These Leaders Are Rallying to Stop New NY Taxes on Tax-Exempt Nonprofits
By Michael Hamill Remaley, Senior Vice President, Public Policy & Communications
If you’ve worked in philanthropy for a little while, you probably already know many of the local leaders who fly the flag on behalf of New York’s nonprofit sector, but you might not be as familiar with the big issue they are working on right now – or about the important victory that is as close as a signature by Governor Cuomo.
Many of us in the philanthropic and nonprofit sectors closely followed and exercised our voices on the controversial measures affecting nonprofits that were debated in the run-up to last year’s hastily approved U.S. Tax Cuts and Jobs Act, such as the proposed repeal of the Johnson Amendment (eliminated from the final legislation), the negative impact of raising of the standard deduction on incentives for charitable giving (included in the legislation), and the elimination of the estate tax (not included in the legislation, but exemptions doubled). But there was another legislative change included in TCJA that took most of us by surprise, one that is now causing bipartisan consternation and considerable nonprofit anger across the nation: UBIT.
In a moment, I will detail TCJA’s change to the federal Unrelated Business Income Tax, how it will cost nonprofits and what’s being done about it in Washington. But the action happening here in New York is what’s most exciting now. Our local nonprofit leaders have worked closely with legislators in the New York State Senate and Assembly to pass a bill that would decouple state and federal tax law so that New York State would NOT automatically impose a UBIT on nonprofits for commuter related benefits. That legislation is now awaiting Gov. Cuomo’s signature, but it is not clear whether or not he intends to sign it.
Now, let’s take a step back and quickly outline the two federal changes to UBIT. According to the National Council of Nonprofits, as a result of TCJA, the potential tax liability for unrelated business income requires every charitable nonprofit to know where its income is coming from and determine whether any of it is taxable under the UBIT regulations. Income from advertising and corporate sponsorships is especially prone to being considered “unrelated,” so NCN recommends caution for nonprofits with income from those sources. Says NCN, “Just because the income is used for a mission-related purpose does not shield the income from tax liability. The activity that generated the income/loss is actually what triggers the tax.” But what really has foundations and nonprofits up in arms is that TCJA created a new UBIT liability for tax-exempt organizations that provide transportation fringe benefits for their employees, such as commuting/parking expenses. Tax-exempt employers may still subsidize employees’ commuting (in some localities, they are required to do so)/parking expenses through a bona fide reimbursement arrangement, pre-tax qualified “cafeteria” plans, or compensation reduction agreements, so that payments are excluded from the employees’ W-2s, but nonprofit employers will now have to pay UBIT on those amounts.
These two changes have produced a vast outcry (interestingly, some of the strongest voices being heard in Washington are coming from associations of evangelical churches outraged by the new taxes on parking benefits). NCN and many others are advocating to delay the implementation of new taxes on tax-exempt entities and for the IRS to provide guidance to help organizations interpret their liabilities. The U.S. Congress has taken notice, with three bills introduced to repeal these new taxes. Rep. Mike Conaway (R-TX-11) introduced the Nonprofits Support Act (HR 6037) that repeals the two new taxes. Rep. Mark Walker (R-NC-06) introduced the Lessen Impediments from Taxes (LIFT) for Charities Act (HR 6460) that repeals just the tax on transportation benefits. Rep. Jim Clyburn (D-SC-06) introduced the Stop the Tax Hike on Charities and Places of Worship Act (HR 6504) that would also repeal the transportation benefits tax and also includes a “pay for” that proposes raising the corporate tax rate from 21 percent to 22 percent. But none of these is expected to be enacted this year.
On a number of fronts, New York State has been a leader in seeking creative legislative fixes to mitigate the damage from TCJA, most widely reported on the SALT workaround. And so, it is not surprising that our state has also moved legislation to address the impact of TCJA’s new UBIT taxes on nonprofits.
The legislation awaiting Gov. Cuomo’s signature (S. 8831/A. 11051) decouples the State’s UBIT from the federal tax code with respect to changes in the treatment of commuter related fringe benefits. The NY legislation came about largely as a result of strong nonprofit voices, led in no small part by Nonprofit Coordinating Committee’s Sharon Stapel and joined by leaders from Human Services Council, New York Council on Nonprofits, Lawyers Alliance of New York, UJA-Federation of New York, Fiscal Policy Institute, and the Commission on Independent Colleges & Universities in New York. (Philanthropy New York has participated in the planning meetings of this ad hoc NYS Tax Reform Coalition, but has not taken an official position on the legislation).
The legislation awaiting Gov. Cuomo’s signature will protect nonprofit institutions from additional negative effects of the federal tax law. TCJA imposes federal UBIT taxes on any amount a nonprofit employer has “paid or incurred” for providing employees with pre-tax commuter benefits, such as a NYC Metrocard, Buffalo NFTA metro Pass, Rochester RTS Pass, or employee parking. New York State law currently imposes a state UBIT whenever federal law does so. As a result, New York will automatically follow the new federal statute, imposing an additional 9% tax effective January 1, 2018. If the nonprofit pays for all or part of the employee’s commuter benefits, it will have to pay both the federal tax (21%) and the 9% New York tax. While the legislation would not address the 21% tax on commuter benefits for which NY nonprofits will still be on the hook to the feds, it would save them from having to pay an additional 9% to New York State.
Without this legislation, NPCC says nonprofits will be subjected to millions of dollars in unanticipated, unbudgeted new New York State taxes in 2018, diverting critical funds from the services they provide to New Yorkers to a new tax. New York nonprofits are now faced with an unprecedented tax that is squarely aimed at states that rely more heavily upon mass transportation. Nonprofits provide transportation benefits as a way to attract and retain workers, while helping to reduce traffic and air pollution. Because nonprofits in New York City are mandated to provide transit benefits to their employees, they have no means to avoid this new State tax, absent enactment of this bill.
Given Gov. Cuomo’s leadership on other aspects of fighting back against TCJA, one might think he would be in a rush to sign this bipartisan legislation. However, he has given no indication one way or the other what are his intentions on this legislation, and some have speculated that he might welcome the additional funds coming into the state coffers. There is a “call to action” afoot to urge Gov. Cuomo to sign the legislation. To learn more, check out NPCC’s Alerts & Updates page.
Some in nonprofit circles view the new UBIT taxes as just another wound in our “death by a thousand cuts.” In New York, we have an opportunity to avoid a little bit of the pain being inflicted by TCJA. We are thankful that our nonprofit advocacy leaders a working so hard on our behalf.