Tax Reform and the UBIT

Speaking for the Obama administration today, Treasury Secretary Timothy Geithner proposed reducing the highest corporate tax rate from 35% to 28% (25% for manufacturing). The proposal would also do away with some corporate tax deductions and subsidies to compensate for the lost tax revenues. Leading Republican presidential candidates have called for even lower corporate tax rates. Mitt Romney has proposed a 25% top corporate tax rate. Rick Santorum’s plan would reduce the top rate to 17.5%.

 How is the possibility of corporate tax reform relevant to exempt organizations? 

 For exempt organizations other than trusts, unrelated business taxable income is subject to the same tax rates as business corporations under §11. Using the corporate tax rates is consistent with the underlying basis for the UBIT, which is to prevent tax-exempt organizations from competing unfairly with taxable corporations when engaging in similar business activities.

 If any of the proposals for lower corporate tax rates are enacted, exempt organizations will pay less tax on UBTI. Exempt organizations may step up the level of their unrelated business activities if they become more profitable due to lower tax rates. Any organization that increases its unrelated business activities should exercise caution, however, because engaging in excessive unrelated activities may result in loss of tax exemption.

 For exempt organizations organized as trusts, UBTI is taxed at the rate for non-exempt trusts and estates under §1(e). The highest tax rate is 39.6% of taxable income exceeding $7,500. This is the same as the highest tax rates for individuals, although for most individuals the 39.6% rate does not kick in until their taxable income exceeds $250,000. If income tax rates for individuals are also lowered and the reductions are applied to trusts and estates, unrelated business activities of exempt trusts will also become more profitable.


Resources: Obama corporate plan cuts tax rate, shuts loopholes, Reuters (Feb. 22, 2012); §511(a), (b).

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