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Policy Issue: Unrelated Business Income Tax (UBIT)

Publication date: 
May, 2019
Unrelated Business Income Tax (UBIT)

The 2017 Tax Cuts and Jobs Act made two changes to the tax code regarding the unrelated business income tax (UBIT) that negatively affect foundations and other tax-exempt organizations. The first is a requirement that tax-exempt organizations pay a new tax on fringe benefits offered to their employees, such as parking and transportation benefits. Nonprofits have never been subject to such a tax before.

The second is a requirement that tax-exempt organizations calculate unrelated revenue streams separately or “in silos.” When tax-exempt organizations earn profits through an activity unrelated to their tax-exempt status, this revenue is taxed. Under the new law, tax-exempt organizations can no longer aggregate the profits and losses of unrelated business activities, but rather must pay taxes separately for each activity. For those organizations that are affected, this change will increase their tax burdens.

Research by the Urban Institute and Independent Sector estimates that the new tax on fringe benefits will, on average, cost nonprofits $12,000 per year and the requirement to calculate unrelated income streams separately will cost affected nonprofits $15,000 per year. Both changes to the tax code funnel money away from its intended charitable purpose and limit the ability of tax-exempt organizations to fulfill their missions. Both provisions are overly burdensome to the tax-exempt community, including houses of worship, nonprofits, and foundations, and should be repealed immediately.

This new law is not only unfair to all nonprofits, but it has racial equity implications as well. The Urban Institute study revealed that the new tax on transportation fringe benefits will place a heavier burden on small nonprofits, and some studies (such as one conducted by the Philadelphia African American Leadership Forum) have shown that nonprofits led by people of color tend to be smaller than white-led organizations. Therefore, the UBIT transportation tax potentially places a greater burden on nonprofits led by people of color. The Urban Institute study also estimated how the new UBIT taxes will affect human service, education and health nonprofits, which often serve low-income communities and communities of color. 

Forum’s Policy Position

United Philanthropy Forum (the Forum) supports a full repeal of the changes to the unrelated business income tax (UBIT) for tax-exempt organizations in the Tax Cuts and Jobs Act of 2017. Specifically, the Forum calls for a full repeal of the requirement that unrelated income streams be calculated and reported separately and a full repeal of the treatment of fringe benefits as taxable income. 

Legislation in the 116th Congress

Stop the Tax Hike on Charities and Places of Worship Act - (H.R. 1223) and (S. 501

  • Representative Jim Clyburn (D-SC) sponsored the Stop the Tax Hike on Charities and Places of Worship Act (H.R. 1223) in the House and Senator Sherrod Brown (D-OH) sponsored the companion billl (S. 501) in the Senate to repeal the increase in unrelated business taxable income by amount of certain fringe benefit expenses.
  • In an important difference to the LIFT for Charities Act, the Stop the Tax Hike on Charities and Places of Worship Act provides a payfor by increasing the corporate income tax rate from 21% to 21.03%.
  • CRS Summary: "This bill modifies the requirements for determining the unrelated business taxable income of tax-exempt organizations. The bill repeals a provision that requires unrelated business taxable income to be increased by the amount of expenses paid or incurred by a tax-exempt organization for certain fringe benefits for which a tax deduction is not allowed, including benefits relating to transportation, parking, or an on-premises athletic facility."

Lessen Impediments From Taxes (LIFT) for Charities Act - (S. 632 and H.R. 1545)

  • Senators James Lankford (R-OK) and Chris Coons (D-DE) and Representatives Mark Walker (R-NC) and Tom Suozzi (D-NY) reintroduced the Lessen Impediments From Taxes (LIFT) for Charities Act (S. 632 and H.R. 1545).
  • CRS Summary: "This bill modifies the requirements for determining the unrelated business taxable income of tax-exempt organizations. The bill repeals a provision that requires unrelated business taxable income to be increased by the amount of expenses paid or incurred by a tax-exempt organization for certain fringe benefits for which a tax deduction is not allowed, including benefits relating to transportation, parking, or an on-premises athletic facility."

Nonprofits Support Act (H.R. 513) and the Preserve Charities and Houses of Worship Act (S. 1282)

  • Representative Mike Conaway (R-TX) sponsored the Nonprofits Support Act (H.R. 513) and Senators Ted Cruz (R-TX) and Jeanne Shaheen (D-NH) sponsored the companion bill, Preserve Charities and Houses of Worship Act (S. 1282).
  • These bills go further than either the Stop the Tax Hike on Charities and Places of Worship Act or the LIFT for Charities Act. They not only would repeal the UBIT on fringe benefits, but also would repeal the requirement that tax-exempt organizations calculate unrelated revenue streams separately or “in silos.”
  • CRS Summary: "This bill modifies the requirements for determining the unrelated business taxable income of tax-exempt organizations. The bill repeals provisions that (1) require organizations with more than one unrelated trade or business to compute unrelated business taxable income separately for each trade or business; and (2) increase unrelated business taxable income by the amount of expenses paid or incurred by an organization for certain fringe benefits for which a tax deduction is not allowed, including benefits relating to transportation, parking, or an on-premises athletic facility.
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