Edward Zelinsky (Cardozo), Does TCJA Tax Churches? Should It?:
Does the new federal tax law, commonly known as the Tax Cut and Jobs Act (TCJA), tax churches as some have argued? If so, is this tax appropriate?
The answers are “yes” and “yes.” The TCJA provisions taxing qualified transportation fringes treat secular and religious employers alike, including houses of worship. In a world of imperfect choices, the TCJA reasonably treats all employers fairly without entangling church and state inordinately.
Churches (including all houses of worship such as synagogues, temples and mosques) pay more taxes than many people believe. Churches do not pay property taxes or basic income taxes. But churches do pay the employer portion of federal social security (FICA) taxes for their non-clergy employees. Churches also often pay or collect state sales taxes on the tangible personal property they sell or purchase. In most states, churches also pay real estate conveyance taxes like other real estate purchasers and sellers.
Most importantly for the issue of the TCJA, churches, like other nonprofit institutions, are subject to federal and state taxes on unrelated business income (UBIT). Under the UBIT, a nonprofit corporation which is otherwise income tax-exempt under the Internal Revenue Code pays corporate income taxes on any business the corporation runs if such business is unrelated to the purpose of the corporation’s tax-exemption. In practice, few churches pay the UBIT perhaps because they avoid generating unrelated business income or because of lax enforcement of the UBIT–or perhaps for both reasons.
The drafters of the TCJA correctly took aim at certain fringe benefits including “qualified transportation fringes” such as employer-provided parking and transit passes. The proper way to tax these fringe benefits is to include them in the employee’s gross income as part of her compensation. Unwilling to go this far, the drafters of TCJA instead denied employers an income tax deduction for these fringe benefits. Thus, if a corporate employee excludes $100 from her salary for an employer-sponsored transit pass to take a commuter train to work, under TCJA, the employer cannot deduct this $100. With TCJA’s corporate tax rate set at 21%, the employer thus pays $21 to the federal treasury to offset the tax advantage to the employee who can exclude the entire $100 in transit benefits from her gross income.
However, denying a deduction is meaningless to a nonprofit employer which does not pay general income taxes. Accordingly, the drafters of TCJA decided that, when a nonprofit employer provides these qualified transportation fringe benefits, that amount will be considered UBIT to the tax-exempt employer. Thus, a tax-exempt employer whose employee excludes $100 in salary for a transit pass will pay the same $21 tax on this excluded amount as does a taxable employer. ...
The TCJA provisions pertaining to qualified transportation fringes treat secular and religious employers alike. Compliance for churches and other nonprofit organizations can be simplified by the IRS developing an abridged UBIT return for entities which only owe UBIT on qualified transportation fringes.