By: Philip Hackney
In the new tax act of 2017, Congress imposed an unrelated business income tax on transportation, parking, and athletic facility fringe benefits that a nonprofit provides to its employees. I write because I suspect there are universities or hospitals or other large nonprofits out there (pension funds maybe) that offer these types of fringe benefits that are unaware that they must pay UBIT on the total value of these benefits at the end of the year. The law went into effect for taxable years starting January 1, 2018.
In Section 13703 of the bill, Congress promulgated the following new rule: UBIT “shall be increased by any amount for which a deduction is not allowable under this chapter by reason of section 274 and which is paid or incurred by such organization for any qualified transportation fringe (as defined in section 132(f)), any parking facility used in connection with qualified parking (as defined in section 132(f)(5)(C)), or any on-premises
athletic facility (as defined in section 132(j)(4)(B)).”
Another amendment to UBIT under Section 13702 of the bill will make this provision have more bite too. New section 512(a)(6) provides that a nonprofit must assess and pay tax on each individual unrelated business activity. This provision prevents the nonprofit from using a loss in one unrelated business activity to offset a gain in another. This is not unlike passive activity loss rules under section 469 in a sense. However, all passive activities can be used to offset other passive activities. On the whole, this likely makes nonprofits worse off than other typically situated investors, and is likely causing many nonprofits to reconsider how their UBIT activity is organized. Curious whether the IRS will pass regulations similar to passive activity legislation that allows a loss to be taken once a particular activity is sold. Lacking this provision penalizes nonprofits unfairly I think.
Nevertheless, the point for bringing this up is that there will be no way to use other losses to offset this particular activity. (What I mean by that is that the amount will be considered income simply as a result of its being paid. This is an odd conception of income). It’s also hard for me to think of ways to allocate costs like depreciation towards these activities to limit the tax.
Thus, any nonprofit out there, or state college or university, or pension fund that offers any of these types of fringe benefits without remuneration from their employee needs to evaluate how to adapt to this change in circumstance. Otherwise, they are likely accumulating a bill of 21% times the amount of these fringe benefits.
Because these benefits remain excludable from the employees income, it would seem that the best strategy will involve paying the employee a little more and then charging the employee pre-tax for these benefits. Be interested to hear if anyone has come up with a method for adapting to the change. My guess is that this is not a long term harm to nonprofits, but it is a trap for those who fail to adjust in the first or second years of the change. Not a great way to do legislation.
A side note is that previously for amounts under $50,000, a nonprofit faced a marginal rate of 15% under section 11 of the Code. Section 13001 of the Tax Act eliminates the progressive rates of the former corporate Code and makes it one flat rate of 21%. Once a nonprofit gets about $50,000 of UBIT, it then will have a rate cut generally.
In the bill, Congress maintained an employee’s right to exclude these amounts from income, but eliminated the ability of employers to deduct these amounts. This is probably the right result, otherwise there is a double deduction going on. It appears to me that there was an effort to make for profit and nonprofit employers pay the same costs associated with these types of fringe benefits. Probably not a bad idea on the whole. Nevertheless, I suspect there are workarounds for wealthier employees and that the less wealthy employees will bear the brunt of this change unfairly.
These are preliminary thoughts only. Would love to hear thoughts out there on these new UBIT provisions and their impact on nonprofit activities.