Not-for-profit organizations have already begun planning for 2018 after the Tax Cuts and Jobs Act went into effect. This planning however has come to a pause while the IRS implements the new Unrelated Business Taxable Income (UBTI) rules.
What are the New UBTI Rules?
The new rules may make it more difficult for not-for-profit organizations to calculate their UBTI. Section 512(a)(6) requires that a not-for-profit calculate their unrelated business income separately for each business activity; however, it does not distinguish what constitutes a separate trade or business activity.
Additionally, Section 512(a)(7) now taxes expenses for certain employee fringe benefits. With the confusion around UBTI and the lack of clarity within Section 512, some not-for-profits are struggling to estimate their potential tax liabilities.
This confusion has encouraged not-for-profit representatives to request that the IRS delay the implementation of these new UBTI rules until final regulation. John Graham of the American Society of Association Executives (ASAE) has shared such sentiment in his March 28th letter, “It’s clear from the confusion and volume of questions about how the new tax law impacts tax-exempt entities that we need more time and more guidance to fully understand our compliance obligations.”
As we navigate the changing tax landscape, we encourage you to consult with your Sikich tax advisors to determine how your not-for-profit organization can plan for potential UBTI tax.