IRS Issues Guidance Regarding Qualified Transportation Fringe Benefits

The IRS has quietly issued clarifying guidance regarding the nondeductibility of Qualified Transportation Fringe Benefits (QTFs) under the Tax Cuts and Jobs Act of 2017.

The Act provided that certain commuting benefits, such as employer-paid parking, transit passes, and carpool arrangements which were provided to employees tax-free would no longer be deductible against taxable income for corporate taxpayers. Tax-exempt employers providing these benefits must include that amount in unrelated business taxable income (UBTI).

Following the passage of the Act, there had been conflicting interpretations from commentators and practitioners as to whether elective employee salary reduction agreements to purchase similar commuting benefits with tax-advantaged funds would be treated as nondeductible to corporate taxpayers and includible in UBTI for exempt employers. The IRS has recently updated Publication 15-B, Employers’ Tax Guide to Fringe Benefits, to include language that clarifies their position that “no deduction is allowed for qualified transportation benefits (whether provided directly by you, through a bona fide reimbursement arrangement, or through a compensation reduction agreement)” for amounts paid or incurred after December 31, 2017.

Tax-exempt employers with these salary reduction agreements should be particularly aware of the impact of this interpretation. Many of these organizations have no other sources of UBTI and would not otherwise be required to calculate a tax liability. As an income tax, any organization which expects to have a tax liability of $500 or greater is required to make quarterly estimated tax payments. It is also important to note that the IRS’ interpretation is subject to change as additional interpretive guidance is issued throughout the coming year.

If you have questions about the impact of the IRS’ recent guidance or any other part of the Tax Cuts and Jobs Act, please feel free to contact us.

J. Calvin Marks
J. Calvin Marks | Senior Manager