportation fringe benefits
In the TCJA, Congress removed the ability of for-profit businesses to deduct expenses for employee fringe benefits and applied an income tax to these benefits for tax-exempt organizations. Rather than creating parity in this part of the federal tax code, this action created a new income tax on nonprofits' fringe benefit expenses.
In effect, charitable nonprofits were required to pay income taxes on employee parking spaces and transit passes. This rule applied regardless of whether the organization paid directly for the benefit or the employee paid for the benefit through payroll deductions. Churches would be required to pay these taxes as well and file Form 990-T even though filing Form 990 annually is optional for churches.
Temporary IRS guidance did not address transit passes. Regarding parking lots, it did exempt nonprofits from taxes and filing Form 990-T if more than 50% of their parking spaces are available for public use or if they had less than $1,000 of tax liability per year. On Feb. 22, 2019, we submitted comments on this guidance.
Thanks to the efforts of nonprofits throughout the country, the President signed legislation in 2019 to repeal the tax on transportation benefits provided by nonprofits to their employees. Because the tax is repealed retroactively, nonprofits that paid the transportation tax could apply to the IRS for a refund.
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