Bills
| 3.23.22

Restoring Nonprofits’ Federal Tax Deduction for Employee Benefits (S. 632)

Do you support or oppose this bill?

What is S. 632?

(Updated February 16, 2022)

This bill — known as the Lessening Impediments from Taxes (LIFT) for Charities Act — would eliminate a tax provision that requires charities, churches, and other traditionally tax-exempt organizations to pay federal taxes on employee benefits. It’d amend the Internal Revenue Code to modify how the unrelated business taxable income of tax-exempt organizations is determined, so that certain fringe benefits for which a tax deduction isn’t currently allowed -- such as transportation benefits, parking, or an on-premises athletic facility -- would no longer be taxed. 

Argument in favor

Nonprofit organizations don’t have the budgets or staff to handle the new tax rule requiring them to pay federal taxes on employee benefits. Moreover, imposing taxes on “nonprofit” organizations makes it harder for them to lift up their communities.

Argument opposed

The new tax rules create greater parity between nonprofit and for-profit organizations in order to simply the tax code for all organizations. Rolling back the new rules in pieces defeats the purpose of the new, simpler tax code.

Impact

Nonprofit organizations; churches; International Revenue Code; and the Treasury Department.

Cost of S. 632

A CBO cost estimate for this bill is unavailable.

Additional Info

In-Depth: 

“Tax reform was designed to help simplify the tax code and reduce burdens on small businesses, not add burdens on nonprofits. Due to a provision in the tax reform bill, the law now requires some churches and some nonprofit organizations to pay new employee benefit taxes. Most nonprofits are not equipped to handle the additional compliance burden. Many, if not most, churches have never had to fill out IRS Form 990s. The legislation introduced today would eliminate this problem once and for all.” 

Original cosponsor Sen. Chris Coons (D-DE) adds: 

"As co-chairs of both the National Prayer Breakfast and the Senate Prayer Breakfast, Senator Lankford and I believe that we have a moral obligation to support our neighbors most in need, and nonprofits play an essential role in doing just that. Nonprofits are organized around a cause, mission, or community need, and employees of nonprofits often have the same access to parking and meals that others in the community have because the nonprofit serves the whole community. Requiring these organizations to pay a federal tax on these employee benefits, something they have never been required to do before, will cause them to not only face an increased operating cost, but also an administrative burden. I am proud to join Senator Lankford in addressing this unfair and burdensome tax, and I urge my colleagues to consider this important piece of legislation so that America’s charitable nonprofits and houses of worship are able to continue providing critical services to communities without undue burden.”

Rep. Mark Walker (R-NC), who plans to introduce a House companion to this legislation, adds: 

“Churches and charities serve on the frontline of our battle against the generational cycles of poverty and the traps of government dependence. Washington should ensure their work in our communities is not restricted by unnecessary taxes and strenuous compliance processes. The LIFT for Charities Act will maintain that non-profits and places of worship remain uninhibited by federal burdens.”

Last Congress, Sen. Lankford introduced this bill to protect churches, charities, and other non-profit organizations from a provision in the new tax law that would tax some employee benefits for the first time. The LIFT Act would repeal a section in the tax code that would require some tax-exempt organizations to pay federal taxes on employee benefits such as parking, meals, or transportation benefits for the first time by filling out IRS Form 990s (which many churches have never had to fill out before):

“Tax reform was designed to simplify tax filing, not make it more complicated or burdensome. By definition, tax-exempt organizations do not typically file tax returns. But, a glitch in last year’s tax reform bill would become a huge burden to churches, charities, and non-profit organizations. Most churches and non-profits… especially in rural locations, are not equipped to handle major tax code changes. Non-profit, tax-exempt entities are designed to better our communities and our nation. I look forward to joining my colleagues to find ways to address this unfortunate situation. [This bill is a] common-sense solution that protects the non-profit backbone of our society, as they give back to our communities in ways that are invaluable to us as a nation.”

