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Changes to the Taxation of Not-for-Profit’s Unrelated Business Income

By: Jennie K. Schott, Audit & Assurance Services Assistant 

The changes that the new tax reform is bringing on has been one of the hottest discussions in the accounting and tax field during the 2018 calendar year. The new law has changed a substantial number of previously written tax laws, and there are very few levels of individuals and businesses that are not affected by its changes. There are several pieces of the tax reform that all non-profit organizations should be aware of, specifically related to the Unrelated Business Income Tax (UBIT).

The UBIT is a tax imposed on a non-profit organization’s income from a trade or business that is (a) regularly carried on and (b) not directly or substantially related to the non-profit organization’s exempt purpose. For example, let’s say that your non-profit organization’s purpose and function is to provide art materials to local schools. If your organization would decide to create a store-front location to sell art materials and other goods to paying patrons, this would qualify as Unrelated Business Income (UBI). If a non-profit earns more than $1,000 in UBI during any fiscal year, it is required that the organization pay tax on the UBI at the corporate rate through the filing of Form 990-T.

The new reform is changing the UBIT framework in more than one way, starting with its perspective on certain fringe benefits provided by non-profit organizations to their employees. Fringe benefits can range from parking and commuting costs, to on-premises gyms and moving expense reimbursements. Under the new reform, the costs of providing fringe benefits (paid by the employer) will be classified as Unrelated Business Taxable Income to the employer. In other words, the non-profit organization paying for these benefits provided to its employees will also be responsible for paying income tax on these benefits.

The new reform is also requiring a mandatory separation of lines of business for all UBI activities. Before the tax reform took place, a non-profit organization could aggregate its profits and losses from all of its UBI activities. The advantage in doing so would be to offset the losses from one UBI activity with the gains of another, potentially decreasing the organizations tax liability. Under the new law, the combination of these lines of business is prohibited.

These UBIT-related alterations to the tax law may not affect all non-profit organizations, but it is something for all to be aware of. If your organization is feeling unsure about the new reform and could use some additional guidance on the most effective and efficient ways to account for these changes, while minimalizing tax liabilities, Holbrook & Manter’s team of tax and accounting professionals is here to help. Reach out to us today for assistance.