Removing Barriers Blog

Unrelated Business Income Tax (UBIT) Update
Posted August 24, 2018 by CUNA Advocacy

On August 21, the IRS released interim guidance regarding certain UBIT provisions in the Tax Cuts and Jobs Act of 2017 (TCJA).  Notice 2018-67 will be published in Internal Revenue Bulletin 2018-36, dated September 4, 2018. 

The new tax law requires the separate computation of UBIT for tax-exempt organizations with more than one unrelated trade or business.  Before the TCJA, when a tax-exempt organization operated more than one unrelated trade or business activity, losses generated by one business could be used to offset income derived from another.  Now, losses generated by one unrelated trade or business cannot be used to offset income derived from another unrelated trade or business.  Clearly, this results in an increase in unrelated business taxable income and must be reported in a revised IRS Form 990-T.  This provision became effective on January 1, 2018. 

All credit unions are exempt from the federal corporate income tax under §501(c)(1) of the Internal Revenue Code for federally-chartered credit unions and under §501(c)(14)(A) for state-chartered credit unions.  Nevertheless, income at state-chartered credit unions that the Internal Revenue Service (IRS) deems to be unrelated to the credit union’s tax-exempt purpose is subject to taxation under §511-513; 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.” UBIT was designed to prevent unfair market competition from tax-exempt entities against for-profit entities. 

The IRS requires that state-chartered credit unions file annual Form 990s, like most other tax-exempt entities.  These credit unions must also file a Form 990-T (UBIT Form) if the tax-exempt entity has $1,000 or more of unrelated business taxable income to report. 

The TCJA requires tax-exempt organizations currently subject to UBIT (including state-chartered credit unions) to pay UBIT (effective 21 percent) 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.  This means that 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. 

However, CUNA and our partners in the tax-exempt sector will continue to urge Treasury to delay these new tax provisions.  There is 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. 

Worth noting is that some cities, including Washington, DC, New York, and San Francisco, have mandated that employers provide pre-tax mass transit benefits.  Thus, employers in those cities do not have the option of changing those benefits to avoid the new fringe benefit tax. 

In addition, this new tax on fringe benefits basically taxes an expenditure made by an employer, not sales or other revenue-generating activity. 

CUNA believes that the IRS should not require compliance with these new UBI taxes until the IRS issues final rules.  That will give not-for-profit entities the clarity and time needed to correctly implement the changes, buy or update needed software, and time to train staff on the new changes.