Spending act repeals UBTI increase for certain transportation fringe benefits

The recently signed Further Consolidated Appropriations Act, 2020 (H.R. 1865), which partly funds the federal government through fiscal year 2020, contains a litany of changes to the Internal Revenue Code (IRC). One such change is the repeal of the increase in unrelated business taxable income (UBTI) for certain fringe benefits enacted as part of the 2017 Tax Cuts and Jobs Act (TCJA). 

PREVIOUS LAW

The TCJA created IRC Section 512(a)(7), which requires tax-exempt employers to increase their UBTI by amounts paid or incurred in providing qualified transportation fringe benefits for employees, including parking and public transportation benefits. The law not only fashioned a new tax liability that would divert funds from the missions of all exempt organizations, but also created new record-keeping and compliance burdens for thousands of members of the not-for-profit community (e.g., churches and small charities) that have little or no experience dealing with the IRS. In some areas, local regulations mandated that employers offer pre-tax transportation benefits to their employees, thereby preventing employers from eliminating such benefits in order to avoid the tax. Because of the new section, some organizations have experienced six-figure increases in their UBTI. Unsurprisingly, Section 512(a)(7) has been deeply unpopular since its inception.

NEW LAW

H.R. 1865 repeals Section 512(a)(7) in its entirety, retroactive to the passage of the TCJA.

WHAT DOES COHNREZNICK THINK?

The repeal of Section 512(a)(7) brings closure to two years’ worth of financial strain and administrative uncertainty for the not-for-profit community. The retroactivity language demonstrates Congress' clear intent to limit UBTI to its pre-TCJA role. We encourage not-for-profit leaders to explore filing amended returns to potentially recoup tax paid on UBTI under Section 512(a)(7).

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