Potential UBIT: Is Your Church Aware?

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The Tax Cuts and Jobs Act (TCJA), enacted in December 2017, has far-reaching, significant effects on U.S. taxpayers, including many tax-exempt organizations that haven’t previously had a return filing obligation. Due to a specific provision contained in the bill, not-for-profit organizations (including religious organizations that have historically been exempt from filing annual returns with the IRS) may potentially face an income tax liability for parking they provide to their employees.

Qualified Parking Deduction Disallowed

The TCJA added Internal Revenue Code (IRC) Section 512(a)(7), which specifies that an organization’s unrelated business taxable income (UBTI) should include any deductions incurred by tax-exempt employers in connection with providing certain qualified transportation fringe benefits to their employees—including parking facilities used in connection with qualified parking—if the deduction isn’t allowable under IRC §274. Initially, this change within the TCJA was somewhat overlooked. Although the correct application and enforcement of this provision isn’t completely clear yet, this change has the potential to cause not-for-profit organizations, including churches and other religious organizations, to file federal Form 990-T, Exempt Organization Business Income Tax Return, and pay a 21 percent unrelated business income tax (UBIT) on the cost of parking provided to their employees. In addition to the requirement to file a federal income tax return, employers affected by this change in tax law also might be required to file state income tax returns and pay state income tax, further increasing their financial burden.

The rationale for this new tax was that it would bring parity between tax-exempt employers and taxable employers with respect to employer-provided parking, since the TCJA also disallowed a deduction to taxable employers for the cost of employee parking under IRC §274. For more information on this change to taxable employers, visit BKD’s Tax Reform Resource Center.

Both the cost of compliance with this new provision and the new taxes imposed represent a potentially significant burden on religious organizations. As awareness of this change has grown, churches and other religious organizations have started questioning the justification for the tax and pressuring Congress to repeal IRC §512(a)(7). For example, the Evangelical Council for Financial Accountability has been circulating a position statement requesting the tax on employer-provided parking be repealed. It remains uncertain as to whether Congress will act to repeal this provision.

Many questions remain regarding how to calculate the increase to UBTI for the disallowed qualified parking fringe benefit. If an employer owns a surface parking lot but doesn’t charge the public or employees for parking, as is the case with most churches, does this create UBTI for the employee parking? If so, how is the amount determined? If a tax-exempt organization includes an otherwise-excludable transportation fringe in an employee’s gross income, will it avoid UBTI treatment?

We’re currently anticipating the release of additional guidance on IRC §512(a)(7) from the IRS and U.S. Department of the Treasury to address many of the open questions surrounding this provision. If you have questions about how this new provision could affect your organization, contact Lauren or your trusted BKD advisor.

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