Nonprofit Alert: IRS Guidance on New Rules for UBITBy Robert Lyons | May 21, 2018
The IRS has begun the process of creating guidance concerning unrelated business income tax (UBIT) on fringe benefits and other areas of concern. Specifically, they are addressing the tax calculation on multiple lines of business. In addition, the guidance is expected to cover on-site athletic facilities, employer treatment of pre-tax commuter benefits, and executive compensation.
Multiple Lines of Business
There are several key issues to be addressed in the forthcoming IRS guidance addressing the concept of “siloing” which is the process of isolating one business from others. The issue involving siloing revolves around the question of what constitutes a trade or business, primarily in the area of partnerships and their treatment of lines of business. The problem to be addressed goes beyond the traditional definition of a trade or business to include such issues as investments, passive activities and debt-financed income.
It appears, based on various unofficial comments, that passive investment activities would be considered a single line of business. This would mean that a not-for-profit with multiple investments in partnerships may be able to aggregate those partnerships in a single line of business instead of looking through the investment partnership to consider the nature of the investment or how the income is being reported. The key issue is whether a partnership generating UBI from debt-financed property is different from a passive partnership generating income from a line of business.
On-Site Athletic Facilities
The Tax Cuts and Jobs Act (hereafter, “TCJA”) imposed a tax on on-site athletic facilities (if a deduction is not allowed under Code section 274). Section 274 addresses disallowance of certain entertainment and recreation expenses. Earlier in the year, the IRS took the position that section 274, which was not changed, does not disallow in-house athletic facilities; therefore, until further guidance is offered, those facilities will remain non-taxable.
The IRS will address compensation of over a million dollars based on its source. This is a multifaceted issue of combining situations where an executive is paid by multiple entities. This could be the case in related not-for-profit organizations or a not-for-profit with a for-profit subsidiary.
Qualified Transportation Fringe Benefit
The most pressing issue is the treatment of “qualified transportation fringes” in relation to salary reduction plans. Janine Cook, IRS Deputy Associate Chief Counsel, stated that IRS publications have been updated to clearly state that if an employer wants to give employees additional compensation on a pre-tax basis to pay for parking metro passes, it is still classified as a transportation fringe benefit even though it does not represent additional compensation to the employee.
According to Cook, the pre-tax benefits fall under the for-profit deduction limitation, and UBIT fringe benefit rules under Code section 512(a)(7) apply. The IRS has taken the position that just because the benefit is on a pre-tax basis, it is no less a “transportation fringe benefit.” This achieves parity in the treatment of transportation benefits between the for-profit and not-for-profit employer.
Under current state law, cities such as New York City, Washington D.C. and San Francisco, for example, have commuter laws whereby employers with workforces over a specific size are required to provide transportation assistance.
In 2015, New York City passed the Affordable Transit Act, which requires employers with 20 or more full-time employees working in New York City to offer those employees the opportunity to purchase certain pre-tax transportation benefits. The law was instituted to reduce transportation costs for employees, promote a cleaner environment by increasing the use of mass transit or transportation in an eligible commuter highway vehicle, and lower payroll taxes for employers.
The only problem is that this is not optional on the part of qualified employers, and many NYC not-for-profits will have UBI to report as a result of this benefit alone.
990-T Filing Requirement
The need for the filing of a 990-T Exempt Organization Business Income Tax Return is going to place an additional burden on many not-for-profit employers who have historically stayed away from unrelated activities. There is an added expense on the part of the employer to gather the information and report on the Form 990-T. The form is currently being revised, which could reflect either a simple line item for the tax or a more elaborate section on computing the tax. The main thing to remember is that the Form 990-T is an income tax return and requires estimated payments. This is in addition to a number of state filings.
The change in the law for Qualified Transportation Fringe Benefits does not impact employee reporting or the allowability for the fringe benefit. The impact and burden seem to have totally fallen on the employer. This will require additional record keeping, returns to file and estimated payments to make on a quarterly basis.
Much of what has been included in this brief article relating to executive compensation, multiple lines of business and on-site athletic facilities is based on conjecture and/or opinion of IRS and other leading authorities on both a state and federal level – the same people who will ultimately have an impact on the final rules in this area. While there is no time frame for issuance of the additional guidance, it will hopefully be available before the end of the year. As more information becomes available we will pass it on, but we expect the final results to follow along the lines provided in this article.
About Robert Lyons
Robert (Rob) Lyons, CPA, MST, is a Tax Director, Exempt Organizations in the Nonprofit, Government & Healthcare Group at Marks Paneth LLP. Mr. Lyons brings to this role the skills he has developed during more than 30 years of providing tax and consulting services to his clients in the nonprofit, higher education, and public sector industries. His experience includes handling substantial exempt organization tax issues. Mr. Lyons has testified in front of the House and Ways Committee in... READ MORE +