CalNonprofits Articles

The new federal tax law signed last December included a big surprise for nonprofits and churches related to employee benefits.

If your nonprofit provides employees a transportation benefit (such as a monthly amount for commuting), a parking reimbursement at work, or gym benefit, that amount is now taxed as if it were unrelated income (despite the fact that it’s actually an expense).

It sounds confusing, and it is.

If your nonprofit spends — let’s say — $20,000 per year in such employee benefits, then you must report $20,000 as unrelated business income and pay 21% taxes on it (UBIT — Unrelated Business Income Tax). You will have to file Form 990T and pay $4,200 (21%) in taxes as calculated on the 990T. With this extra 21% tax, your cost of providing these benefits rises to $24,200.

Prior to the new tax law, UBIT had not impacted most nonprofits. If, for example, your senior services nonprofit earns money by selling books related to Alzheimer’s, caregiving and retirement, then that income is related to your mission and is exempt from corporate income tax. If, however, the same nonprofit buys a restaurant (unrelated to its mission), the income from the restaurant would be unrelated, and the nonprofit would have to pay income taxes on it. This new tax applies only to nonprofits, and in fact, it doesn’t apply to a nonprofit’s unrelated business which is regularly carried on and which is already reported separately.

Help fight this new “parking tax” on nonprofits

In addition to the illogical and the harmful effects of this law, the language is vague in several parts. For example, the League of American Orchestras has pointed out that it is unclear whether the tax would apply to reimbursing musicians for travel to performance locations in other cities.

Because repealing this law is unlikely to happen during this election year, the new UBIT Coalition — CalNonprofits, National Council of Nonprofits, the American Institute of Certified Public Accountants (AICPA), the American Society of Association Executives (ASAE), and 33 others are calling on the Treasury Department and the IRS to delay new UBIT liabilities unless and until the government provides clear guidance to nonprofits on how to implement this new tax.

The Coalition is also calling on nonprofits to contact their members of Congress about this new tax, and to ask them to let the Treasury know they would like to see a delay. Coalition members are finding some responsiveness with both Republican and Democratic representatives, including through several bills being introduced. The Nonprofits Support Act, H.R. 6037, introduced by Representative Michael Conaway (R-TX), would repeal both of the new UBI taxes. Representative Mark Walker (R-NC) introduced the LIFT for Charities Act that would repeal the new tax on certain parking and transportation benefits. And, Representative Jim Clyburn (D-SC), is expected to introduce the Places of Worship and Charitable Organizations Tax Fix Act to repeal the transportation benefits tax.

While introducing legislation is a positive first step, we will need to keep the pressure on. Here’s three steps to take:

First: talk with your auditor (if you have one), accounting staff and board finance committee about the changes. Don’t wait for the audit to start to find out whether your auditor thinks you have to pay these taxes. You may need to be planning now for how to pay them.

Second: join us in the campaign to seek either a delay or better guidance. Go to this page on the IRS webpage, type in “Form 990T” in the “Form/Instruction/Publication Number”, and write comments to the IRS, explaining why you are concerned about this new tax and what it will mean for your nonprofit. Please send your comments to Nancy Berlin as well so we can work together and get clear answers about how this problem is going to get fixed.

Third: share the comments you submit and the questions you have about the new taxes with your Senators and Representatives and ask them to urge the Treasury Department and IRS to delay these new taxes.

This is a confusing, poorly-written, disastrous, and unfair tax. Let’s stop it.

If you have any questions about this campaign, please contact Nancy Berlin, Policy Director at CalNonprofits 

Other references:

Attorney Gene Takagi gives more details on the new tax, and explains that if your organization has multiple unrelated business activities, then the new tax law also means you can no longer use losses in one activity to offset profits in another activity: The New Tax Law and Its Impact on Nonprofits – Part 2

CalNonprofits letter to the IRS

National Council of Nonprofits letter to the Treasury Dept and IRS 

American Institute of CPAs letter to the letter to the Treasury Dept. and IRS

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