With a Deluge of New Nonprofit Taxes, a Trickle of Guidance

In case you haven’t heard, Congress created new tax obligations for nonprofits as part of the 2017 tax law. The explanations for them vary, but the bottom line is that they will divert billions of dollars away from charitable activity and into federal coffers. While concerning in its own right, this tax increase on the nation’s third largest employment sector is particularly alarming in a bill that was allegedly about job creation.

For months, the charitable community has been dissecting the particulars of these unrelated business income tax (UBIT) increases. Independent Sector has also joined a wide range of organizations in asking the Department of the Treasury to provide some clarity  and—to the extent possible—some relief for impacted nonprofits.

Last week, we finally received some interim guidance on one of these provisions: the requirement that nonprofit organizations calculate UBIT separately for each unrelated trade or business. Here are a few things that stand out from this notice:

  • While awaiting final guidance, organizations may rely on a “reasonable, good-faith estimate” of what constitutes a separate trade or business. This includes considering all activities occurring under the same six-digit North American Industry Classification System (NAICS) Code to be part of the same trade or business.
  • UBIT that would otherwise be owed for the newly created tax on nonprofit transportation fringe benefits can be offset by UBIT losses in an unrelated trade or business.
  • Treasury is eager to hear from the charitable community about this interim guidance. Submissions can be made to notice.comments@irscounsel.treas.gov by December 3, 2018.

There are still a lot of questions to be answered, but Independent Sector ultimately believes that Congress should repeal these tax increases on nonprofits. There are a number of bills that would do just that: Representative Michael Conaway (R-TX) and Senator Ted Cruz (R-TX) have each introduced legislation (H.R. 6037/S. 3317) to repeal both provisions, while Representative Mark Walker (R-NC) and Senator James Lankford (R-OK) have each proposed (H.R. 6460/S. 3332) repealing only the transportation fringe benefit tax. Representative James Clyburn (D-SC) has also introduced legislation to repeal the transportation fringe benefit tax (H.R. 6504).

Many legislators remain unaware of these provisions’ impact on our sector’s ability to serve our communities, and they need to hear from the nonprofits they represent. For assistance contacting your legislators, or to share how your organization may be impacted, please don’t hesitate to contact us.

Types: Blog, Policy Update
Global Topics: Administration, Public Policy, Voices for Good
Policy Issues: IRS Oversight, Nonprofit Operations, Tax & Fiscal Policy, UBIT