Nonprofits that operate on a calendar year budget typically must file their Internal Revenue Service (IRS) Form 990 on May 15. This year, however, they had a new tax to pay.
#NonprofitTaxDay came and went on May 15, with the National Council of Nonprofits and other advocacy organizations trying to garner attention on the new taxes that impact nonprofit expenses.
Congress failed to repeal a provision in the 2017 Tax Cuts and Jobs Act (TCJA) that imposed an unrelated business income tax (UBIT) on expenses of nonprofits that provide employees with transportation benefits. Transportation benefits could include things like transit passes and parking, under Section 512(a)(7) of the tax law. Another provision impacting large nonprofits, like hospitals, is targeted for repeal. Internal Revenue Code Section 512(a)(6) imposes allocation or accounting rules on revenue-generating operations that are not imposed on for-profits. Instead of aggregating profits and losses from all unrelated business activities, nonprofits are required to “silo” each separate trade or business and pay unrelated business tax income. This would especially impact large charities or hospital systems that operate various entities.
A broad coalition of nonprofits declared #NonprofitTaxDay on May 15. Nonprofits were surveyed to provide an estimate of how much they paid in the new taxes and what impact that had on program spending. “Everyone agrees this is bad policy, no one’s defending that,” said David L. Thompson, vice president of public policy for the National Council of Nonprofits in Washington, D.C. Nonprofits are caught in the middle, being held hostage by other issues, he added. “They’re waiting on some tax vehicle to come along and attach something to it,” he said of Congress. If nonprofits can garner enough attention for repeal, they’ll be a big enough deal to pass legislation, he said.
The #NonprofitTaxDay campaign asks organizations to estimate how much they would have to pay in taxes on those expenses and what that means for diverting dollars away from program. “We can’t raise prices like for-profits,” Thompson said. “This is something that has consequences, all of them negative. We want people to know that they can help on the advocacy side of things,” he said.
Thompson hopes that pressure by nonprofits will help to get a bill enacted before the Congressional recess in August. #NonprofitTaxDay is designed to be pressure, he said, urging senators and representatives to sponsor any and all bills to repeal the tax. He is hopeful that the second half of the year might be when progress is made. “There’s lot of reasons to pass a tax bill,” he said, including extenders, about 70 typos or technical mistakes in the 2017 tax law, disputes over which business tax breaks should be enacted. “We have one that no one disputes,” Thompson said.
Several bills in Congress have been introduced, including some with bipartisan support, but neither were passed in time to avoid a tax on nonprofits come May 15.
H.R. 1223, sponsored by House Majority Whip James Clyburn (D-S.C.), would repeal the transportation tax in 512(a)(7) but is the only one that specifies how to pay for it. The bill would raise the corporate income tax rate from 21 percent to 21.03 percent to cover the $1.8 billion cost. A companion bill was introduced in the Senate by James Lankford (R-Okla.) and Chris Coons (D-Del.), The Lessening Impediments from Taxes (LIFT) for Charities Act (S. 632).
H.R. 1545, sponsored by Rep. Mark Walker (R-N.C.) and Tom Suozzi (D-N.Y.) is a straight repeal of transportation benefits tax on nonprofits. H.R. 513, sponsored by U.S. Rep. Mike Conaway (R-Texas), saw a companion bill reintroduced in the Senate (S.1282) with bipartisan sponsors, Sen. Ted Cruz (R-Tex) and Sen. Jeanne Shaheen (D-N.H.), on May 2. The measure would repeal the business silo provision. The legislation would repeal the transportation tax and the siloed business provisions but neither specifically cites a way to make up the revenue.
One reason for the bipartisan support for repeal, Thompson said, is that nonprofits got nothing out of the tax reform bill in 2017. “It’s not debatable that some of those tax cuts were on the backs of nonprofits and people they serve,” he said.
The transportation tax, roughly 21 percent, could divert an average of $12,000 a year from a nonprofit’s mission, according to a study commissioned by Independent Sector (IS). About one in 10 organizations surveyed were considering dropping transportation and parking benefits altogether, even though employer-provided benefits are mandated in some metropolitan areas, like Washington, D.C., New York and San Francisco.