The surprising taxes your foundation may already owe the IRS

Knowing that our members (and their grantees) may still be unclear on how the Tax Cuts and Jobs Act will impact their organizations, WRAG has invited Tim Delaney, president & CEO of National Council of Nonprofits, to share some background. 

By Tim Delaney
President & CEO
National Council of Nonprofits

Does your foundation pay for employees’ parking or transit passes? Or do you let your employees set aside pre-tax dollars for their transportation expenses? If so, congratulations: you may now owe a 21 percent federal tax on those payments. And – surprise! – your first payment was due on April 15, so you may face a late-filing penalty, too.

If you’re startled by this news, you’re not alone.

Hidden in the Tax Cuts and Jobs Act are two new unrelated business income taxes (UBIT) on foundations, charitable nonprofits, and houses of worship that are surprising just about everyone. One provision requires tax-exempt employers to pay a 21 percent income tax on their expenses paid for employee fringe benefits for transportation. Another imposes a 21 percent tax on income from each (undefined) “separate” “trade or business.” Both taxes became effective January 1, 2018, with quarterly tax payments due in April. The provisions are so vague and ambiguous that compliance is impossible. The government hasn’t told anyone which transportation expenses are taxable, or what activities constitute a separate trade or business.

Tax-exempt entities have a right to insist that the government provide both the guidance needed to comply and a transition period for organizations to develop the necessary record-keeping systems. For more information, see this statement and this blog post by the National Council of Nonprofits.

Your voice matters. Go to the “comment form” on the IRS website. (In the line for Form/Instruction/Publication Number, type “Form 990-T.”) Insist that the government delay implementing these new UBIT subsections until one year after it issues Final Rules providing both the necessary guidance for compliance and a reasonable transition period for organizations to develop the necessary record-keeping systems.

When you do, you will not be alone. Many organizations – including the National Council of Nonprofits, American Bar Association, American Institute of Certified Public AccountantsAmerican Society of Association Executives, and Council on Foundations – have submitted detailed comments.

Your voice still matters. While those organizations articulated legal reasons, the IRS needs to hear from LOTS more organizations (meaning not just your foundation, but your grantees, too!) about the practical reasons to immediately delay implementation, retroactive to January 1, 2018, to erase any penalties for late filing.

Your voice is needed, today.