The new tax law, passed in late 2017, contained two new subsections of the IRS Code as it relates to unrelated business income (UBIT). The lack of clarity and guidance specific to nonprofit organizations for these additional sections may have significant impact on nonprofits.

One subsection of concern is using the structure of UBIT tax to impose a tax on expenses for employee transportation fringe benefits. While this immediately brings concern for nonprofits operating in states that require employers to offer pre-tax transportation benefits, such as New York, the Alliance for Strong Families and Communities recently learned that this change goes much further. The new subsection would impose UBIT on all employer subsidies for transportation, even those in which the employee voluntarily asked to have a pre-tax benefit. Therefore, nonprofits that offer this pre-tax benefit regardless of location will be affected by this subsection. Any amount a nonprofit employer has “paid or incurred” for qualified transportation benefits such mass-transit cards or employee parking will be taxed.  

The other subsection of concern is one that directs nonprofits with more than one unrelated trade or business to compute their UBIT income separately without giving a definition of “separate trade or business.” Not defining this term is causing a lack of understanding of compliance and an increased probability that nonprofits may file their UBIT earnings and losses incorrectly.  

The Alliance has joined other national organizations in an effort, led by National Council of Nonprofits, to request that the IRS delay implementation of these subsections until clarity and guidance specific to nonprofit organizations is delivered. In addition, the Alliance will be submitting comments and recommendations to the IRS public comment webpage in the coming weeks. Members, provide input, data on how this would impact your organization, or offer examples of how lack of clarity would complicate filing your unrelated business income. Contribute to our comments to the IRS by contacting Jennifer Ralston Herrera, associate director of public policy at the Alliance.

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