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Congress Rolls Back Burdensome Unrelated Business Income Tax (UBIT) On Transportation Benefits

A much-hated tax on non-profit organizations is on the way out. At the end of 2019, Congress repealed a provision of 2017’s Tax Cuts and Jobs Act (TCJA) that triggered the UBIT of 21 percent on non-profit employers that provide employees with transportation fringe benefits. Unequipped to handle the additional administrative burdens and compliance costs, thousands of non-profits had complained — and legislators apparently listened.

Same benefits, new costs

At issue is the TCJA provision saying that non-profits must count disallowed deduction amounts paid for transportation fringe benefits such as transit passes and parking in their UBIT calculations. UBIT applies to business income that is not related to the organization’s tax-exempt function. Thus, simply by continuing to provide some of the same transportation benefits they have always provided employees, non-profits were liable for additional tax.

For example, employers were forced to assign a value to parking spaces provided to employees. Such activities were time-consuming and burdensome, and the additional costs forced non-profits to divert funds from pursuing their missions. Non-profit coalition Independent Sector estimates that the transportation tax and related administrative costs set back non-profits by an average $12,000.

Fortunately, the repeal of the UBIT provision will be retroactive. Although the details have not yet been hammered out, non-profits that paid the tax on applicable transportation benefits in 2018 and 2019 are expected to get their money back.

Other developments

Repealing the UBIT on certain transportation benefits is not the only recent legislation of interest to non-profits. Last month, Congress also streamlined the foundation excise tax. The current two-tiered tax that many foundations protested will be replaced with a 1.39 percent revenue-neutral tax.

Congress is likely to address other non-profit demands — for example, for the introduction of a universal charitable deduction — in future sessions. We can help you stay current with the latest tax developments affecting nonprofits. Contact us.

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