If the only certain things in life are death and taxes, then changes to the tax laws should be considered almost as certain.
In 1913, Congress was granted the power to collect income taxes. Later that year, the Revenue Act of 1913 created tax exemption for nonprofit charitable organizations. In 1917, donations by individuals to these organizations were also made tax exempt. Fast forward 100 years and we’re still tinkering with tax exempt status, and churches are still adjusting to the changes.
You probably remember headlines about the Tax Cuts and Jobs Act of 2017. It streamlined some elements of our tax system by reducing the number of tax brackets, increasing the standard deduction for taxpayers and reducing or eliminating some other deductions.
One change that didn’t make headlines (until now) is a provision targeting fringe benefits paid by businesses to their employees. To partially offset new tax breaks given to businesses, those businesses may no longer take a tax deduction for the benefits paid to employees for commuting to and from work, including the cost of parking. This seems like a reasonable trade-off from a business perspective.
The problem with this change [found in Internal Revenue Code Section 512(a)(7)] is that it treats nonprofit organizations the same as for-profit businesses. What this means is that tax-exempt nonprofits (including churches) are now responsible for unrelated business income taxes (UBIT*) on any of these transportation-related benefits they pay their employees.
If your church does not pay transportation fringe benefits to any employees, breathe a sigh of relief here. (sigh). But keep reading!
If your church does provide transportation fringe benefits to employees, you will need to pay the appropriate UBIT and report these benefits by filing Form 990-T. Be aware that the IRS has not yet provided specific guidance on how to calculate this new tax. It is possible that a delayed implementation may be granted, but also possible that taxes may be owed retroactively to January 1, 2018.
Here are some other things to know:
* Maybe you have heard of UBIT before. It grew out of concerns that nonprofit organizations were going beyond their nonprofit purposes and making money on unrelated activities. The Revenue Act of 1950 established UBIT for an array of organizations. Churches were not affected until the Tax Reform Act of 1969. Since then churches have owed UBIT on income generated by a variety of activities like selling non-religious merchandise in a bookstore, charging rent to an outside group for using a debt-financed building, and charging fees to park on their parking lot for events unrelated to the church’s exempt purpose (See IRS Publications 1828 and 598).