The Tax Cuts and Jobs Act (TCJA) is expected to cause some challenges for most in the nonprofit industry. While several significant tax law changes took effect in 2018, you should know and understand four of them now.
Two of the provisions that are most likely to affect your nonprofit organization are changes in unrelated business taxable income (UBTI).
Also, Revenue Procedure 2018-38 changed the rules regarding Schedule B – Schedule of Contributors, and a recent change in Michigan law applies to sales tax for 501(c)(3) and 501(c)(4) exempt organizations.
Let’s take a closer look at these four specific changes and how they may impact your nonprofit organization’s reporting and tax obligations.
Losses in one trade or business can no longer offset income in another trade or business.
Previously, the gain or loss from any unrelated trade or business regularly conducted were netted together to determine UBTI. If, for example, an organization conducts unrelated business A for a profit, and the organization also conducts unrelated business B and had a loss, the previous rules allowed the organization to net the activity from A and B. The income from A would be reduced by the deficit from B in calculating UBTI.
The new rules no longer allow the two to net. The income from A will be reported and the deficit from B will create a net operating loss to carry forward and only be applied to future UBTI generated by B. The specific deduction of $1,000 in computing UBTI is maintained but is not considered in determining the separate UBTI calculation of each separate trade or business.
This new rule applies to tax years beginning after December 31, 2017. Any net operating loss from tax years beginning before January 1, 2018, can be carried forward and applied to any income in subsequent years, regardless of which trade or business created it.
Organizations must carefully consider if their activities constitute more than one distinct trade or business and report accordingly going forward. Interim guidance suggests the NAICS code will be used to determine the unrelated trade or business. It is likely that the overall tax burden will increase for exempt organizations, since gains from one unrelated trade or business can no longer be offset by the shortfall from another unrelated trade or business.
Certain qualified transportation fringe benefits must be reported as unrelated business income.
Previously, when organizations provided employees with transportation fringe benefits, employees did not have to add those amounts to their taxable income, and the nonprofits included it in routine expenses. (For-profit entities could deduct these expenses from their taxable income). Under the new provision, the amounts paid for such benefits will be included in UBTI, effective for amounts paid or incurred after December 31, 2017. For-profit entities will no longer be able to deduct these costs. The effect is that for-profit entities and nonprofit organizations will be treated the same, both paying tax on these fringe benefits provided to their employees.
Qualified transportation fringe benefits include a parking garage where employees park for free, commuter transportation, and transit passes. If a parking garage is also used by nonemployees, the organization will need to allocate the cost of providing the parking to determine the amount to include in UBTI. The IRS indicated that these benefits cannot be shifted to taxable compensation for the employees so that they are deductible by the organization. The IRS updated Publication 15-B, Employer’s Tax Guide to Fringe Benefits, to reflect these changes. This change could mean that more nonprofit organizations will be required to file Form 990-T.
Schedule B is now required only for 501(c)(3) exempt organizations.
Revenue Procedure 2018-38, released on July 16, 2018, modifies the requirements to file Schedule B – Schedule of Contributors with Form 990 or 990-EZ. Schedule B is used to report names, addresses and amounts of substantial contributors to exempt organizations. This requirement now applies only to 501(c)(3) charitable organizations; previously it affected all 501(c) organizations.
Several reasons for this change include:
- The IRS is required to make annual returns available to the public. It cannot disclose the names and addresses of contributors but must include the contribution information. This meant the IRS was spending resources to redact that information from returns when making it available to the public.
- Exempt organizations faced increased time and resources to provide the information to the IRS and also redact it when complying with public disclosure requirements.
- There is a risk that the information could inadvertently be disclosed to the public.
Affected organizations must continue to maintain this information in their records and be able to provide it to the IRS under examination. The change is effective for taxable years ending on or after December 31, 2018.
Michigan law changed the rules for 501(c)(3) and 501(c)(4) organizations that collect sales tax.
Previously, 501(c)(3) and 501(c)(4) organizations in Michigan that had less than $5,000 of taxable sales in a calendar year were not required to collect and remit sales tax. The previous law caused issues for organizations who were close to that threshold because it was not an exemption of the first $5,000, but all or nothing. If they were over $5,000, they owed sales tax on all of the sales. If they were under, they owed sales tax on none of it.
The new law states that the first $10,000 of taxable sales for fundraising purposes are exempt as long as total sales for the calendar year are less than $25,000. This change took effect September 26, 2018, according to Michigan Compiled Law (MCL) 205.54o. We anticipate receiving further guidance from the State of Michigan as well as updates to forms and instructions.
If you have questions or concerns about how any of these changes affect your organization’s tax and reporting responsibilities, contact a member of Yeo & Yeo’s Nonprofit Services Group.