The act slapped a 1.4 percent tax on some university endowments, a impost which administrators have estimated would have cost Harvard $43 million in fiscal year 2017. The tax, which University President Drew G. Faust has called “unprecedented,” saw widespread media coverage.
But Congress also mandated a less-noticed change in the way Unrelated Business Income Tax is calculated that could mean more expense and paperwork for Harvard.
UBIT imposes a tax, similar to those imposed on for-profit companies, on trades or businesses of a nonprofit deemed “unrelated” to that organization’s purpose. These unrelated businesses could include hotels, bookstores, and food courts.
Tax-exempt organizations are required to file publicly available Internal Revenue Service forms that detail the organization’s unrelated businesses. Harvard’s 2014 list of unrelated business activities—a list filed in 2016—includes hotel operations, partnerships managed by Harvard Management Company, the University’s investment arm, and parking lots.
Before the Tax Cuts and Jobs Act passed, universities could offset gains and losses from different lines of business to reduce their taxable income under UBIT.
In fiscal years ending in 2015 and 2014, forms Harvard filed with the IRS show more than $30 million in unrelated business income. But, after incorporating deductions, unrelated business taxable income dwindled to $0.
With the new law, each unrelated business will be taxed individually, which will prevent Harvard from offsetting losses between unrelated businesses.
Elizabeth L. Clark, senior director of federal affairs for the National Association of College and University Business Officers, said she thinks the change in the law could burden universities.
“Colleges and universities not only will perhaps see some new tax liability, they also face a completely new paperwork regime when it comes to tracking activities,” Clark said.
Harvey P. Dale, a New York University Law School professor, said the original purpose of UBIT was to treat tax-exempt and taxed institutions equivalently in businesses in which they might compete.
“The purpose of the law, everybody said, was to level the playing field,” said Dale, “but that has eroded over time.”
Dale said he thinks this justification for UBIT is flawed. He specifically cited the fact that the IRS reporting requirement of UBIT does not apply to for-profit organizations. He said he thinks the new law widens the gap between nonprofit and for-profit groups.
“This change just adds to the disparity, because for-profit corporations can indeed, and by all means do, offset their losses from one business against the profits from another business,” Dale said.
It remains unclear exactly how the new law will affect nonprofits, and the IRS has yet to release official guidelines.
“I think we will see guidance emerge from the IRS and the Treasury over the coming weeks and months, but I think there’s no way to predict what kind of timeline they’re on,” Clark said.
Ofer Lion, a partner at a Los Angeles law firm who specializes in tax-exempt organizations, said there are lingering questions regarding how universities will be allowed to group different lines of businesses to reduce taxes.
University spokesperson Melodie Jackson wrote in an emailed statement that Harvard is still assessing the impact of the change to UBIT.
“The University is aware of the UBIT siloing issue and we are assessing its potential impact as we await IRS guidance,” Jackson said.
—Staff writer Eli W. Burnes can be reached at firstname.lastname@example.org.
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