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.
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 appies 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.
Actions you can take
1. Provide feedback by Thursday Nov. 8 on a national survey to understand how nonprofits will be affected. This confidental survey will inform federal advocacy on this issue and has been developed by researchers from the Urban Institute and George Washington University.
2. Comment on IRS transitional rules defining separate trades or busineses prior to December 3. We suggest reviewing the NAICS Codes and comments on whether they are a reasonable method for determining separate trades or business activities for your organization. Comments should be emailed to Notice.Comments@irscounsel.treas.gov with reference to Notice 2018-67 in the subject line.
3. Ask the IRS to delay enforcement of both UBIT provisions until on year after issuing final guidance. Use the public IRS tax comment form to ask for a delay. Under Form/Instruction/Publication Number, type in Form 990-T Visit Tips and Tricks: Regulatory Comments for more tips on wiriting effective comments.
For legal, policy, and practical reasons, and consistent with established precedent, Treasury and the IRS should immediately delay implementing those two new UBIT subsections until one year after Final Rules are promulgated, to provide both the necessary official guidance for compliance and a reasonable transition period for nonprofits to develop the necessary record-keeping systems.
4. Advocate for legislation to address one of both UBIT provisions. 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: