Legends? Sure. Tax policy seers for the nonprofit sector? Huh? It turns out that the Beatles predicted 52 years ago a situation many nonprofit organizations may find themselves in now when they sang, “if you drive a car, I’ll tax the street; if you try to sit, I’ll tax your seat; if you take a walk; I’ll tax your feet.” Despite fact that the 2017 Tax Cuts and Jobs Act promised lower taxes for employers, many nonprofits will see their tax bill increase in 2018.
Employee Benefits – “Penny Lane”
One of the most confusing provisions in last year’s tax bill is a new law charging nonprofits unrelated business income tax (UBIT) for employee fringe benefits. You may not think in terms of nonprofit employers providing “fringe” benefits to their employees in the same way as a corporate entity, but that’s exactly how the IRS views employee parking lots or on-site athletic facilities. According to the new law, nonprofit organizations will be required to pay taxes on these and other fringe benefits – and the tax even applies to nonprofits in communities that require them to provide transportation benefits.
Even if your organization has no other form of earned revenue, you still may need to file a Form 990-T to pay taxes on these employee benefits. The real shame is that some of these perks served as one of the few ways in which nonprofits could competitively recruit and retain talent – and to top it off, this is all particularly unusual, since UBIT is designed to tax nonprofit income, not expenditures.
Because this is an entirely new way to tax nonprofits through UBIT, experts still aren’t clear exactly how the IRS will interpret the law, making it difficult to judge how it applies to specific examples, such as that prime employee of the month parking spot. Until then, sector advocates are asking legislators to consider delaying when the law takes effect. Hear more about this in a recent episode of our Voices for Good podcast.
Silo Accounting for Earned Income – “Everybody’s Got Something to Hide Except Me and My Monkey”
Another provision in the 2017 tax bill prohibits nonprofits from using losses from one revenue-generating activity to offset the tax liability of a more successful one. This new restriction calculates UBIT by activity rather than for the total of the organization’s operations. Each activity is charged at a new 21 percent tax rate, which cannot be reduced.
Policymakers claim the changes to fringe benefits and the new silo accounting rules were made in terms creating more fairness within the tax code between nonprofit and for-profit entities. The truth is that for-profit organizations still have the ability to sharply reduce any tax liability through other mechanisms and deductions not available to tax-exempt organizations.
What Now? – “Help!”
The good news is that advocates are pushing back on the notion that equal treatment in statutory regulatory language is the same thing as equal treatment in practicality – and we know we have some work ahead of us to get the sector up to speed on what’s coming and how to prepare.
The even better news is that if your head is still spinning after reading about UBIT, there’s a wealth of resources below to help better contextualize the issues at play.
Yes, the new tax regime may have us all wishing for “Yesterday,” but with some work we can ensure that the “Taxman” doesn’t hurt our ability to serve our communities.
“That’ll Be the Day…”
- UBIT? You bet! – Voices for Good podcast
- Compliance Bulletin: IRS Updates Employer Guide for 2018 Tax Changes to Fringe Benefits
- Certain Fringe Benefit Expenses Treated as Unrelated Business Taxable Income – Ernst & Young
- New Unrelated Business Taxable Income Liability for Providing Certain Fringe Benefits, Ropes & Gray podcast
- Some Employers Can’t Abandon Newly Taxable Commuting Benefits, Tax Analysts