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Tax-exempt organizations are not immune to the tax law overhaul known as the Tax Cuts and Jobs Act of 2017. The provisions of the Act change the way certain tax-exempt organizations, including state-charted credit unions, will report and incur tax on unrelated business income (UBI).
Organizations with multiple UBI sources will no longer be permitted to offset its profitable UBI activities with its unprofitable UBI activities. That is, UBI will be separated and reported by source, and each activity stream, net of its related direct and indirect deductible expenses, shall incur tax independently depending on its net taxable income/loss position.
This change, which is effective for tax periods beginning after Dec. 31, 2017, will also impact the manner in which net operating losses (NOL) are tracked and applied to future tax periods. Therefore, just as organizations will no longer have the ability to offset net taxable income and losses from multiple UBI sources, the application of NOL arising after Dec. 31, 2017, will also be restricted to the activity that originated the NOL. The good news is, the NOL accumulated up thru Dec. 31, 2017 may be carried over and applied to the net taxable income for any and all of the organizationâ€™s UBI streams until depleted or 20 years from the year it was generated, whichever comes first.
So what does all of this mean for organizations with multiple sources of UBI, particularly with sources which consistently generate net taxable income? Well, it means unrestricted NOL accumulated up thru Dec. 31, 2017, if any, will eventually run out. Certainly, the rate of NOL depletion will vary by organization, but this new methodology will ultimately force organizations to examine its UBI analyses and take a deeper dive to ensure all expenses incurred to generate each UBI source is examined and included to the appropriate extent in UBI calculations going forward.
The costs incurred by tax-exempt organizations for certain fringe benefits offered to the organizationâ€™s employees, incurred after Dec. 31, 2017, will be added to taxable UBI. The disallowed fringe benefits include the following:
The extent to which the above benefits relate to generating UBI is of no consideration. The bottom line is, if a tax-exempt organization provides these specific fringe benefits, the costs incurred by the organization to do so will be subject to UBIT. The Act acknowledges further guidance will be issued to assist organizations in interpreting this provision, particularly in determining how depreciation of parking and on-premises athletic facilities will be allocated.
In conclusion, the Act will likely mean tax-exempt organizations will be more vulnerable to UBIT going forward. Additionally, the implementation of the 21 percent flat corporate tax rate may or may not benefit tax-exempt organizations depending on the extent of taxable UBI reported.
As more guidance is released on provisions related to UBIT, Doeren Mayhewâ€™s tax advisors will keep you up-to-date on the potential impact to your organization. In the meantime, if you want to gain more insight on how the changes to UBIT might affect your particular tax-exempt organization or would like a review of managementâ€™s UBIT analysis, contact Doeren Mayhewâ€™s tax advisors.
Want to reach the author? Email Aubrey Clegg or contact her at 305.232.8272
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