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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.

This is the source of the complaint that the TCJA taxes churches. Churches have been subject to UBIT, though few in practice have paid it. A church (like any other nonprofit employer which previously did not owe the UBIT) will now pay UBIT if the church provides its employees with qualified transportation fringes including free parking and commuter transit passes.

The complaint, moreover, is not just that churches must now pay the UBIT on the parking and other transportation fringes they provide to their employees. For many churches, the greater expense will be the cost of the legal and accounting services they must obtain to comply with the UBIT.

Whether to tax churches and church personnel involves the imperfect trade-offs inherent in most tax policy choices. In terms of the First Amendment’s Free Exercise clause, it is desirable to minimize church-state entanglement. Taxation can be very entangling. This helps to explain why churches are not taxed on their church-related properties or on their general income. Such tax-exemption minimizes church-state entanglement.

On the other hand, it is unfair and inefficient for a church employee who receives a transit pass or an employer-provided parking place to get favorable tax treatment not available to secular employers and their personnel. Churches use public services like other employers and institutions. All tax policy choices involve such conflicting considerations as the revenue government needs to provide public services and fairness among similarly-situated taxpayers.

The TCJA strikes a reasonable balance, similar to the tax treatment of churches under the FICA, sales and real estate convenience taxes. Moreover, the IRS can simplify compliance with the TCJA-based UBIT for churches and other nonprofit institutions. The IRS could develop a simple form for churches and other nonprofits which only owe the new TCJA tax. This simple form would not impose on churches the cost and complexity of complying with the longer UBIT form (990-T) when it is not applicable.

Much parking provided to church employees has no fair market value since such parking is also available for free to other users such as congregants and visitors to the church. The IRS could clarify that, in such cases, the church (or any other nonprofit entity) owes no UBIT since there is no charge for the parking the church provides for free to all.

In contrast, under the TCJA, my employer, Yeshiva University, must pay the 21% UBIT on the cash amounts I exclude from my gross income for my employer-provided transit pass. Congress should have included these amounts in my gross income. The TCJA, which taxes my employer instead, is a second best alternative.

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.

In a world of imperfect choices, the TCJA reasonably treats all employers fairly without entangling church and state inordinately.

Recent Comments

  1. richard wilkinson

    For churches and nonprofits, isn’t this a tax on an expense? How does that make sense?

  2. Eric B Rasmusen

    I agree that this is a good tax, but simply taxing the employee would be better. In between, I wish the new law had given the organization the option: pay 21% tax, or require the employee to pay income tax at whatever rate is appropriate for the employee. For some church employees that might be 0%. This would also be a way to introduce the idea that the tax should really be on the employee.

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