Because of recent changes to the tax law, some nonprofit organizations will find themselves with taxable income this year, requiring them to make quarterly payment of estimated taxes.
Nonprofit organizations have long been subject to tax on Unrelated Business Taxable Income (UBTI), but the tax reform package passed late in 2017 created a new category of UBTI that relates to various fringe benefits that may be provided to employees. Organizations that provide transportation fringe benefits (such as parking and public transit benefits) or provide on-premise athletic facilities may now have UBTI related to these amounts. Based on IRS guidance, this will apply whether the organization directly pays for the benefits or allows the employees to use pre-tax salary deductions to pay for the benefits. While further IRS guidance is required regarding various details, a simple example illustrates that if an organization is providing each of its 100 employees a monthly transit benefit of $100, it will have an annual increase to UBTI of $120,000 (100 employees x $100 x 12 months). Depending on how the organization is structured, the UBTI will be taxed at the rates for corporations (21% for calendar year 2018) or trusts (maximum rate of 37% for calendar year 2018). Note that fiscal-year corporations will be taxed used a blended rate, which was discussed in a previous blog post.
How are estimated payments calculated?
Tax-exempt organizations that expect to owe $500 or more in tax for the year are required to make quarterly estimated payments. For 2018, the 4 payments are due April 17, June 15, September 17, and December 17. Organizations that do not pay the required quarterly amount by the due date will be subject to a penalty. Even if a deadline was missed, it is important to make the payment as soon as possible, since the penalty is calculated based on the number of days late. Organizations that did not pay the correct amount for April should add that amount to their June payment to stop the penalty from continuing to accrue.
Estimated payment amounts can be calculated using IRS Form 990-W. In general, the quarterly amount will be 25% of the annual amount due. The calculation of the annual amount due depends on whether the organization paid tax in 2017 on UBTI. If the organization paid tax in 2017, its annual payment will be the lesser of the tax due for 2017 and the tax due for 2018. This allows organizations that previously paid tax on UBTI to avoid increasing their estimated payments, even if their UBTI is expected to increase in the current year. This favorable provision does not apply to organizations that had no tax due for 2017. These organizations will have to pay estimates based on the amount of expected tax due for 2018.
Even organizations that are able to use their 2017 tax to avoid penalties may still wish to base their estimates on expected income for the current year, in order to avoid being hit with a sizable tax bill when they file their next annual return.
How do we make a payment?
Payments for exempt organizations must be made electronically. Although other EFT options are available, the IRS offers its own free service called EFTPS (Electronic Federal Tax Payment System). Taxpayers must enroll in EFTPS in order to use it and should keep in mind that payments must be set up by 8 PM the day before the due date in order to be considered timely.
For more information about the new UBTI rules or for assistance with your estimated payment requirements, please contact your Hertzbach Tax Advisor at 410-363-3200 or email us at firstname.lastname@example.org.