By Rhonda G. Williams, CPA
Barraclough & Associates, P.C.
Certified Public Accountants & Consultants
Surprise, the Tax Cuts and Jobs Act Affects Tax-Exempt Entities, Too!
Tax-exempt entities do not pay taxes, so why would the new tax act affect them? Actually, all tax-exempt entities have to pay taxes on certain types of income. Nonprofit organizations in New Mexico must report unrelated business income (UBI) on Form 990-T and New Mexico Form CIT-1. Trust accounts must report UBI on Form 990-T and FID-1. Not only have the mechanics for calculating UBI on Form 990-T changed, but the form itself will now be used to report and calculate the tax on disallowed employee benefits.
An unrelated business is any trade or business the conduct of which is not substantially related to the exercise of an organization’s exempt purpose. If a nontaxable entity has gross income of $1,000 or more from a regularly conducted unrelated trade or business, including UBI reported to it on Form K-1, it must file Form 990-T, even if taxable income is zero. This affects:
1. any domestic or foreign organization exempt under IRC Section 501, and
2. trust accounts as defined in IRC Sections 408(e), 408A, 529(a), 220(e), and 530(a). These include IRAs, SEP IRAs, SIMPLE IRAs, Roth IRAs, Coverdell Education Savings Accounts, Archer Medical Savings Accounts, and Health Savings Accounts.
Each account of a type listed above is treated as a separate trust for unrelated business income tax purposes (even if there is a single owner or beneficiary for multiple accounts). A custodian is treated as a trustee.
No aggregation of income and losses – In the past, income and losses from various UBI activities could offset each other on Form 990-T. The new law does not allow multiple activities to be aggregated. Now, the entities’ total UBI must be computed by adding together the net UBI of each separate unrelated trade or business. For this purpose, the net UBTI of each trade or business may not be less than zero. Therefore, the net operating loss of each trade or business must be tracked separately. In the past, net operating losses could be carried back two years, then forward. The new law requires that net operating losses be carried forward.
Tax on disallowed employee benefits – Tax-exempt entities often provide nontaxable fringe benefits to employees, such as athletic facilities, parking facilities, and transportation benefits. The new tax law requires tax-exempt entities to pay tax on the value of those benefits by treating the disbursements as UBI. In other words, those previously nontaxable benefits will now be taxable, but the tax will be assessed on the tax-exempt employer, not the employee, and will be paid via Form 990-T.
Please contact your tax advisor for additional information.