Congress Finally Eliminates UBIT for Nonprofits
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Nonprofits that assist their employees with parking and other transportation fringe benefits can breathe a sigh of tax relief. The much-maligned tax on not-for-profit organizations is on its way out. You can read more of JLK Rosenberger’s take here about a tax package that attempted to prevent this burdensome tax on nonprofits as it was making its way through Congress near the end of 2018.
Fast forward to the end of 2019 when Congress finally repealed a portion of 2017’s Tax Cuts and Jobs Act (TCJA) that affected the unrelated business income tax (UBIT) of 21% on nonprofit employers if they assist employees with transportation benefits. Due to the burdensome cost of administrative tasks and compliance regulation, thousands of nonprofit organizations complained — and Congress decided to listen.
What extra costs were causing problems?
The TCJA provision stated that nonprofits must count disallowed deduction amounts paid for transportation benefits such as transit passes and parking costs in their UBIT calculations. UBIT applies to business income that isn’t directly connected to the organization’s tax-exempt purpose, but the problem was that by continuing to provide transportation benefits previously considered part of the employee benefits package, nonprofit organizations were now liable for an additional and cumbersome tax.
One example of unexpected administrative costs was that employers were required to assign a value to parking spaces used by employees. Such requirements were both time-consuming and burdensome, and the additional costs and logistics required nonprofits to divert funds away from their tax-exempt mission. The burden was more substantial than expected, the nonprofit coalition’s Independent Sector estimated that both the tax and related administrative requirements cost nonprofits an average of $12,000.
Thankfully, the repeal of the UBIT tax will also be retroactive. Although specific details are not yet available, any nonprofit organization that paid the tax on transportation benefits in both 2018 and 2019 can expect to get their money back.
Any other great news?
Repealing the UBIT isn’t the only recent change to legislation that will benefit nonprofits. Congress also streamlined the foundation excise tax in December. The current two-tiered tax that many foundations disliked and argued against will be replaced with a 1.39% revenue-neutral tax. Furthermore, many expect Congress to address other nonprofit concerns, including the introduction of a universal charitable deduction.
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