Nonprofit Radio: Unrelated Business Income Tax and Fringe Benefits

I’ll be on Nonprofit Radio this Friday, June 1, at 10:30 am PT / 1:30 pm ET talking with host Tony Martignetti about the unrelated business income tax and how charities who provide certain transportation- or parking-related fringe benefits to their employees may now be required to pay the tax even if they have no unrelated business income.

Basics of the Unrelated Business Income Tax

Net income from unrelated business activities will generally be subject to the unrelated business income tax (UBIT) if the activity constitutes:

  1. a trade or business;
  2. that is regularly carried on; and
  3. is not substantially related to the organization’s exempt purpose.

This general rule is subject to several exceptions and modifications. You can read more about the UBIT laws at Unrelated Business Income Tax Explained and Unrelated Business Taxable Income – What Doesn’t Count?

“Tax Cuts and Jobs Act”

Tony and I previously discussed the “Tax Cuts and Jobs Act of 2017” as the most significant change to the Internal Revenue Code in over 30 years based on tax reform advocated by congressional Republicans and the Trump administration despite its ill effects on nonprofits. See The New Tax Law and Its Impact on Nonprofits – Part 1 and Part 2. One of the impacts of  the Act on many nonprofits is described in Section 512(a)(7) of  the Internal Revenue Code:

Increase in unrelated business taxable income by disallowed fringe

Unrelated business taxable income of an organization shall be increased by any amount for which a deduction is not allowable under this chapter by reason of section 274 and which is paid or incurred by such organization for any qualified transportation fringe (as defined in section 132(f)), any parking facility used in connection with qualified parking (as defined in section 132(f)(5)(C)), or any on-premises athletic facility (as defined in section 132(j)(4)(B)). The preceding sentence shall not apply to the extent the amount paid or incurred is directly connected with an unrelated trade or business which is regularly carried on by the organization. The Secretary shall issue such regulations or other guidance as may be necessary or appropriate to carry out the purposes of this paragraph, including regulations or other guidance providing for the appropriate allocation of depreciation and other costs with respect to facilities used for parking or for on-premises athletic facilities.

Listen in to learn what this means and what we still don’t know.

Comments to the IRS / Treasury

The National Council of Nonprofits, the American Institute of Certified Public Accountants, the American Society of Association Executives, and many others in calling on the Treasury Department and the IRS to delay new UBIT liabilities unless and until the government provides clear guidance. I encourage you to send your comment to the IRS online about delaying implementation of the UBIT rules. It’s simple. The comment form requires just your email, the name of the applicable form (“Form 990-T”), and your brief comment. The National Council of Nonprofits offers the following suggested comment:

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.

Resources

UBIT: How the Beatles Predicted Your 2018 Tax Increase (Independent Sector)

Increases to unrelated business taxable income by amount of certain fringe benefit expenses for which deduction is disallowed (RSM US LLP)

Certain Fringe Benefits Provided by Not-for-Profits May Be Considered Taxable Income (Moss Adams)

Taxing Tax Exempts and Other Oxymorons in the New Tax Law (National Council of Nonprofits)

Letter to Treasury Secretary and IRS Commissioner re: Urgent Request to Delay Implementation of the New UBIT Provisions in Public Law No. 115-97 (National Council of Nonprofits)