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TAX ALERT: How Tax Reform Affects UBI Calculation for Tax-Exempt Organizations

TAX ALERT: How Tax Reform Affects UBI Calculation for Tax-Exempt Organizations

The recent Tax Cuts and Jobs Act (P.L. 115-97), effective for tax years beginning after December 31, 2017, has garnered much attention for its individual- and business-focused provisions, but it also contains some significant changes for exempt organizations affecting the unrelated business income (UBI) landscape. Specifically, these changes relate to the calculation of losses on a separate trade or business and the disallowance of transportation fringe benefits provided to employees.

Tax Reform Changes Affecting UBI Calculations

The new law requires exempt organizations conducting more than one unrelated trade or business activity to calculate UBI separately for each unrelated trade or business. This effectively prohibits using current losses arising from one specified unrelated trade or business to offset income from another unrelated trade or business. If an organization has an excess of expenses in Activity A, it cannot use those to offset income from Activity B. In addition, future net operating losses (NOLs) incurred after the effective date may only offset future income from that same trade or business. This would potentially result in paying taxes on UBI of a profitable separate trade or business for the very first time, since they will no longer be allowed to net together income and losses arising from multiple unrelated business activities.

Unfortunately, only transitional rules and interim guidance are available at this time to aid in the determination of what makes up a separate trade or business under this new law. The IRS is currently soliciting further comments for definitive final guidance. Until final guidance is issued, it is possible that the IRS could take a practical approach and group together business activities in broad categories, such as advertising or debt financed income. The IRS could also take a stricter approach and consider advertising from each publication as separate unrelated business activities, which would mean that the organization would need to compute UBI separately for each advertising activity and pay tax on any activity that turns a profit (with no corresponding offset from other advertising activities generating losses).

Changes to Transportation Deductions

Another change under the new law is all tax-exempt organizations will have to include as UBI any amounts paid or incurred for any Qualified Transportation Fringe Benefits. This includes transit passes or qualified parking provided to employees on or near your business premises. It includes parking on or near the location from which your employees commute to work using mass transit, commuter highway vehicles, or carpools.

Additional guidance in these areas is expected and is definitely needed to aid the implementation of this new law. The IRS, with the urging of various exempt organizations, is also currently considering a delay in the implementation of some of these rules. In the meantime, exempt organizations should start looking at their UBI activities and employee fringe benefit programs in order to assess the tax impact of the new law and make contingency plans in anticipation of future guidance.

The tax team at MGO is ready to assist you with this review and minimize any adverse impacts from the new law. For further guidance or to schedule a consultation, please visit: mgocpa.com/contact-us




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