Senators Lankford, Coons urge delay of new tax liabilities on nonprofits

WASHINGTON, DC –Senators James Lankford (R-OK) and Chris Coons (D-DE), co-chairs of the National Prayer Breakfast and the Senate Prayer Breakfast, sent a letter to the Secretary of the Treasury, Steven Mnuchin, expressing their concerns about the challenges faced by tax-exempt organizations, such as charitable nonprofits, houses of worship, and foundations, regarding compliance with new tax liabilities.

Enacted in December 2017, the Tax Cuts and Jobs Act applies the Unrelated Business Income Tax (UBIT) of 21 percent to tax-exempt organizations in an unexpected manner. Historically, nonprofits have paid UBIT if they operated unrelated businesses or trades. However, under the new law, nonprofits must now use a significantly different method of calculating and reporting the income and loss for each unrelated business or trade in ways that are unclear. The new law also directs nonprofits to pay UBIT on employee benefits, such as transit passes, parking spots, and provided meals for the first time. 

“Nonprofits in Oklahoma, Delaware, and all across the country provide countless services to Americans in need, including combating homelessness, lifting faith, providing health care to the medically underserved, and improving outcomes for disadvantaged youth,” Lankford and Coons wrote. “Employees of nonprofits often have the same access to parking and meals that others in the community have because the nonprofit serves the whole community. Eating a meal with the homeless in their shelter should not be a taxable benefit for their employees; it is part of the work of the nonprofit.”

“Requiring these organizations to pay a federal tax on these employee benefits, something they have never been required to do before will cause them to not only face an increased operating cost, but also an administrative burden.”

The new tax liabilities took effect on January 1, 2018, giving nonprofits just a few days over the holidays to understand and adapt to the new tax liabilities and budget for the unanticipated costs. Many organizations were in the middle of their fiscal years at the time and had to adjust their systems and procedures retroactively. Additionally, Treasury and the IRS have not issued Final Rules on either section of the new law, leaving many questions unanswered for charities, houses of worship, foundations and other tax-exempt organizations and their professional advisers, despite these organizations writing to the Department and IRS.

The letter written by Senators Coons and Lankford urges the Department of the Treasury and the Internal Revenue Service to delay the implementation of the new UBIT sections until one year after the Final Rules are issued. The delay would provide additional time for the Department to work with Congress and the tax-exempt community to address the confusion and operational compliance challenges faced by charitable nonprofits, houses of worship, and foundations so that they are able to continue providing critical services to communities without undue burden or interruption.

The full text of the letter is copied below and is available here. 

November 27, 2018

The Honorable Steven Mnuchin 

Secretary

U.S. Department of the Treasury 

1500 Pennsylvania Ave NW 

Washington, D.C. 20220

Dear Secretary Mnuchin:

We write to call your attention to the challenges that tax-exempt organizations, including charitable nonprofits, houses of worship, and foundations, are experiencing regarding compliance with the new Internal Revenue Code Sections 512(a)(6) and 512(a)(7) under the Tax Cuts and Jobs Act (Public Law No. 115-97) enacted in December 2017. 

As you know, under the Tax Cuts and Jobs Act, two sections apply the Unrelated Business Income Tax (UBIT) of 21% to charitable nonprofits, houses of worship, and foundations. While we understand that nonprofits have historically paid UBIT if they operated unrelated businesses or trades, Section 512(a)(6) imposes a significantly different method of calculating and reporting the income and loss for each unrelated business or trade for nonprofits in ways that are unclear.

Section 512(a)(7) directs nonprofits to pay UBIT on employee benefits such as transit passes, parking spots, and provided meals for the first time. Nonprofits are organized around a cause, mission, or community need, and employees of nonprofits often have the same access to parking and meals that others in the community have because the nonprofit serves the whole community. Eating a meal with the homeless in their shelter should not be a taxable benefit for their employees; it is part of the work of the nonprofit. Parking is most often not an unrelated business for a nonprofit, and it is only an issue in the narrow case that the nonprofit leases their parking spaces on days or times they are not normally used for the nonprofit. If a nonprofit owns spaces in an urban area for the use of their employees, that is no different than providing the employee office space to work during the day or a bike rack to store their bike. That is not unrelated business. If a nonprofit is near a large university and they use their parking lot as a fundraiser during a sports game or concert, it is the same as using their parking lot to set up a table to sell lemonade on a summer afternoon as a fundraiser. A parking lot is not a benefit to most nonprofits, it is an essential part of their reach into the community. Parking lots for nonprofits are often gravel and unstriped; it is not even possible to note a cost per space, because there is no way to accurately determine how many spaces they have on their open lot. 

Requiring these organizations to pay a federal tax on these employee benefits, something they have never been required to do before, will cause them to not only face an increased operating cost, but also an administrative burden by filing 990-T forms with the IRS for the first time. 

As Senator Lankford and I mentioned in our previous letter to the Department and IRS regarding the impact of the Tax Cuts and Jobs Act on the charitable deduction, nonprofits in Oklahoma, Delaware, and all across the country provide countless services to Americans in need, including combating homelessness, lifting faith, providing health care to the medically underserved, and improving outcomes for disadvantaged youth. Also, as co-chairs of both the National Prayer Breakfast and the Senate Prayer Breakfast, we believe that we have a moral obligation to support our neighbors most in need, and nonprofits play an essential role in doing just that.

The new unrelated business income taxes on tax-exempt entities ostensibly took effect on January 1, 2018. Nonprofits had only a few days over the holidays to learn of and try to understand these new tax liabilities, adapt their accounting systems and procedures to secure full compliance, and budget for the unanticipated costs. Many organizations were in the middle of their fiscal years on January 1, and thus were expected to adjust their systems retroactively.

It is the responsibility of the Department of the Treasury to issue regulations that provide guidance to the affected communities in order to enable them to comply with the new law. We understand that on August 21, 2018, Notice 2018-67 was released with interim guidance regarding issues arising under Section 512(a)(6). However, many questions remain unanswered for charities, houses of worship, foundations and other tax-exempt organizations and their professional advisers on both sections, despite these organizations writing to the Department and IRS. Also, on November 8, the Department of the Treasury and IRS published a 2018-2019 Priority Guidance Plan, placing guidance for Section 512(a)(7) on this list. However, this still does not provide taxation clarification for nonprofits.  

We urge the Department and IRS to delay the implementation of both Section 512(a)(6) and 512(a)(7) until one year after Final Rules are issued. It is essential that the Department of the Treasury and IRS engage the regulated community during the formal rulemaking process to identify not only how the wording of the new provisions is causing confusion and operational compliance challenges among nonprofits and their professional tax advisors, but also possible regulatory solutions. 

Mr. Secretary, we believe strongly that a one year delay in implementing the Final Rules is a necessary step that will provide additional time for the Department to work with Congress and the tax-exempt community, including America’s charitable nonprofits and houses of worship, so that they are able to continue providing critical services to communities in Delaware, Oklahoma, and across the country without undue burden or interruption. 

We urge you to act swiftly on this matter.

Sincerely, 

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