Simplified Rules Proposed for Nonprofits With Business Income

Proposed rules released Thursday would simplify the tax-filing process for nonprofits with taxable side businesses.

The proposed rules are designed to give clarity to a provision of the 2017 tax overhaul that required nonprofits with business income unrelated to their charitable mission to calculate each “trade or business” separately and would have required nonprofits to pay income taxes separately on each of its business lines.

For nonprofits with several lines of unrelated businesses, that could balloon the work needed to file taxes and, for some, potentially increase their tax payments.

“Rules published today are perhaps the least bad option for implementing a very bad law,” said David Thompson, vice president for public policy for the National Council of Nonprofits in a statement. He called on Congress to repeal entirely the provision requiring nonprofits to calculate their unrelated-business income taxes separately. Before the 2017 tax law, nonprofits could calculate and pay all of their unrelated-business income taxes as one line item. That allowed them to offset losses from one business with profits from another, reducing their potential tax liability. The 2017 tax law, as originally written, made that impossible.

Issued by the Internal Revenue Service for public comment, the rule for unrelated business income tax, or UBIT, would allow nonprofits to aggregate those business-income lines into one of 20 broadly defined industries, based on the Department of Labor’s industry sector codes. The proposed rule allows losses to offset profits from business activities within the same industry, but it does not allow that offsetting across industries. The proposed rules are open for comment for the next two months.