December 12, 2018
Under Section 512(a) of the Internal Revenue Code, nonprofits are subject to tax on gross income, minus directly connected expenses, for activities that constitute an “unrelated trade or business.” The Code offers a three-pronged test for determining whether a particular activity is an “unrelated trade or business.” The activity must be (1) a trade or business that is (2) regularly carried on, and (3) isn’t substantially related to the organization’s exempt purpose. There are many exceptions to what activities qualify as “unrelated trade or business,” including exceptions for volunteer services.
Changes Under 2017 Tax Reform
- Requires requires tax-exempt organizations (EOs) to treat each trade or business activity separately for UBIT purposes*; and
- Subjects certain employer-provided fringe benefits (such as transportation and on-premises gyms and athletic facilities) to unrelated business income tax—which tax-exempt entities are required to pay.
* Whereas under previous law, separate trade and business activities could be used to offset UBIT liability (by offsetting losses with income), under current law, there are fewer opportunities to do so—with the only offsets allowed being between different tax years for the same trade or business activity.
The Council has concerns about the added administrative burden these provisions will place on foundations—especially those which were not previously subject to UBIT.
Resources and Bills:
- Council Summary of Notice 2018-99 (Interim Guidance for Calculating UBIT on Transportation/Parking Benefits)
- Treasury Notice 2018-99 (Interim Guidance for Calculating UBIT on Transportation/Parking Benefits)
- Council's Comments on Notice 2018-67 (Proposed Rules for "Siloing" UBIT)
- Treasury Notice 2018-67 (Proposed Rules for "Siloing" UBIT)
- LIFT for Charities Act of 2018 (S. 3332)
- Protect Charities and Houses of Worship Act of 2018 (S. 3317)
- Stop the Tax Hike on Charities and Places of Worship Act of 2018 (H.R. 6504)
- Taxpayer First Act of 2018 (S. 3246)
- LIFT for Charities Act of 2018 (H.R. 6460)
- Nonprofits Support Act of 2018 (H.R. 6037)
- Letter to Congress Outlining Concerns with New UBIT Provisions - July 11, 2018
- Letter to Treasury/IRS on Implementation of New UBIT Provisions - May 16, 2018
- House Bill H.R. 1 – Tax Cuts and Jobs Act
- Council Analysis of H.R. 1
- House Bill H.R. 1 – Tax Reform Act of 2014
- Council Summary of Tax Reform Act of 2014