IL Removes Parking Inclusion From Base Income for Exempts in 2019

On Aug. 23, Illinois enacted Senate Bill 1257 (Public Act 101-0545), which provides, among other things, that for tax years starting on or after Jan. 1, 2019, tax-exempt entities are permitted to determine their pre-apportioned Illinois unrelated business taxable income (UBTI) without taking into account an adjustment for income resulting from the qualified transportation and fringe benefit provisions under IRC Section 512(a)(7) enacted by the Tax Cuts and Jobs Act of 2017 (TCJA). However, tax-exempt entities in Illinois will continue to be required to separately calculate UBTI for each separate unrelated trade or business under IRC Section 512(a)(6), also enacted by the TCJA.

Background

Prior to the TCJA, tax-exempt entities could offset income and losses from different trades or businesses, which had the effect of minimizing the tax on UBTI in many cases. Under IRC Section 512(a)(6) as enacted by the TCJA, an exempt organization with more than one unrelated trade or business now is required to separately calculate UBTI for each trade or business.

Another significant change for tax-exempt entities under the TCJA is the qualified transportation and fringe benefit adjustment to UBTI under IRC Section 512(a)(7). Under this provision, UBTI is increased for organizations that have employees by any amount for which a deduction is not allowable because of Section 274 and that is paid or incurred by the organization for any qualified transportation fringe or any parking facility used in connection with qualified parking. This change generally increased federal tax on UBTI for most tax-exempt entities starting in 2018. It also increased tax on UBTI starting in 2018 for states that conform with IRC Section 512(a)(7). 

The provision of a qualified transportation fringe that results in an increase in UBTI under IRC Section 512(a)(7) is not an unrelated trade or business for purposes of determining whether an organization has more than one unrelated trade or business. As a result, an organization with an increase in UBTI under IRC Section 512(a)(7) and only one unrelated trade or business may use deductions from the unrelated trade or business to offset its increase in UBTI under IRC Section 512(a)(7). An organization with an increase in UBTI under IRC Section 512(a)(7) with multiple trades or businesses, however, may not offset its increase in UBTI under IRC Section 512(a)(7).

Illinois treatment

Illinois generally conforms to changes in the IRC effective on the date the federal tax change is effective. Therefore, unless Illinois specifically decouples state tax law from a specific provision of the IRC, Illinois adopts changes to federal tax law, such as the changes to how tax-exempt entities are taxed under the TCJA. Because Illinois did not decouple state law from the TCJA changes that relate to tax-exempt entities for 2018, tax-exempt entities filing in Illinois were required to compute UBTI separately for each trade or business and make the adjustment to UBTI for the qualified transportation and fringe benefit inclusion.

Conclusion

As a result of the recently enacted change, beginning in 2019 tax-exempt entities filing returns in Illinois no longer will be required to adjust UBTI for the federal qualified transportation and fringe benefit inclusion. However, tax-exempt entities filing returns in Illinois still will be required to compute income and loss for each separate trade or business when determining Illinois UBTI. The decoupling of Illinois tax law from the qualified transportation and fringe benefit inclusion under IRC Section 512(a)(7) should be accounted for when planning for the 2019 income tax year. Tax-exempt entities should continue to monitor legislation from other states in which they have a significant presence to determine whether any similar changes are made to decouple state law from certain provisions of the TCJA.