Update on Taxability of Transportation Fringe Benefits
Recently, Rubino & Company published an article in our newsletter addressing the effect of The Tax Cuts and Jobs Act of 2017 on tax-exempt organizations. The most controversial of these provisions is the imposition of unrelated business income tax (UBIT) on the amount of certain employer-paid fringe benefits (transportation, parking, and gym membership). In our article, we indicated that tax-exempt employers may be able to reimburse employees for commuting and parking through a qualified pre-tax compensation reduction agreement (CRA) to avoid this tax. Based on our discussions with the IRS prior to issuing the article, however, we added that this was at the time an unsettled area because the IRS is revisiting the allowability of such plans for these costs. Well, the IRS revisited the matter.
The law states the following-
“Unrelated business taxable income of an organization shall be increased by any amount for which a deduction is not allowable under this chapter by reason of section 274 and which is paid or incurred by such organization for any qualified transportation fringe (as defined in section 132(f)), any parking facility used in connection with qualified parking (as defined in section 132(f)(5)(C))…”
The controversy has centered on the intended meaning of the phrase “paid or incurred by such organization.”
Jenny Herrera of our firm attended a nonprofit law and tax conference in late March. Janine Cook, IRS Deputy Associate Chief Counsel (tax exempt and government entities) indicated that the IRS updated Publication 15-b to clarify that even if the benefit is provided under a CRA, the payment will still result on UBI for the organization.
We are reaching out to our tax-exempt clients to inform the following steps that should be taken now:
- Organizations need to determine the amount of transportation and parking costs that are currently provided. Amounts paid on or after January 1, 2018 are subject to the tax. Please note that it does not matter if the entity has a fiscal year-end. Any payments made on or after January 1, 2018 will be subject to the tax.
- Organizations should plan on reporting this total as UBI. The federal corporate rate that will apply to these amounts is 21%. Jurisdictions such as DC, MD, VA generally adhere to the federal definition of UBI. Therefore, state income taxes will likely apply as well.
- Income tax payment should be made, the first one is due on April 15, 2018 (for calendar year-end clients).
- If the organization has not previously filed federal income taxes (990-T), they will need to enroll in the EFTPS payment system in order to remit its taxes.
In addition, Patty O’Malley from our office will be contacting our non-profit clients to discuss in more detail this provision of the new tax law, as well as other provisions of the law affecting tax-exempt organizations.
We expect guidance on the law from the IRS in the near future. When additional information comes to light, we will certainly share it with you. Until then, please do not hesitate to contact us if you have any questions.
Jenny Herrera – CPA, CGMA | Shareholder
Office 301.564.3636 – Direct 301.214.4179