The Tax Cuts and Jobs Act Impacts Unrelated Business Income
By Michelle Mann, HoganTaylor Tax Senior Manager
The Tax Cuts and Jobs Act (TCJA), which passed in December 2017, has made several changes to the reporting of unrelated business income that will affect many tax-exempt organizations, even those who may not have filed a Form 990-T in the past. Unrelated business income is a trade or business activity, regularly carried on, and unrelated to the organization’s exempt purpose.
Impact on Transportation and Parking Expenses
The cost of transportation fringe benefits will be treated as unrelated business income for costs incurred after 12/31/17. Such costs include providing to employees rides in commuter highway vehicles, transit passes, and qualified parking.
Qualified parking includes any cost for maintaining a parking lot or parking garage owned by the organization for the free parking use by employees. It also includes paying for parking at a public parking facility or lot, and an allocation of rent for parking spaces if the organization rents office building space. Costs may include real estate tax, cleaning and maintenance, and depreciation of a parking lot or facility.
The new TCJA provision turns expenses into income. Legislation has been proposed to repeal this provision and many are calling for the IRS to delay implementation, but for now, this provision affects fiscal year returns for years ending in 2018 for costs incurred after 12/31/17.
UBI Reporting Changes
Effective for tax years beginning after 12/31/17, unrelated business income from each activity must be segregated for reporting purposes. This means that a loss in one business activity cannot offset profits in another business activity. Separate businesses might include transportation fringe benefits discussed above, debt financed rental income, advertising, and unrelated business income from investments that generate forms K-1.
In the past, total unrelated business income and expense has been combined on the Form 990-T. Losses in one business could offset profits in another. Going forward, income from each business can be offset with expenses to net it to zero, with a separate net operating carryover that can be used to offset income from the same business in the future.
These new net operating losses have an unlimited carryover and can be utilized at 80%. Prior net operating loss carryovers (from years through 2017) are still available for 20 years and can offset any unrelated business income at 100%.
Tax exempt entities organized as corporations are subject to tax on the Form 990-T (for unrelated business income) at corporate tax rates. The corporate rate has been reduced to 21% beginning in 2018. Tax exempt entities organized as trusts are subject to trust rates, with the maximum now 37%.
The HoganTaylor Nonprofit practice will keep you updated on any additional developments or issuance of regulations related to the passage of the TCJA. If you have any questions about the changes outlined in this article, or any others you think may impact your organization, please contact the author, Michelle Mann, at firstname.lastname@example.org or 501.227.5800.