Tax Reform Trap: Your Charity May Be Subject To Unrelated Business Income Taxes

Congress imposed an unrelated business income tax (UBIT) on transportation, parking, and athletic facility fringe benefits that a nonprofit provides to its employees. This provision was created to create parity between nonprofits and for-profits as for-profit enterprises no longer can deduct expenses related to these benefits. This is true even if you have to offer commuter benefits under local laws (such as San Francisco, New York or Washington DC).

 Another trap is that this law applies even if the benefit is indirectly paid by the employer (i.e. you allow your employees to take a pre-tax deduction for these costs).

 This is effective for anything paid as of Jan 1, 2018 so it can impact 2017 tax returns that use a fiscal year.

Indirect benefits are subject to UBIT as well.

 Example: Small nonprofit pays employee $5,000 a month and does not pay commuter or parking benefits but allows employee to contribute part of their salary to a pre-tax deduction plan for commuter expenses. Employee contributes $250 pretax each month used to pay for mass transit.

 Result: The IRS would deem the employer paid $4,750 in salary and $250 in commuter benefits. Since a business would not be able to deduct the $250 the employee allocated to a pre-tax deduction. A nonprofit would be subject to UBIT on $250 of income.

 UBIT is imposed using corporate tax rates which is now a flat 21%.

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