Tax Cuts and Jobs Act Update Released

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Tuesday, July 31, 2018

Updated Information on the Jobs Act

The Tax Cuts and Jobs Act (the “Act”) made a number of significant changes to the Internal Revenue Code (“Code”). One change that has received little analysis, but which could have a meaningful impact on a large percentage of United Methodist churches and other entities, relates to fringe benefits.

To put this change in its proper context, we believe it is helpful to provide a brief overview of fringe benefits.  In general, compensation and benefits provided by employers to employees are taxable. There are a number of exceptions to this general rule, including certain fringe benefits outlined in § 132 of the Code. One of the excluded fringe benefits is the “qualified transportation fringe,” which, pursuant to § 132(f), includes any of the following:

(A) Transportation in a commuter highway vehicle if such transportation is in connection with travel between the employee’s residence and place of employment.

(B) Any transit pass.

(C) Qualified parking. [1]

(D) Any qualified bicycle commuting reimbursement.

Thus, and in general, if an employer provides any of these particular fringe benefits to its employees, their value would not be treated as taxable income to those employees. In addition, and prior to the implementation of the Act, tax-paying employers could generally treat these benefits as deductible expenses that would decrease those employers’ taxable incomes. Going forward, however, the Act added language to § 274(a) of the Code that now precludes tax-paying employers from deducting expenses relating to qualified transportation fringe benefits. (The Act did not change the nontaxable treatment of these benefits as to the employees who receive them.)

More importantly, in what appears to be an attempt to treat nonprofit and tax-paying employers equally in this context, the Act also made changes to § 512, which defines “unrelated business taxable income.” Specifically, the Act created a new § 512(a)(7), which reads as follows:

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 (as defined in section 132(f)), any parking facility used in connection with qualified parking (as defined in section 132(f)(5)(C)), or any on-premises athletic facility (as defined in section 132(j)(4)(B)). The preceding sentence shall not apply to the extent the amount paid or incurred is directly connected with an unrelated trade or business which is regularly carried on by the organization. The Secretary shall issue such regulations or other guidance as may be necessary or appropriate to carry out the purposes of this paragraph, including regulations or other guidance providing for the appropriate allocation of depreciation and other costs with respect to facilities used for parking or for on-premises athletic facilities.

To date, the IRS has not issued any guidance on how this new language will impact nonprofits generally – and, thus, there is no guidance for local churches, districts, conferences, and general agencies, specifically.

GCFA will continue to monitor any developments in this area moving forward, and we will pass along any information made available by the IRS.

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[1] “The term ‘qualified parking’ means parking provided to an employee on or near the business premises of the employer or on or near a location from which the employee commutes to work by transportation described in subparagraph (A), in a commuter highway vehicle, or by carpool. Such term shall not include any parking on or near property used by the employee for residential purposes.” (§ 132(f)(5)(C))

Legal Services Department
May 29, 2018

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As outlined extensively in the IRS’s Publication 521, the “deduction of certain moving expenses to a new home because [the taxpayer] started or changed job locations” has been an available deduction, and it is created by Section 217 of the Tax Code. In addition to the available deduction, another section of the Code – Section 132(g) – provides that the reimbursement of qualified moving expenses by an employer will not be treated as a taxable fringe benefit. In other words, if the employee would be able to take the moving expense as a deduction, the employer could pay for those expenses on a tax-free basis.

Unfortunately for those who will incur moving expenses that would meet the deductibility standards outlined in Publication 521, the Act has suspended the application of Sections 217 and 132(g) from January 1, 2018 through December 31, 2025. The end result of this suspension is that (1) moving expenses incurred during that time period will not be a deductible expense (except for certain members of the Armed Forces) and (2) any reimbursement by, or payment of, these expenses by an employer during the same time period will need to be reported as taxable income to the employee (again, except for certain members of the Armed Forces).

Thus, for example, if a local church covers some or all of the moving expenses of an employee, such as its pastor, the church will need to report that amount on as taxable income to the employee. And, as another example, if the payment of moving expenses is made by an annual conference on behalf of a pastor serving a local church, the conference will likely need to issue that pastor a Form 1099-MISC reflecting the amount paid (the instructions to Form 1099-MISC state Box 7 should include “taxable fringe benefits for nonemployees,” which will presumably include moving expenses for the years during which Sections 217 and 132(g) are suspended).

Legal Services Department
February, 2018

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In our first communication regarding the Tax Cuts and Job Act’s partial repeal of the Johnson Amendment, we mentioned there was no guarantee the language of the initial draft would survive the legislative process. With the draft legislation’s passage by the House Ways and Means Committee, the language addressing the Johnson Amendment has already been modified, in two significant ways. First, the partial repeal now would apply to all Section 501(c)(3) organizations, rather than just churches. Second, the partial repeal would be only temporary – it would go into effect on January 1, 2019, and would then sunset after December 31, 2023. 

Legal Services Department
November 10, 2017

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GCFA’s Legal Services Department previously provided information regarding President Trump’s intent to repeal the so-called “Johnson Amendment.” On November 2, 2017, an initial draft of the “Tax Cuts and Jobs Act” (H.R. 1) was released. The 429-page bill would implement numerous and varied changes to the Internal Revenue Code. Among the extensive proposals contained in the Act is a partial repeal of the Johnson Amendment.

The Act, as currently drafted, would allow churches, their integrated auxiliaries, and conventions or associations of churches to engage in certain political campaign activities without jeopardizing their tax-exempt status. Specifically, those organization would not be treated as campaigning on behalf of a candidate for public office “solely because of the content of any homily, sermon, teaching, dialectic, or other presentation made during religious services or gatherings,” as long as such content both (1) occurs as a part of the organization’s “regular and customary activities in carrying out its exempt purpose” and (2) produces nothing more than “de minimis incremental expenses.”

We believe there are a few important takeaways from this language. First, this is only the initial draft of the Act. It is only beginning is journey through the legislative process. Should this portion of the Act eventually become law, there is no guarantee the language in the initial draft will be retained. Second, even if the language remains as is, it would not be a full and complete repeal of the Johnson Amendment. It does not apply to all 501(c)(3) organizations. And for those to which it does apply – i.e., churches, their integrated auxiliaries, and conventions or associations of churches – the Act’s language is still not a total repeal of the ban on political campaign activities. For example, the proposed language would not appear to permit a church to hold a rally for a particular candidate, or to circulate literature which promotes a particular candidate. Finally, given the targeted nature of the language, opponents may raise First Amendment objections to the current language.

GCFA’s Legal Services Department will continue to monitor the Act’s progress and report on any significant developments.

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