UBIT Rules and New Requirements

Urgent concerns about new UBIT rules

The comprehensive tax reform provisions signed into law last December 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 no 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.

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 recent 
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.

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.

Congress is considering a year-end tax package that includes repeal of the UBIT on parking and commuting benefits. And Senators Chris Coons (D-DE) and James Lankford (R-OK) have sent a letter to the Treasury Department asking for a delay in implementation.

You can take action today by urging your elected officials to ask Treasury to delay implementation and vote to repeal the new tax.