Tax reform, Small(er) Organizations and UBIT

A few weeks back, I went to the American Bar Association’s Tax Section meeting in Washington, DC and almost the entire day’s presentations had to do with the impact of tax reform on the tax exempt sector. We usually get a bit more variety than that – but that is indicative of how much we are all struggling to get our heads around what our clients need to do to be compliant with the new laws. It was also a great reminder that many more organizations may be paying unrelated business income tax and filing a 990-T than have in previous years. Why? Well, does your organization: a) make parking available to your staff, regardless of whether there is any direct cost to your organization to do so; b) provide other transit-related benefits to staff (like transit passes, shuttle busses, etc.); or c) have at least 1 unrelated business/line of revenue taxed as an unrelated business? If so (or, even if you are just interested), you should read on!

First, for more posts on the unrelated business income tax and a bit of background, see prior posts here and here.

The tax cuts touted as a part of tax reform were given in part by imposing more taxes on the tax exempt sector (see my prior post on the final version of the 2017 tax reform bill for a summary of some of the effects).

A significant amount of the burden of tax reform will be borne by the largest organizations (particularly colleges, universities, and hospitals) – but many organizations may be caught off-guard and owe taxes when their next return is due, thanks to two specific changes:

1. New taxable fringe benefits:

a. New Internal Revenue Code Section 512(a)(7) increases unrelated business taxable income by amounts that an organization pays/incurs for qualified parking benefits for its staff and from providing qualified transportation fringe benefits (like transit passes, for example).

b. So, yes, this is a tax on an expense. Weird.

c. There are some places where this will be clearer – for example, if an employer pays $100 per parking spot to a third party for its staff, and the amount that the employer pays is no different than what the staff would pay if they went and contracted with the third party for parking.

d. A twist on the above that starts the confusion could be – what if the employer gets a deal on the contracts for parking spaces because it purchases so many, and so the value to each staff member is actually $150. Are we taxing $100 per parking spot, or $150 per parking spot?

e. It gets weirder – because one of the issues folks are raising is that we aren’t really sure if the tax is on the expense of the employer, or the value of the benefit to the staff. For example, imagine a situation where an organization makes parking available to its staff in a lot adjacent to the building it owns, but staff can also park on the street where parking is free and plentiful. If we are taxing the value to the employee, the value is $0. However, if we are taxing the expense of the employer, there are costs associated with keeping up the lot (plowing, resurfacing, etc.) that could be attributed to each employee’s parking spot (and thus potentially taxable).

The larger the organization, the more complex the above issues can get. Also more annoying if the organization operates in a city that requires the provision of transit passes…

2. UBIT Silo-ing:

a. Thanks to tax reform, there is now a “special rule” that applies any time an organization has more than 1 unrelated trade or business and requires that taxes for each unrelated business be calculated separately, and a loss from one cannot be used to offset the gains from another. So – each trade or business is “silo-ed” for purposes of determining taxable income. Feel special?

b. Unfortunately, writing the tax law really, really fast doesn’t always lead to lots of clarity. So, we don’t know what it means to be “1 unrelated trade or business” – and so we don’t know what goes in each silo. Some examples of questions people way smarter than me are asking:

i. We don’t know if the taxable fringe benefits discussed above are a silo at all, and if they are, whether they can be grouped with anything else.

ii. We don’t know if debt-financed income, which isn’t really an unrelated business but is taxable, belongs in a silo, and if so, whether it can be grouped with anything else.

iii. We don’t know if multiple locations of the same unrelated business (catering services at multiple locations, for example) are silo-ed together.

iv. We don’t know how to allocate expenses to decrease our unrelated business income if, for example, our parking lot is used for related purposes, but also staffed and leased out for unrelated purposes.

The answers to how we handle taxable fringe benefits and whether they are included here could influence whether an organization has more than one trade or business – and thus whether they are in the special rule. If taxable fringe benefits are a trade or business for the purpose of silo-ing, then an organization that has debt-financed income because it rents out half of a building it owns (that is subject to a mortgage), then it could be in the special rule. Feel special now?

Organizations that could be newly subject to the taxable fringe benefits issue should absolutely be planning – this started for benefits provided as of January 1 of this year (regardless of tax year).

Organizations with tax years that started on or after January 1 also need to be thinking about UBIT silo-ing.

Our hope is that we will get more guidance from the IRS in the relatively near future that will help to clarify the above questions (and many more). Guidance or no-guidance though – any organizations that may be affected should get this on their radar!

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