If your foundation pays for its employees’ parking or transit passes or allows employees to set aside pre-tax dollars for their transit costs, you may be surprised to know that your foundation may now owe the IRS a 21% unrelated business income tax on those payments. And – surprise! – your first payment was due on April 15, so you may face a late-filing penalty, too. If you’re startled by this news, you’re not alone.
Hidden in the Tax Cuts and Jobs Act are two new unrelated business income taxes (UBIT) on foundations, charitable nonprofits, and houses of worship that are surprising just about everyone. One provision requires tax-exempt employers to pay a 21 percent income tax on their expenses paid for employee fringe benefits for transportation. Another imposes a 21 percent tax on income from each (undefined) “separate” “trade or business.” Both taxes became effective January 1, 2018, with quarterly tax payments due beginning last April. The provisions are so vague and ambiguous that compliance is impossible. To date, the government has not told anyone which transportation expenses are taxable, or what activities constitute a separate trade or business.
What Your Foundation Can Do
Foundations are permitted to provide input on the implementation of the law (commenting on regulations/proposed regulations, etc.) without crossing into lobbying restrictions. Further, tax-exempt entities have a right to insist that the government provide both the guidance needed to comply and a transition period for organizations to develop the necessary record-keeping systems. For more information, see this statement and this blog post by the National Council of Nonprofits. Washington Nonprofits has raised this issue with the IRS as well as our entire congressional delegation. But the IRS needs to hear your voice too.
Go to the “comment form” on the IRS website. (In the line for Form/Instruction/Publication Number, type "Form 990-T.") Insist that the government delay implementing these new UBIT subsections until one year after it issues Final Rules providing both the necessary guidance for compliance and a reasonable transition period for organizations to develop the necessary record-keeping systems. Feel free to customize this language:
- "For legal, policy, and practical reasons, and consistent with established precedent, Treasury and the IRS should immediately delay implementing the two new UBIT subsections, retroactive to January 1, 2018, 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."
Help Build Momentum
Many organizations – including, the National Council of Nonprofits, American Bar Association, American Institute of Certified Public Accountants, American Society of Association Executives, and Council on Foundations – have submitted detailed comments. While those organizations articulated legal reasons, the IRS needs to hear from more organizations, including your grantees. Please share Washington Nonprofits’ action alert with your grantees, or let us know if we can provide you with additional materials.
Laura Pierce is the Executive Director of Washington Nonprofits, the state association for all nonprofits.