Looking for Certainty

24 July 2018 Published in News & Updates

The Problem for Nonprofits: The new tax law, which took effect on January 1, 2018, creates a number of significant liabilities for nonprofits but fails to provide certainty in how and when these new taxes apply. This uncertainty leaves nonprofits in critical need of a reprieve until the IRS and Treasury can issue formal guidance on how to calculate tax liabilities.

Many nonprofits already owe taxes as a result of this new tax law, detailed later on this page. Some nonprofits have already submitted quarterly-estimated payments, but without IRS guidance, these payments are more like best guesses that they are like estimates.

Using this Best-Guess Strategy for calculating tax liabilities forces nonprofits to either overestimate-and-overpay or underestimate-and-underpay their liabilities – creating a lose/lose situation. This confusion is costly. Overpayment diverts money from mission. Underpayment short changes future budgets and may potentially incur late-penalties. Lack of clarity surrounding these new taxes means that nonprofit accounting systems, bookkeeping software, and workplace reporting practices will require expensive updates, but without guidance on how to calculate these new taxes, these changes are either left uncompleted, on hold, or done following that Best-Guess Strategy. Many nonprofits could be forced to retroactively adjust 2018 tax liabilities. This lack of clarity takes time away from mission. It is unnecessarily expensive for our community.

How to Help the Situation:Just as elections have consequences when people don’t vote, policymaking has consequences when constituents remain silent.*”Join us in seeking a reasonable solution. First, go to the IRS public comment form. (Complete the form by typing Form 990-T when asked for “Form,Instruction Publication Number.”) Insist that the Treasury and IRS delay implementation of the two new UBIT subsections until one year after the final rules are promulgated. Then forward your comments to Senator Hatch and ask him to work for clarity on behalf of the nonprofit community that does so much for the people of Utah.

So What Exactly Are those New Unrelated Business Income Taxes (UBIT)?

The new tax law was voted on in late December 2017 with a January 1, 2018 effective date. This left nonprofits with days to respond to something that normally requires and is allowed months of preparation. The new taxes impacting nonprofits include new taxes on trade or business and transportation benefits. 

Tax on "Trade or Business":New Section 512(a)(6) taxes each “trade or business” of a nonprofit independently, disallowing aggregation of profits and losses.
Tax on Transportation Benefits: New Section 512(a)(7) taxes expenses for transportation benefits, such as transit passes and parking, provided by nonprofit employers, and perhaps even those paid for by employees through voluntary pre-tax withholdings.

Nonprofits are required to pay unrelated business income taxes of 21 percent on both of these items.

Uncertainty about Taxes

Left unanswered are questions like whether or not the profits or losses from separate locations under one management should be aggregated or treated separately. How should an employer value “free parking” included in a lease and provided to employees? Does the tax apply when the employer is mandated by state or local law to provide transportation benefits as in New York or Washington, DC?

Thank you to Nonprofit Quarterly for that quote from our friend and partner Tim Delaney. Tim Delaney is President & CEO of the National Council of Nonprofits of which UNA is a member.