New tax hits churches

A new tax on churches, synagogues and other nonprofits could cost some groups tens of thousands of dollars.

The recent tax-code rewrite requires churches, hospitals, colleges, orchestras and other historically tax-exempt organizations to begin paying a 21% tax on some types of fringe benefits they provide their employees.

That could force thousands of groups that have long had little contact with the IRS to suddenly begin filing returns and paying taxes for the first time.

Many organizations are stunned to learn of the tax and say it will be a significant financial and administrative burden.

It also means political peril for lawmakers, many of whom were surely unaware of the provision when they approved the tax plan. Churches’ tax-exempt status, in particular, has long been considered sacrosanct and Republicans are relying on the faithful to back them in the November elections.

At least one Republican lawmaker is now proposing to rescind the tax, though House Ways and Means Chairman Kevin Brady - one of the architects of the Tax Cuts and Jobs Act - is defending the provision.

It will simplify the code when it comes to how workers are compensated, Brady said.

The debate comes as Republicans celebrate the six-month milestone of the law’s enactment. They’ve emphasized the benefits of its big cuts in taxes on businesses and individuals.

But to help defray the budgetary cost of those changes, Republicans simultaneously pared tax breaks for workers’ fringe benefits, which is projected to raise around $40 billion over the next decade.

They were mainly trimming deductions companies have long taken for entertaining clients and providing meals for employees.

But Republicans also wanted to treat nonprofits equally, which proved challenging.

Because those organizations don’t pay income taxes, lawmakers couldn’t take away fringe-benefit deductions. So instead they created a 21% 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.

The proposal got virtually no attention when the legislation was making its way through Congress late last year, and many groups are outraged to now learn of the requirement.

Many nonprofits say they are confused over how exactly the tax is supposed to work.

Churches and other groups want to know how they are supposed to go about calculating the value of things like parking spaces for employees. Some wonder if the garages provided as part of clergy residences are now taxable.

Universities want to know if the bus services they provide for faculty and students are taxable and how they figure out how much they owe. Orchestras want to know how to treat musicians who may perform in different locations.

Treasury is now working on regulations spelling out the details of how the tax will work, though the groups are supposed to have already been paying the tax. It took effect Jan. 1 and nonprofits are supposed to pay it quarterly.

A host of groups, including the Boys & Girls Clubs of America, Goodwill Industries, the YMCA and the National Council of Nonprofits are demanding the tax at least be delayed, saying it is unfair to ask them to be paying a levy they don’t understand.