Bill would treat nonprofit leases of agricultural land as taxable unrelated business income

Senate Bill 99 would require tax-exempt organizations in Montana to treat rental income from the leasing of agricultural property as unrelated business taxable income beginning in tax year 2026, with collections likely in fiscal year 2027, sponsor Sen. Becky Beard told the House Taxation Committee during a hearing.

Supporters said the change would prevent some nonprofits from gaining an unfair competitive advantage over private ranchers. "It seems incompatible that a group whose purpose is to create a nature preserve and eliminate ranching on an area ... could claim that those same ranching activities are part of their exempt purpose," Charles Denow, representing United Property Owners in Montana, said during testimony, citing annotated tax returns he provided to the committee.

Opponents argued the bill would override the federal, case-by-case process for determining unrelated business taxable income and impose new administrative burdens on nonprofits that use lease revenue to support conservation missions. "The IRS's method for determining UBTI is actually quite elegant and adaptable," Adam Jespersen, executive director of the Montana Nonprofit Association, said, urging the committee to retain the federal standard that evaluates each organization's mission and activities.

Land trusts, conservation organizations and several ranchers described practical consequences if the bill becomes law. "If Prickly Pear Land Trust... were to get hit by UBIT starting next year because of this bill, we would be forced to pass that cost along to the lessees or to keep that grazing land entirely off of the rolls and out of production for the local ag economy," Mary Hollow, executive director of Prickly Pear Land Trust, testified.

Department of Revenue staff said the department would start with federal UBTI reporting and that the bill would add an item the department would need to track. Finn McMichael of the Department of Revenue said the department would likely implement new rules and form changes and that corporate tax rates would apply if groups filed as corporations (the department noted the corporate income tax rate is 6.75%). The fiscal note indicated the number of affected organizations is unclear.

Sen. Beard said the bill was drafted after specific concerns were raised about at least one organization's reporting and that the intent is to address perceived inequalities in how income from ag leases is treated. She acknowledged the committee heard several opponents and invited continued review.

The committee hearing produced extensive testimony but no formal committee action on SB 99 during the session recorded in this transcript. The bill will remain under consideration by the legislature according to the usual committee process.