UBIT Rules and New Requirements
Urgent concerns about new UBIT rules
The comprehensive tax reform provisions signed into law in December 2018 include a new requirement for nonprofits to pay Unrelated Business Income Tax (UBIT) equal to 21% of the value of commuting and parking benefits provided to employees. This tax on nonprofit expenses is unprecedented and prompts many questions about how to comply with the new rules. While only limited guidance has been issued by the Internal Revenue Service (IRS) to clarify which benefits are subject to the tax and how to value certain benefits, the new requirements officially took effect beginning on January 1, 2018. Momentum is gaining in Congress to repeal the provision.
Since many orchestras offer parking and transportation benefits for staff and musicians, the costs of this new tax on nonprofits could be considerable. And, the IRS may choose to apply the tax whether nonprofits pay for benefits directly or employees pay them through a pre-tax compensation reduction agreement. The League has partnered with the broader nonprofit sector in meetings with officials at the U.S. Treasury Department, contributed to a Politico article on this topic, was featured in a national podcast by Independent Sector, providing an overview on this complicated area of tax policy, and has filed comments on behalf of orchestras to Treasury and IRS leaders requesting a delay in implementation and an immediate formal public rule-making process to clarify many outstanding questions about the new tax.
IRS issues limited guidance amidst calls for delayed implementation
On December 10, the Internal Revenue Service issued interim guidance (2018 – 99) aimed at addressing how nonprofits should value their liability for the new 21% Unrelated Business Income Tax (UBIT) on employee parking benefits in 2018. The guidance is temporary, will be followed by formal regulations, and does not address outstanding questions related to how the tax also applies to employee commuting benefits. A separate IRS notification (2018 – 100) offers to waive underpayment penalties for nonprofits that have not previously been required to report UBIT on Form 990-T and did not make estimated payments in 2018. “Treasury is sensitive to the concerns of the tax exempt community, and hopes this guidance can significantly limit the impact on non-profit groups,” said Treasury Secretary Steven Mnuchin in a news release. Nonprofits are united in asking for a halt in administering the new tax. Senators Chris Coons (D-DE) and James Lankford (R-OK) sent a letter to the Treasury Department asking for a delay in implementation. On February 22, 2019, the League filed comments to the Internal Revenue Service, asking the agency to use its authority to delay implementation of the UBIT until one year after a formal rulemaking process is complete.
The new tax on nonprofits is diverting substantial nonprofit resources away from charitable activity, according to the report, “How the TCJA’s New UBIT Provisions Will Affect Nonprofits.” On January 21, Independent Sector released the report, produced by the Urban Institute and based on a November 2018 survey, estimating the impact of the 21% Unrelated Business Income Tax (UBIT) on employee parking and commuting benefits. Here are some key findings:
- The highest share of nonprofit organizations that participated in the survey and reported providing transportation benefits were those focused on the arts, culture and humanities (31 percent), followed by those focused on public and social benefit (16 percent).
- Organizations reported an average new transportation tax payment of $10,456.
- Related administration costs were, on average, an additional $1,346 per organization.
- Nonprofits reported a high level of confusion regarding whether the new tax applied to their organizations, and how to calculate their tax liability.
Congress considers repeal
Meanwhile, leaders in Congress are moving to repeal the provision. In 2018, Congress considered, but did not pass, a year-end tax package that included repeal of the UBIT on parking and commuting benefits. This development was important because the package was endorsed by members of Congress who had also supported the tax reform bill that created the new UBIT provision. Several provisions have been introduced in 2019:
- Representative Michael Conaway (R-TX) introduced HR 513
- Representative James Clyburn (D-SC) introduced legislation HR 1223 with 30 original cosponsors
- Senator Sherrod Brown (D-OH) introduced S 501
- Senators Chris Coons (D-DE) and James Lankford (R-OK) introduced S 632
You can take action today by urging your elected officials to ask Treasury to delay implementation.