2018 blew in with a whole bunch of unfortunate changes/presents/burdens on the tax-exempt sector:
The 2017 tax bill passed by Congress implemented a variety of changes that seem to aim to make life more difficult for nonprofits. Some of those headaches are really only applicable to larger organizations, but some of them are more equal-opportunity. These are most likely to impact small and medium-sized nonprofit organizations:
Unrelated business income tax changes
- Most tax exempt organizations are subject to the unrelated business income tax on revenue from certain business activities (non-exempt purpose activities). In the past, tax exempt organizations were able to offset profits from one unrelated business with the losses from another and reduce tax liability as a result. Now, each unrelated business must be separately calculated and a loss from one business cannot be used to offset the profits for another.
- As mentioned above, operating losses from one unrelated business can no longer be used to offset unrelated business taxable income from a different line of business. This now includes net operating losses that accrue over time. As a transition rule, any organizations with operating losses from prior years can use those to offset any unrelated business taxable income, regardless of the line of business, on future years until it runs out. Any net operating losses generated in 2018 or later will also only offset up to 80% of unrelated business taxable income (in previous years, organizations could offset up to 100%), and cannot be carried back (in previous years, organizations could carry it back for two years).
- Instead of a graduated tax rate, one bright note is that there is now a flat 21% tax on unrelated business taxable income.
Some fringe benefits are now taxable to the nonprofit organization
- For tax years starting on or after January 1, 2018, nonprofits that provide their employees with qualified transportation and parking benefits (nontaxable fringe benefits to the employee) will have to include the value of those benefits as unrelated business taxable income, which could trigger the need to file a Form 990-T and pay tax. Organizations that provide these types of benefits should consult with their tax advisor to determine what actions they may be able to take to avoid/limit the tax.
There were also a variety of changes made that impact charitable giving and concerns have been expressed that the changes may impact the amount of money given to charities. I predict that most small and medium-sized organizations will not see the same kinds of impact in their charitable giving programs from the law changes as larger organizations could see – but it is anyone’s guess and people far smarter than me have opined at great length on that topic.
New Exemption Applications
In January, the IRS released the new 1024-A – which is now the form required for organizations seeking recognition of 501(c)(4) status. As a reminder, this is separate from Form 8976/the 501(c)(4) notice requirement.
IRS Rejecting Incomplete/Wrong Returns
The IRS is now returning Form 990s that are incomplete or filed on the wrong form. I regularly see incomplete 990s – particularly by preparers (including CPA preparers) who are not familiar enough with the requirements of the Form 990. Incomplete forms can result in penalties accruing – see here for more information on how the IRS handles incomplete returns.
** Updated 4/5/18 with additional links.