Nonprofits May See Increases in Unrelated Business Income Tax

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

• Tax on excess compensation: Expands the tax on excess compensation in tax-exempt organizations by defining “covered employee” as anyone earning over $1 million. Related party considerations and exemptions for medical services remain unchanged.
• Changes to net investment income: The excise tax rate for net investment income of private foundations will be tiered based on total assets. Foundations with less than $50 million in assets will retain a 1.39% rate, while a new top rate of 10% is proposed. 
• Tax credit for contributions of individuals to scholarship granting organizations: To qualify, the organization must be designated as a “scholarship granting organization.” This designation allows the organization to provide scholarships to elementary or secondary school students, subject to specific criteria.