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Taxes on Transportation Benefits and Unrelated Business Activities

Jan 15, 2020

Thanks to the efforts of nonprofits throughout the country, Congress approved, and the President signed, legislation to repal the tax on transportation benefits provided by nonprofits to their employees.

Because the tax is repealed retroactively, nonprofits that paid the transportation tax will be able to apply to the IRS for a refund. The IRS has not issued guidance yet on how a refund can be claimed. Several House members have sent a letter to the IRS commissioner requesting an expedited process for issuance of refunds.

Unfortunately, no action has been taken in 2019 on the Unrelated Business Income Tax (UBIT) on nonprofits' separate trades and businesses.

Background

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 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. Although these new provisions related to UBIT took effect on January 1, 2018, The Internal Revenue Service (IRS) and the Treasury did not offer guidance until the end of 2018 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. 

IRS transitional rules

On August 21, 2018, the IRS proposed interim and transitional rules for determining separate trades or businesses for purposes of UBIT liability. 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. North American Industry Classification System (NAICS) 6 digit codes can be used 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.

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. Read the National Council of Nonprofits' comments in response to the rulemaking for more infomation.

Transportation fringe benefits

TCJA required 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.

The IRS did issue temporary guidance on the transportation tax, which did the following: 

  • Exempted nonprofits from filing Form 990-T for less than $1,000 of taxes on transportation benefits for employees;
  • Waived 2018 tax penalties and made taxes dues when nonprofits file their next Form 990;
  • Taxed parking spaces reserved for employees after March 31, 2019;
  • Exempts parking lot expenses if more than 50% of parking spaces are also available for public use;
  • Did not  address how to calculate taxes on nonprofits that pay for employees’ transit passes.

On Feb. 22, 2019, Colorado Nonprofit Association submitted comments in response to this guidance.

Our comments

More information

For more information on this issue, also check out the following resources:

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