More Jeers Than Cheers Result From New Rule Clarifications
Thanks to the Tax Cuts and Jobs Act and the recent Act to Provide the Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018, Pub. L. No. 115-97 (phew, that’s a mouth-full!), nonprofit leaders will be looking at quite a few changes with regard to how your organization’s income is reported and how its taxes will be calculated.
If yours is a smaller organization with a single unrelated trade or business, and you generate more than $90,385 of taxable income each year, you might be pumped to learn of the flat 21 percent tax rate. However, your elation may not last after learning that you will no longer be able to carryback your organization’s net operating losses. For larger exempt organizations with unrelated business taxable income (UBTI) from more than one trade or business, the changes are truly a mixed bag depending on your unique situation.
This article will break down the most significant changes outlined in this particular piece of legislation and will examine how they could impact your organization.
Read Also: Scorecard For The Tax Cuts And Jobs Act
No More Aggregation
According to the legislation, the UBTI from an exempt organization’s separate unrelated trade or business must now be calculated separately. Why the change, you ask? Well, by calculating this income separately, taxing authorities are working to ensure that a nonprofit organization can no longer use the loss from one unrelated trade or business to offset the income from another unrelated trade or business.
Ouch!
While the change outlined above is less-than-great news for those in the not-for-profit sector, there is a “glimmer of good” to acknowledge. This bright spot comes to us in the form of a rate change that will impact all non-trust exempt organizations.
A Flat Rate For All
Instead of the graduated rates that were previously in effect for nonprofits, organizations are now able to apply a flat tax rate of 21 percent to their unrelated business taxable income. What we will see moving forward as a result of this change, is that organizations with unrelated business taxable income greater than $90,385 will pay a lower tax bill than they were subjected to in prior years.
Bye-Bye Parking Permit
We also learned that, as a result of this legislation, some of the benefits that were provided to a nonprofit’s employees in the past (and paid for by the organization), including qualified transportation, parking facilities used for qualified parking and access to on-premises athletic facilities, will now be added to the organization’s UBTI. This particular provision might sting a little since employees of tax exempt organizations often choose this line of work because of their belief in the cause, despite the sub-par wages. The fringe benefits outlined above were often used to offset a lower compensation. That being said, it’s important to note that this particular tax treatment doesn’t apply if the same type of benefits are provided to volunteers.
No More Carrybacks
The final change this particular piece of legislation enacted is a new limitation to net operating losses (NOLs) incurred by nonprofit organizations. Moving forward, the NOL deduction will be limited to 80 percent of the organizations UBTI. Furthermore, it will restrict the amounts that are carried over to other years by adjusting the NOL applied to account for the loss limitation that arises in tax years that begin after Dec. 31, 2017. Generally speaking, carrybacks for UBTI have been eliminated and unused NOLs are allowed to be carried forward indefinitely.
By Matt Long (Wooster office)
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