Nonprofit Increases in Unrelated Business Income Tax
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Nonprofit Increases in Unrelated Business Income Tax
The One Big Beautiful Bill could change the way you pay your taxes in the U.S. The bill would change the rules for exempting certain types of income from tax. The change could have a significant impact on the way we pay our taxes. It could also lead to a change in the way the tax system is run in the United States. It is important to be aware of the changes and make sure you are aware of how they will affect you. It’s important to make sure that you are able to pay your tax bill.
While nonprofits have long operated under special tax-exempt protections, the recently proposed One Big Beautiful Bill Act indicates a significant tightening of the rules around unrelated business taxable income (UBTI).
If passed, the bill could have far-reaching effects on your organization, impacting it through policy changes, funding reductions, and other tax implications that could significantly affect your financial strategies and the ways you deliver services to your community.
UBTI may be increased on certain fringe benefits
Nonprofits often rely on certain transportation fringe benefits to attract and retain employees, such as transportation subsidies and parking allowances. The proposed bill would turn the provision of the above benefits into UBTI for tax-exempt organizations. Religious organizations would be exempted from this provision.
This additional tax burden could force nonprofits to reevaluate their employee benefit packages, potentially reducing the attractiveness of working in the nonprofit sector or bear the additional tax burden. Moreover, the administrative burden of tracking and reporting these fringe benefits as part of UBTI could increase operational costs and necessitate more stringent financial oversight.
What you can do now
Nonprofit organizations should conduct a thorough assessment of their current fringe benefits by reviewing and identifying those that may be subject to unrelated business income tax. They should also consider re-evaluating benefit packages and be sure to communicate and educate their employees about the change.
Exclusion of research income limited to publicly available research
This change means that any research income that is not freely available to the public will now be treated as UBTI. Nonprofits engaged in research activities will need to carefully evaluate the extent to which their research is accessible to the public. If the research is behind paywalls, restricted to certain groups, or otherwise not publicly available, the income derived from it will be subject to UBTI rules. It is important to note that nonprofits, where research activities are incidental to their primary exempt mission, will no longer be eligible for the research UBTI exclusion.
This shift could impact the financial planning and tax liabilities of research-oriented nonprofits. These organizations may face increased taxable income, leading to higher tax burdens and necessitating adjustments in their financial strategies.
What you can do now
Nonprofits might need to implement a more sophisticated tracking process to distinguish between publicly available research income and non-public research income and to account for related expenses accurately.
Other potential tax changes to watch