House Ways and Means Chairman Kevin Brady (R-TX) — one of the architects of the Tax Cuts and Jobs Act that created this new rule — defended the change, arguing that it will simplify the tax code when it comes to how workers are compensated. Through his spokesman, Rob Damschen, Rep. Brady states:

“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 consideration.”

In response to Rep. Brady’s claims, Mike Batts, chairman of the board of the ECFA, says:

“The whole idea of tax exemption for nonprofit organizations that are doing charitable, religious and educational work is for them not to be on the same playing field as for-profit businesses when it comes to taxes, in order to incentivize the good work they do to make our society better.”

The National Council of Nonprofits, Council on Foundations, Independent Sector, Union of Orthodox Jewish Congregations of America, Cal Nonprofits, and the Evangelical Council for Financial Accountability (ECFA) support this bill. Tim Delaney, president of the National Council of Nonprofits, the largest network of charitable nonprofits in the U.S., says: 

“Taxing tax-exempts is the very definition of an oxymoron. But worse, this tax is also illogical, unworkable, and unfair. Almost everyone in Congress acknowledges it was a mistake, an error, and this legislation shows there is bipartisan support for its repeal. Hundreds of thousands of nonprofits, houses of worship, and foundations will be forced to divert money away from their missions to make tax payments soon, unless this tax is repealed – retroactively – in the coming weeks.”

Last Congress, EFCA circulated a position statement that has been signed by over 2,600 churches and nonprofits, advocating for the provisions’ repeal by either legislation or action by the Treasury Department. In this position statement, ECFA stated:

“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. (Taxable employers are no longer able to deduct the cost of certain parking benefits provided to their employees.) This premise is flawed at its core. The very purpose of tax exemption for nonprofit organizations is not to have their charitable, religious, and educational activities on the same footing as taxable businesses because of their important work and the inherent challenges associated with raising money to support such work. Furthermore, the federal income tax on unrelated business income is intended to apply to income generated from unrelated commercial activities conducted by tax‐exempt organizations. Providing parking to employees does not constitute generating income from an unrelated commercial activity and there is no sound policy basis for applying a tax intended for commercial activity to the essential element of parking by employees of tax‐exempt organizations. The idea that tax‐exempt organizations should be taxed on parking they provide to their employees is highly inappropriate and must be stopped. [emphasis original]”

This bill has five bipartisan Senate cosponsors, including three Republicans, one Democrat, and one Independent, in the 116th Congress. A House companion bill will also be introduced by Rep. Mark Walker (R-NC) (as of early May 2019, Rep. Walker's bill has yet to be introduced).

In the 115th Congress, this bill had three bipartisan Senate cosponsors, including two Republicans and one Democrat, and didn't see committee action. A House companion bill, sponsored by Rep. Walker with six Republican House cosponsors' support, also didn't receive a committee vote.


Of Note: Currently, the new tax code will require churches and nonprofits to begin paying a 21% tax on employee benefits such as parking, transportation, and other related benefits. This provision will cause nonprofit organizations to file federal income tax returns and pay unrelated business income tax on the benefits they provide to employees. Additionally, many nonprofit employers affected by this new law will also be required to file state income tax returns, possibly incurring a state income tax as a result of the new federal income tax. Compliance with this new rule could cost churches’ and nonprofits’ somewhere in the tens of millions of dollars annually. Daniel J. Cardinali, president and CEO of Independent Sector, says the new tax rule "will divert an average of $12,000 away from each nonprofit organization's mission, hurting the individuals and communities who need help the most."

A range of nonprofits, including the Boys & Girls Clubs of America, Goodwill Industries, the YMCA, and the National Council of Nonprofits have requested that the new tax obligation on employee benefits at least be delayed, arguing that it is unfair to ask them to pay a levy many of them still don’t fully understand.


Media:

Summary by Lorelei Yang

(Photo Credit: iStock.com / Roman Tirapolsky)