By: Derek Meyer
The Tax Cuts and Job Act of 2017 added provisions that may cause nonprofit entities to see significant changes in how and when they are taxed. Unrelated business income (UBI) for tax-exempt entities is defined as income generated by a trade or business that is regularly carried on and is not substantially related to furthering the exempt purpose of the organization. This income is subject to unrelated business income tax at corporate tax rates.
With the change in tax code, tax-exempt entities will now be subject to unrelated business income tax (UBIT) when providing certain qualified fringe benefits to employees. Qualified transportation fringe benefits include commuter transportation such as bus, train, or other transit passes and qualified parking. Qualified parking is parking an organization provides to their employees where the employee would otherwise have to pay. Employees who park in lots or garages on an entity’s property where there is no parking fees otherwise charged are not considered to be receiving a fringe benefit. However, entities that pay for employee parking at a facility that they do not own will be subject to these taxable fringe benefit rules. Parking arrangements that are owned by the nonprofit entity where the general public is charged a fee to park are already reported as UBI, and therefore costs attributable to the amount already included in UBI do not have to be included in the amount of UBI under the new provision. If an entity wishes to continue to provide these benefits tax free to their employees, UBIT will apply. For an entity to avoid this tax, the employee will need to pay for these benefits with after-tax dollars.
Some other changes to note from the Tax Cuts and Jobs Act include:
- The federal corporate tax rate, which is the UBIT rate, is now a flat rate of 21%.
- Organizations with multiple unrelated business activities can no longer use losses from one activity to offset profits from another. Going forward, each activity is viewed separately for unrelated business income tax purposes.
These provisions became effective on January 1, 2018. Entities who believe they will be subject to tax for the 2018 tax year should consider making estimated tax payments to avoid underpayment penalties. For calendar year end entities, 2018 estimated tax payments are due on April 17, June 15, September 15, and December 17, 2018. If you believe that this provision may affect your entity, please contact HBE at (402) 423-4343 to discuss further.