Churches & Other Non-Profits to Pay Income Tax on Employee Benefits under New Law

Fellowship of the Minds – by Grif

The 2017 Tax Act (formerly known as the Tax Cuts and Jobs Act), signed into law late last year, was welcomed by wage earners and business alike that saw it as the fulfillment of President Trump’s campaign pledge to ease the burden of federal income tax. The law reduced the corporate tax rate from 35 percent to 21 percent, and created new income brackets that generally reduce the amount of federal income tax levied on wage earners. And yet, the new tax law has a darker, and for some, a more sinister side.

As of January 1, 2018, all non-profit 501(C)( 3) charitable organizations, including churches, which for decades were exempt from paying income tax, are no longer tax exempt.  

Among other things, non-profits may have to file and pay a new income tax called “990-T,” at the rate of 21 percent on some benefits they give to their employees.

Section 512(a) (7) of the new tax code creates categories of taxable income by considering free employee benefits such as parking, travel expenses on company business, and the like as income to the church or non-profit corporation, which would then be taxed. The tax law applies to churches; religious organizations that provide services such as the Salvation Amy, Boys and Girls Clubs of America, Good Will; and secular non-profits such and hospitals and colleges.

See “2018 Tax Law Checklist: New Federal Tax Law – Now What for Nonprofit Board and Staff Members,” National Council of Nonprofits, April 17, 2018.

“Because of this new tax, many tax‐exempt employers, including churches, hospitals, charities, and schools will be required to file federal Form 990‐T, and in many cases, state corporate income returns, every year regardless of whether they actually engage in any unrelated business activity. This new tax was purportedly added to the law to put tax‐exempt employers on the same footing as taxable employers with respect to employer‐provided parking,” the Evangelical Council for Financial Accountability (ECFA) states.

The change in non-profit status was not mentioned during the debate over the tax bill. And even now, many people involved in tax-exempt organizations still do not have a good grasp of what the tax law means for their organizations.

The new law will reportedly apply to all churches that provide parking for their employees even if the employee isn’t charged for parking. So how much does a parking space cost? The IRS is still calculating it. Dan Busby, president of the ECFA, predicts it will cost non-profits even more money than the actual tax amount because some will have to hire accountants just to sort through the new tax requirements.

Busby said “churches weren’t expecting to’ get hit with – of all things – an income tax bill,” which he called “a huge burden on groups that have historically enjoyed tax-exempt status.”

He said there are “nearly 15 million employees that work in the United States for nonprofits – nearly 10 percent of the workforce – so that’s 15 million parking places. And conservatively, it’s going to cost the non-profit community as a whole up to a billion dollars (in income tax levies). That’s a lot of money for ministries that rely on donations.”

Brian Faler, writing for Politico, June 26, 2018, said, “House Ways and Means Chairman Kevin Brady is defending a controversial provision of the GOP tax law that requires churches and other historically tax-exempt organizations to begin paying a 21 percent tax on some types of fringe benefits they provide their employees.”

According to Faler, during the writing and debate leading up to the new tax code, Republicans wanted to treat nonprofits equally with for profit businesses, a task, “which proved challenging.”

“Because those organizations don’t pay income taxes lawmakers couldn’t take away fringe-benefit deductions,” he wrote. “So instead they created a 21 percent tax on the value of some of nonprofit employees’ benefits. The main benefits affected are transportation-related, like free parking in a lot or a garage and subway and bus passes. It also targets meals provided to workers and, in some circumstances, may affect gym memberships.”

However, Rob Damschen, Rep. Brady’s spokesman, defended the new tax policy, saying, “The Tax Cuts and Jobs Act included provisions that provided greater parity in the tax treatment of different types of employee compensation. These provisions apply to both employers that are taxable entities and those that are tax-exempt entities. Providing this greater parity helps to reduce the extent to which decisions about the elements included in the employee compensation package are driven by tax considerations.”

Mike Batts, ECFA chairman of the board, took issue with Damschen.  “What we’re talking about is an income tax on the church for providing parking to its employees — that’s what we’re talking about,” he said. “It’s absurd.”

Predictably, many churches and non-profit organizations are calling for the repeal of the law that would force ministries to file federal tax returns, and in some cases pay taxes.

While churches, religious organizations and other non-profits decry the tax, other groups are delighted that churches now will have to pay income taxes to the IRS. The groups?

Atheists and humanists.

Michael Stone, writing in the online progressive secular humanist blog Patheos June 26, praised the new law saying: Good news: The new Republican tax law that gives to the rich while hurting the poor has a surprising consequence: taxing churches.

“In fact,” he wrote, “the new GOP tax law will force churches to pay taxes for the first time. And the churches are furious. Despite the complaints, taxing churches is long overdue, and a welcome development. A 2015 report from the Secular Policy Institute shows that tax exempt churches cost U.S. taxpayers $71 billion every year. . . . Among the report’s findings: Each year religious groups receive $35.3 billion in federal income tax subsidies and $26.2 billion property tax subsidies. In addition, religious organizations also enjoyed approximately $6.1 billion in state income tax subsidies, along with $1.2 billion of parsonage, and $2.2 billion in the faith-based initiatives.”

Stone noted that there currently is no estimate of how much tax revenue the new law will produce. He quoted Politico, however that the new tax “could cost some churches tens of thousands of dollars.”

“Bottom line:” he wrote, “This is good news. Churches should be taxed. Taxpayers should not be in the business of subsidizing religious superstition. It’s long past time to start taxing churches.” 

Opposition to the new taxes is growing among non-profit organizations.  The Christian Broadcasting Network June 27 reported that more than 1,000 churches and other non-profit groups have signed a petition put out by the ECFA demanding that the new 990-T tax on non-profits be repealed.

According to the ECFA, “By signing the petition, you will be advocating for the repeal of this new burdensome provision in the law . . . either by legislation or effectively by action of the Treasury Department. The position statement may be used to communicate these concerns to members of Congress and/or Treasury officials.”

Fellowship of the Minds