As the midterm elections are nearly here, it’s impossible to miss the warring campaign ads about the new tax law. Some candidates are touting the benefits and others the dire consequence. But what none of the candidates mention is that charitable organizations have actually seen a tax increase as a result of that “tax cut” legislation.
The changes to unrelated-business income taxes (or UBIT) for nonprofits is no one’s favorite topic to talk about. That does the nonprofit world a disservice, and it is likely to do us real harm.
Named the “Tax Cuts and Jobs Act."the 2017 tax law was intended to encourage job growth. But by increasing taxes on nonprofits, the law actually hinders job creation for the sphere of the economy that employs more Americans than all but two other industries — retail and manufacturing.
As the American Institute of CPAs has said about one particular UBIT change, “The burden of this new provision on tax-exempt organizations is substantial, and nearly all tax-exempt organizations are affected.” Much more significantly, these tax increases will hurt the millions of Americans who depend on charitable organizations for education, housing, economic opportunity, disaster relief, spiritual development, scientific advances, arts, culture, and democratic values.
The average American assumes that tax-exempt organizations are exempt from taxes. But as many nonprofit leaders know, nonprofits pay many levies, including a tax on business activity that extends beyond their charitable purpose. That’s where UBIT comes in. The idea behind UBIT had always been: “When charities act like a business, they get taxed on their profits like one.” That made sense for over 60 years, but it all changed late last year.
Transportation Benefits
Under one provision of the 2017 tax law, Congress required charities to pay UBIT not just on their income but on any money they spend to provide transportation benefits to their employees, such as parking or transit passes. They are even required to pay UBIT if they let employees use pretax funds for those purposes. This new transportation-benefits tax is a gross misapplication of the UBIT law’s original purpose.
A local food pantry could now be forced to pay what amounts to a corporate income tax simply because it lets workers park in a shared parking lot. If an employee of a domestic-violence prevention center puts $100 of pre-tax salary onto a public-transit card, her employer could now owe an extra $21 per month to the federal government. That might not seem like a lot, but with nearly 12 million nonprofit employees nationwide, it could mean a big chunk of charitable resources being diverted to government coffers. Even charities in cities that require all employers to provide these benefits will face this new tax burden.
What’s more, religious organizations, which have long been exempt from filing with the IRS, will now have to track, administer, file, and pay these taxes, increasing their administrative burden.
Profits and Losses
As if this fringe-benefit tax wasn’t enough, Congress enacted yet another tax increase on charities in the 2017 law.
Under prior law, a charity that profited from one business activity didn’t owe UBIT if it lost an equal amount on another business activity. For example, a community arts center that made money in its gift shop could offset those profits if it lost money on a piece of land that it owned. This is akin to how businesses generally calculate their taxes.
The new tax law, however, says charities are now required to calculate their taxes separately for each activity. The arts center owes taxes on its gift shop even if it loses money elsewhere. Congress’s elimination of this basic accounting flexibility for charities amounts to nothing more than a cynical revenue grab from organizations least able to spare the cash.
Delay Effective Date
We all know the “tax man” is coming. Yet there are still significant questions that the Department of the Treasury must answer before charities can adequately comply with these new rules. Ultimately, we believe the new rules are unnecessary and unfair, but at the very least, either Congress or Treasury must delay putting them into effect until organizations receive more clarity.
Even when Treasury does act, there is no level of guidance or adjustment that can make these tax increases acceptable. These provisions of the tax bill should be repealed so that charitable organizations across the country can spend less time and fewer resources paying federal taxes and more time focused on building up their communities and improving the natural world.
In these final weeks leading up to elections, candidates and elected officials are especially receptive to hearing about the needs of their communities and voters. Take advantage of this window by letting them know your employees, donors, and constituents need their help to delay and repeal these laws that hurt your community.
It’s time to tell Congress members to fix this mess they have created for charities across the nation.
Jeff Moore is chief strategy officer at Independent Sector and has served as a senior adviser to the secretary of Defense and as legislative director to Rep. Thomas Downey, Democrat of New York.
