New Bills Would Repeal Rule Forcing Churches, Charities to Pay Taxes on Employee Benefits

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Bills have been introduced in both the House and Senate that would repeal a provision in the country's new tax law that makes churches and other nonprofits vulnerable to having to pay new taxes.

Sen. James Lankford, R-Okla., and Sen. Ted Cruz, R-Texas, introduced on Wednesday separate bills designed to eliminate new tax burdens that many churches and nonprofits have been concerned about since the passing of the Republican-backed tax law last year.

Lankford's bill, which was introduced in the House last week by Rep. Mark Walker, R-N.C., is called the Lessening Impediments from Taxes for Charities Act. The legislation would repeal the provision that requires some tax-exempt organizations to pay federal taxes on employee fringe benefits such as parking, meals and transportation for the first time.

The provision requires churches that have never had to fill out an IRS Form 990 to begin filing the form.

"Tax reform was designed to simplify tax filing, not make it more complicated or burdensome," Lankford said in a statement. "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 nonprofits in Oklahoma, especially in rural locations, are not equipped to handle major tax code changes," he added. "Non-profit, tax-exempt entities are designed to better our communities and our nation."

A representative from Lankford's office told CP that they are hopeful that the bill will receive a vote on the floor of the Senate but added that no date for a vote has been set. 

Cruz introduced the Protect Charities and Houses of Worship Act.

"Last year, Congress passed historic tax cuts which are expanding opportunity and allowing hardworking men and women to keep more of their hard-earned money in their pockets," Cruz said in a statement. "While millions of middle-class Americans have seen significant tax relief, charities, churches, and other tax-exempt organizations have been required to pay federal taxes on employee fringe benefits. My bill would repeal this requirement, and allow these charitable organizations to allocate funds and donations for their intended purpose of helping people, rather than for paying taxes to the federal government."

A review of the two bills shows that the Cruz bill repeals paragraphs six and seven of Section 512 of the Internal Revenue Code, while the Lankford/Walker bill only specifically repeals paragraph seven.

Paragraph six creates the special tax reporting rule for unrelated business taxable income and paragraph seven goes into detailing what constitutes unrelated business taxable that is "disallowed fringe," such as parking and transportion.

Paragraph seven has the specific language that states that "unrelated business taxable income of an organization shall be increased by any amount for which a deduction is not allowable." Repealing paragraph seven could render the threat from paragraph six moot because the rule as explained in paragraph seven won't be imposed. 

House Ways and Means Chairman Kevin Brady, R-Texas, has defended the provision to tax fringe benefits, saying that it is matter of fairness.

"It is about treating a nonprofit hospital the same as you treat a for-profit hospital," Brady was quoted as saying recently. "We think the parity issue, the fairness issue is right."

The nonprofit accrediting agency Evangelical Council for Financial Accountability has spoken out against the provision and has told lawmakers that the provision is "flawed to 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," a July 11 ECFA letter to members of Congress states.

"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."

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