The Internal Revenue Service (IRS) released guidance this month regarding certain Unrelated Business Income Tax (UBIT) in the Tax Cuts and Jobs Act of 2017 (TCJA). The guidance is online, and will be published Sept. 4 in IRS Bulletin 2018-36.
A detailed analysis of the IRS guidance can be found on CUNA’s Removing Barriers Blog.
The new tax law requires the separate computation of UBIT for tax-exempt organizations with more than one unrelated trade or business. Losses generated by one unrelated trade or business cannot be used to offset income derived from another unrelated trade or business.
This results in an increase in unrelated business taxable income and must be reported in a revised IRS Form 990-T.
Income at state-chartered credit unions that the IRS deems to be unrelated to the credit union’s tax-exempt purpose is subject to taxation, while federal credit unions are not subject to UBIT requirements because they are instrumentalities of the federal government and subject to restrictions on activities imposed by Congress.
Income that is subject to UBIT is defined as any net income derived from any “unrelated trade or business” – defined as “activity not substantially related to organization’s exempt purpose.” Income is “substantially related” if it “contributes importantly to accomplishment of the organization’s exempt purposes.”
The TCJA requires tax-exempt organizations currently subject to UBIT (including state-chartered credit unions) to pay it on certain employee fringe benefits, namely transportation and parking benefits, as well as on-site gyms and athletic facilities. For-profit businesses are no longer allowed to deduct these and other employee benefits.
The IRS guidance released this week states that any UBIT arising from these fringe benefits will not be subject to the “silo” rule, meaning tax-exempt entities operating more than one unrelated business will be able to calculate their total net tax obligation for these fringe benefits and apply it against any existing UBIT tax liability.
CUNA and its partners will continue to urge Treasury to delay these new tax provisions, due to a significant lack of clarity in the underlying provision requiring separate computation of UBIT for entities with more than one related business as well as uncertainty regarding the provision that includes the definition of fringe benefits and what is covered under the new UBIT tax expansion.