Will the Tax Cuts and Jobs Act Make Your UBIT Jump?
Laurence Sophian, CPA, MBA
As the new tax bill worked its way through Congress last fall, not-for-profits across the country raised their voices high to share concerns about its disincentives for charitable donations — as well as the proposed repeal of the Johnson Amendment. Little was heard, though, about changes to the rules for unrelated business income tax (UBIT). It turns out that the final law, the Tax Cuts and Jobs Act (TCJA), includes several provisions that could boost your organization’s liability for this tax, regardless of whether you operate an unrelated business.
Why your UBI could grow
The most important change relates to how unrelated business income (UBI) is computed. The new law requires not-for-profits to calculate UBI separately for each unrelated business, with the $1,000 deduction typically allowed applied to the aggregate UBI for all businesses. This means that losses in one unrelated business activity cannot be used to offset losses in a different, unrelated business activity.
Your UBI also could increase because net operating losses (NOLs) can only be claimed against future income from the specific business that generated the loss. Under previous law, you could use NOLs from one business to offset the income of another or to offset gains from alternative investments or pass-through entities, also considered UBI.
UBI also might grow due to a change in how certain fringe benefits are treated under the TCJA. In previous years, you could provide your employees qualified transportation benefits (including commuter transportation and transit passes), qualified parking fringe benefits and on-site athletic facilities free of income tax for both you and employees.
The TCJA, however, treats the payments for such benefits as UBI unless they are directly connected to an unrelated business (for example, parking benefits provided employees of an unrelated business). Congress made the change to create parity between not-for-profits and taxable organizations. For-profit businesses lost a previous tax exemption for certain fringe benefits under the TCJA. The end result, though, is that not-for-profits could owe UBIT even without operating any unrelated businesses.
It is not all bad news. The new law also changes the corporate tax rate that not-for-profits pay on UBI to 21% from a range of 15% to 35%. This was the same change made in corporate income taxes on for-profit businesses. So, your UBIT liability might fall despite your higher UBI.
What you can do
Fortunately, you have some options to avoid the worst effects of these changes. For example, you could conduct an audit of your unrelated businesses. You might find that you have been over-reporting your UBI because you have not captured all the related business expenses.
Another option for not-for-profits with multiple unrelated businesses is forming a single taxable corporate subsidiary to hold all of them, which would permit you to again offset their income and losses. Any restructuring will likely carry some implications, whether tax-related, financial or operational.
The treatment of certain fringe benefits can pose a problem for organizations that do not want to revoke benefits, especially in today’s competitive job market. Perhaps you could replace benefits with alternative forms of compensation. Many employees may prefer the cash up front, even though it would be taxable to them.
Changes to the UBIT rules have not received as much coverage as some of the other TCJA provisions. However, that does not mean they will not have negative repercussions for your organization. Consult with your CPA to determine steps you can take to minimize the impact of the TCJA on your bottom line.
Kelly Buchheit, CPA
Many not-for-profits are poised to grow, but recognize risks
According to a recent study, Nonprofit Finance Study: Managing Growth, conducted by not-for-profit software firm Abila, more than 75% of not-for-profits are at least somewhat likely to pursue growth through expanded fundraising efforts during the next 12 to 18 months. In addition, the study also found that 84% of the financial professional respondents expect to seek new grant funding opportunities through pursuing partnerships with other organizations (72%), providing new services (69%) and seeking corporate sponsorships (67%).
The results do not only highlight a desire to grow among not-for-profits. They also reflect the respondents’ recognition that growth makes risk management more challenging. More than 60% indicated that, as their organization grows, their ability to manage risk becomes harder.
If your organization is poised for growth, the report suggests a number of risk management activities. Some examples include creating contingency plans for uncertainty of future funding, maintaining compliance with funding requirements, assessing internal controls and training employees.
Your 990-EZ filings get easier
According to the IRS, one out of three not-for-profits that paper file Form 990-EZ make a mistake. In response, the IRS is updating its Form 990-EZ in an effort to reduce errors. The updated form has 29 help icons to help small and midsize not-for-profits avoid common missteps. The icons describe key information you need to complete many of the form’s fields and provide links to useful information on the IRS website. Additionally, your CPA can work with you to ensure your 990-EZ is filed properly.
Gamers raise funds for hurricane victims
When natural disasters hit, many people look for ways to help the survivors get back on their feet. Some not-for-profits have found particularly innovative approaches to compound the efforts they make and donations they receive. For example, The Los Angeles Times reports that one charity, Direct Relief, received over $500,000 from thousands of online gamers in the wake of the 2017 hurricanes.
Gamers also raised more than $5 million for Save the Children over the last five years by holding marathon gaming sessions on live-stream platforms, such as Twitch and Gaming for Good. The platforms let viewers watch and talk to their favorite players. The resulting donations have prompted more not-for-profits to reach out to the gaming community to build alliances.