Exempt Organizations May Be Able to Bypass New Tax

September 25, 2018

The lion’s share of the Tax Cuts and Jobs Act (TCJA), passed by Congress and signed into law in December of 2017, affected for-profit entities. But the legislation contains at least one provision that could have tremendous impact on your exempt organization: the taxation of employee benefits like parking and transportation.

While a deductible business expense for operating purposes, these benefits are now also considered Unrelated Business Income (UBI) for tax exempt corporations, which is taxed at the new 21 percent corporate rate. This means you could be on the hook for new taxes starting with the 2018 tax year. If you’re not already filing a Form 990-T to account for other UBI, you’d have to submit one this year for your parking and transportation benefits (if they exceed $1,000 or more of gross income).

Minimizing Your Taxes

As we told you earlier in the year, it’s taken some time to unpack the TCJA and gauge its effect on taxpayers. This new tax on exempt organizations is a good example of something that wasn’t glaringly obvious at first.

But there may be a way to minimize its impact on you. A document released by the IRS and Treasury Department late in August of 2018, Notice 2018-67, contains new information that may help reduce any Unrelated Business Income Tax (UBIT) that you owe for parking and transportation benefits. In fact, you may be able to erase it completely.

If your exempt organization is engaged in one or more unrelated trades or businesses, you can net transportation and parking expense income against other Unrelated Business Income. Furthermore, you can use prior year net operating losses to offset this income.

Unsettled Issues

There are other related issues still up in the air. We’re watching for further guidance from the IRS and the Treasury Department that will make all of this clearer. In the meantime, we can start a conversation with you about how this piece of the TCJA might affect your tax-exempt organization. We would, for example, keep you updated on additional clarification that the IRS and Treasury Department provide. We can also look at the structure of your unrelated trades or businesses to start pinpointing relevant areas of concern.

We’re heading into the busy fourth quarter of 2018, and we don’t want this issue to get lost in the shuffle. Connect with us soon, and we can start planning for this year’s tax preparation.

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