The Tax Cuts and Jobs Act cut taxes to the benefit of the American economy. However, a little-noticed provision in the legislation created a new policy to tax nonprofits—including houses of worship—for the first time in the history of the United States. A change this significant to the tax code affecting a part of American life as fundamental as church and charity deserves to be re-examined.
The tax code must be amended to ensure that tax-exempt organizations—including hundreds of thousands of churches—are not required to pay federal income tax and file 990-T forms with the IRS. The Tax Cuts and Jobs Act contains a provision that requires tax-exempt organizations to file federal income tax returns and pay unrelated business income tax (UBIT) on the cost of parking provided to employees. Filing a return is required even if the organizations do not actually conduct any unrelated business activities. This is a significant change in the treatment of charitable organizations. Details of the implementation are pending regulatory guidance by the Internal Revenue Service.
The newly added Section 512(a)(7) of the Internal Revenue Code states, in part: “Unrelated business taxable income of an organization shall be increased by any amount for which a deduction is not allowable under this chapter by reason of section 274 and which is paid or incurred by such organization for any qualified transportation fringe, any parking facility used in connection with qualified parking, or any on-premises. . . The [Treasury] Secretary shall issue such regulations or other guidance as may be necessary or appropriate…”
Many churches, religious schools, and other charities will be required to file federal returns for the first time in their history. In addition to the new federal requirements, many nonprofits will then be required to file state returns and possibly pay state income tax. The new regulations create tax liability and increase operations costs for these nonprofits, all because they simply have a parking lot.
The ERLC supports a solution that repeals Section 512(a)(7) of the IRS code. The Tax Cuts and Jobs Act pushed the charitable sector into uncharted waters with at least two major changes. Taxing nonprofits on basic costs of operating an institution defeats the purpose of nonprofit status, an American tradition for over 100 years. The increase in the standard deduction is a welcome change for many American families, but doing so without making the charitable deduction universal has eliminated the incentive to make charitable contributions for approximately 95% of American taxpayers. The ERLC supports the repeal of Section 512(a)(7) and the passage of a universal charitable deduction.
