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From the CUNA Advocacy Blog – The Tax Cuts and Jobs Act of 2017 (TCJA) requires the separate computation of UBIT for tax-exempt organizations with more than one unrelated trade or business. Before the TCJA, when a tax-exempt organization operated more than one unrelated trade or business activity, losses generated by one business could be used to offset income derived from another. Now, losses generated by one unrelated trade or business cannot be used to offset income derived from another unrelated trade or business. Clearly, this results in an increase in unrelated business taxable income and must be reported in a revised IRS Form 990-T. This provision became effective on January 1, 2018.
All credit unions are exempt from the federal corporate income tax under §501(c)(1) of the Internal Revenue Code for federally-chartered credit unions and under §501(c)(14)(A) for state-chartered credit unions. Nevertheless, income at state-chartered credit unions that the Internal Revenue Service (IRS) deems to be unrelated to the credit union’s tax-exempt purpose is subject to taxation under §511-513; federal credit unions are not subject to UBIT requirements because they are instrumentalities of the federal government and subject to restrictions on activities imposed by Congress.
Income that is subject to UBIT is defined as any net income derived from any “unrelated trade or business” – defined as “activity not substantially related to organization’s exempt purpose.” Income is “substantially related” if it “contributes importantly to accomplishment of the organization’s exempt purposes.” UBIT was designed to prevent unfair market competition from tax-exempt entities against for-profit entities.
The IRS requires that state-chartered credit unions file annual Form 990s, like most other tax-exempt entities. These credit unions must also file a Form 990-T (UBIT Form) if the tax-exempt entity has $1,000 or more of unrelated business taxable income to report.
The TCJA also requires tax-exempt organizations currently subject to UBIT (including state-chartered credit unions) to pay UBIT (effectively 21 percent) on certain employee fringe benefits, namely transportation and parking benefits, as well as on-site gyms and athletic facilities. For profit businesses are no longer allowed to deduct these and other employee benefits. The definitions and IRS guidance regarding this provision is severely lacking in clarity. CUNA and its allies have repeatedly asked the Treasury Department to issue clear guidance on how organizations should value transportation and parking benefits, but so far tax-exempt groups have no clear instructions on how to file. However, the IRS interim guidance released in August stated that any UBIT arising from these fringe benefits will not be subject to the “silo” rule. This means that tax-exempt entities operating more than one unrelated business will be able to calculate their total net tax obligation for these fringe benefits and apply it against any existing UBIT tax liability.
Further, some cities, including Washington, DC, New York, and San Francisco, have mandated employer-provided pre-tax mass transit benefits. As a result, employers in those cities cannot avoid the new tax. Nationwide, thousands of credit unions and other not-for-profit entities that have historically had very limited contact with the IRS and have also never needed this type of administrative expertise, are now suddenly required to begin filing tax returns and pay income tax. It has been estimated that two million employees living in such jurisdictions have these mandated benefits. In addition, this new tax on fringe benefits basically taxes an expenditure made by an employer, not sales or other revenue-generating activity.
On October 22, 2018, the IRS released draft instructions for the updated Form 990-T. It is unclear from the draft instructions whether such tax-exempt organizations are simply required to pay the new tax or are also required to file a Form 990-T income tax return. In the draft instructions for Form 990-T, the IRS seems to propose relief for not-for-profit businesses reporting a “parking tax only” UBIT liability. The IRS seems to infer that only some sections of the Form 990-T would need to be completed. As the proposed tax instructions appear contradictory to the existing Form 990-T filing regulations, it might be appropriate for any IRS changes to be published in the Federal Register where the current filing obligation resides. In addition, given the confusion over the parking and transportation provisions in the TCJA, CUNA believes that stakeholders should be given the opportunity to comment before new filing obligations and potential failure-to-file penalties are finalized.
In early October, the IRS released more interim guidance regarding the meals and entertainment UBIT provision in the TCJA. Accordingly, not-for-profit businesses may only deduct meals and entertainment as a business expense if they have unrelated business income to deduct these expenses against.
On November 1, 2018, CUNA and other tax-exempt organizations wrote Capitol Hill lawmakers regarding the new UBIT provision on transportation fringe benefits. The letter stated, “While full repeal is preferable, the undersigned tax-exempt organizations request that you strongly consider the following:
- A delay in the effective date of this provision to provide organizations time to establish new accounting systems to value and track such benefits, which have never been subject to tax before;
- A carve-out for tax-exempts required by law to provide parking and/or other qualified transportation benefits to employees; and
- For lawmakers to encourage the Treasury Department to issue guidance on valuing these benefits, which in many cases have no readily ascertainable value.”
Further, it continues, “We request a delay in the effective date for at least a year, and further until Treasury and the IRS have issued guidance explaining how to implement this new tax. This new law is forcing many tax-exempt employers, including churches and other houses of worship, to file federal Form 990-T for the first time regardless of whether they engage in any unrelated business activity. Many organizations have missed filing deadlines or, not knowing how to comply, have misfiled Form 990-T. A delay of this provision would hold these tax-exempts harmless until they have clear instructions on how to file.”
CUNA believes that the IRS and Treasury should delay or not require compliance with these new UBI taxes until the IRS issues clear and final rules. That will give not-for-profit entities the clarity and time needed to correctly implement the changes, buy or update needed software, and time to train staff on the new changes.