Lawmakers take aim to end taxing of benefits for nonprofits
Sen. James Lankford, R-Okla., and Sen. Ted Cruz, R-Texas, have introduced separate pieces of legislation set to eliminate tax burdens that many churches and nonprofits are subject to following the passing of the Tax Cuts and Jobs Act in December 2017.
House bill 6460 and Senate bill 3317 would repeal a provision that requires tax-exempt organizations to pay federal taxes on employee fringe benefits such as parking, meals and transportation.
This would require churches to fill out IRS Form 990. This form provides the public with financial information about a nonprofit organization and would make the organization tax exempt from these fringe benefits.
This could also open up nonprofits to other government tax forms such as IRS Form 8868 — used by tax exempt organizations to request an automatic six month extension of time to file its returns — or Section 125 Premium-Only-Plans — a cafeteria plan that allows employees to pay their health insurance premiums with tax free dollars.
Benefit advisers are split in terms of whether or not these new pieces of legislation would help or hinder nonprofits and their benefits. Robson Baker, employee benefits and HR adviser for Clarus Benefits Group in Houston, Texas, says while he has not seen much action taking place in Congress regarding the legislation becoming law, he has begun to inform his clients of the bill and how they should start preparing themselves.
Because the legislation is still in its infancy, many of Baker’s nonprofit clients are unfamiliar with it and do not have a clear plan of action should it become law. Baker says this bill could lead his clients into unfamiliar territory when it comes to filing procedures with the IRS, causing smaller organizations to pay outside bookkeepers with money they may not have readily available.
“A lot of these nonprofits are going to be burdened with additional preparation and staff time,” Baker says. “Many operate off of volunteerism from bookkeepers because not all of these nonprofits are going to be large organizations that have a large staff of professionals who could handle the process.”
Baker refers to organizations such as nonprofit hospitals that have multiple sources of income including religious affiliation, charities and research or educational funds. These organizations receive the most scrutiny from policymakers, arguing whether they provide enough community benefits that justify forgone government tax revenues.
Other advisers, like Chris Corkran, national sales director at National Insurance Partners, says the tax filings could be the necessary sting nonprofits need to feel in order for them to reevaluate other benefits such as their health plan offerings, allowing their advisers to offer more innovative solutions.
“A lot of these smaller organizations are on ACA community rated plans and they simply cannot afford them any longer,” Corkran says. “A little pain allows us to come in and offer outside the box solutions to save them a fair amount of money off of their current plan design.”
These community ratings Corkran refers to requires health insurance providers to offer insurance policies within a given territory at the same price to all persons without medical underwriting, regardless of their health status.
A closer evaluation of the legislations, by The Christian Post, shows various repeals of paragraphs in the Internal Revenue Code that would affect nonprofit entities.
Cruz’s bill — Protect Charities and Houses of Worship Act — repeals paragraph six and seven of Section 512 of the IRC, while Lankford’s bill only repeals paragraph seven.
Paragraph six creates the special tax reporting rule for unrelated business taxable income and paragraph seven details what constitutes as unrelated business taxable that is disallowed fringe, such as parking and transportation.
Paragraph seven has specific language that states that, “unrelated business taxable income of an organization shall be increased by any amount for which a deduction is now allowable.”
Repealing paragraph seven could void paragraph six. However, House Ways and Means Chairman Kevin Brady, R-Texas, has defended the provision to tax fringe benefits, saying that it is a matter of fairness.
“It is about treating a nonprofit hospital the same as you treat a for-profit hospital,” Brady says. “We think the parity issue, the fairness issue is right.”
Bret Brummitt, senior consultant at AG Insurance Agencies and a former church pastor, says he ran his church as a 501(c)3 under the Internal Revenue Code allowing for federal tax exemption of his nonprofit as a public charity or private foundation.
As a small nonprofit, Brummitt says his church would not have been impacted by paying taxes because the amounts were not that hazardous to the community’s finances. “We didn’t have a huge amount of giving or expenses,” Brummitt says. “We also didn’t own property as we rented space from a museum and often relied on volunteers without paid staff.”
With little to no movement so far on either piece of legislation since their inception, Baker and Corkran agree that there is still a long way to go before either bill is suitable for law, should they even get that far.