and work clothes necessary for the job.
Under the miscellaneous itemized deduction disallowance discussion in the legislative history, there is, yes, a final section called "miscellaneous," which includes repayments of Social Security benefits and certain repayments of income under a claim of right.
Some of the items are rare but potentially large when they arise; e.g., losses on deposits at a financial institution. Many of the items are common.
Some of the items may raise issues of interpretation. For example, is the prohibition on deducting repayments of income supposed to apply even when the income and repayment are in the same week?
Tax preparation fees are now generally disallowed. There will undoubtedly be a move to allocate some of these expenses to business and rental expenses, reasonably so. How to classify such expenses may be debated but in general they have something to do with determining "income" under our income tax system, which is arguably becoming, often, a gross receipts tax. There are related issues, larger-dollar issues, which would arise here – legal fees in going to Tax Court, CPA fees for protests arising from long, complex IRS or state tax exams, etc. Tax preparation fees per se may also be "major" in some cases; e.g., the taxpayer with a hundred partnership interests.
The discussion of particulars could go on and on, but generally and conspicuously, there is a retreat from the concept of offsetting related expenses.
Some increase in itemized deduction thresholds doesn't fully explain such an approach to measuring taxable income, particularly when it comes to potentially major expenses directly related to income.
The basic idea is that some business activity within the charity or flow-through items from its investments doesn't necessarily put its exempt status at risk, but there is a tax (or potential tax) to prevent unfair advantage to the charity relative to the business community. The way this new rule works seems to put charities at a relative disadvantage to individuals with the same fact pattern. We anticipate that some charities with bigger or more complex UBI situations will even consider forming a for-profit corporation to report such activities for tax purposes.
The "businesses" can sometimes be such activities as ad sales. An issue here will be identifying what is a separate trade or business; e.g., whether all ad sales are one activity, or part of a bigger activity, or whether there may be separate businesses from ad sales here or there.
The scope of the new rule is to some degree being debated; e.g., whether what is essentially an investment is subject to this particular no-offsetting rule even though the activity generates UBI.
The net operating loss aspects and details generally of this new rule are rather complicated.
Our basic focus, again, is that we see here a move away from allowing offsets, in this case allowing a loss from one unrelated trade or business to offset income from another unrelated trade or business.
Historically, as one would read the legislative history of a particular provision, it explains and justifies why the changes are being made. The legislative history may say the current statute isn't working for this reason or taxpayers are going too far is doing this or that. But the legislative history here is devoid of such justification. Why shouldn't losses from one unrelated business activity offset income from another unrelated business activity? The author finds no explanation of rationale in the legislative history. One would gather that this is just another revenue-generating measure.
The legislators basically ended up adding the parking expense to the charity's unrelated business income, though the nature of the problem is paying an expense. The charity has unrelated business income from paying an expense directly related to fulfilling its exempt work. The expenditure is not unrelated, not business, nor is it income, yet it gets classified (misclassified) as unrelated business income.
I've had some problem recently with my glasses lenses falling out of the frames because I rub them too vigorously in cleaning, and I blame that problem in part to reading provisions such as this.
As taxpayers and tax practitioners, we may not agree on all of the details. But there would seem to be a retreat from reasonableness and fairness in many of the new provisions, including a significant retreat from the basic concept of allowing related expenses to offset the income that is being taxed within the context of a rate structure aimed at net income, not gross receipts.
J. Michael Pusey, CPA, MSA, is a National Tax Director with Rojas and Associates, CPAs, Los Angeles. He has over forty years experience in tax and finance. Mr. Pusey has written or contributed to four tax books, including an AICPA Tax Study, and a finance book. Mr. Pusey began his career with KPMG before working nine years in "national tax" for Laventhol & Horwath and Grant Thornton. He was V.P., Assistant Tax Director, Manager of Research and Planning for a NYSE financial institution prior to beginning his practice, then joining Rojas and Associates.