Nonprofit Tax Alert: Changes to Tax Treatment for Qualified Transportation Fringe Benefits
The recently passed Tax Cuts and Jobs Act (the “Act”) modifies the tax treatment of qualified transportation fringe benefits for all employers. However, Exempt Organizations (“EO”s) are amongst those that will see the most significant effects as this one change may generate a return filing obligation for organizations that had not previously been required to file Form 990-T.
In 2017, employers were allowed on a monthly basis to reimburse each employee with up to $255 for transportation expenses, $255 for parking expenses, and $20 for biking-related expenses on a tax-free basis. At the same time, employers were afforded a deduction for these benefits. Under section 13304 of the Act, qualified transportation benefits (as defined in IRC Sec. 132(f), which includes mass transportation and parking) will no longer be tax deductible by employers if these benefits are reported as tax-free benefits to employees. The only exception is for transportation required for the safety of an employee. In addition, Section 13703 now provides that EOs will be required to include the value of transportation expenses paid to, or on behalf of, their employees as unrelated business income.
Let’s look at an example: In 2017, if an employer provided an employee with $100 per month to offset regular parking costs, the employee would have treated the $100 as tax-free reimbursement income and the employer would have been allowed to claim a $100 deduction. As a result of the Act, for tax years beginning in 2018, the employee can still treat the $100 as tax-free reimbursement income, but the EO employer must report $100 of unrelated business income and cannot claim a $100 tax deduction. This unrelated business income would be included on the EO’s 2018 Form 990-T. If the EO did not previously file Form 990-T, the organization may now have this filing requirement if all unrelated business income for the year – including qualified transportation benefit expenses – exceeds $1,000. Additionally, if the EO expects its annual federal tax liability to exceed $500, it should consider the need to make estimated tax payments with the first payment due date of April 17, 2018. Finally, because many states base their own unrelated business income tax calculations on federal taxable income, this change may also create state level filing requirements.
Due to the passage of the Tax Cuts and Jobs Act on December 21, 2017, and the immediately following holidays, the IRS has yet to release any guidance regarding implementation procedures for these changes. Until then, EOs have the option of continuing to provide these transportation benefits and simply pay the unrelated business income tax; they may discontinue the employer-paid transportation benefit but increase an employee’s salary to compensate; they may institute an employer-sponsored salary reduction program, or they may eliminate transportation support for employees altogether.
If you have any questions concerning how this change will affect your company specifically, or for more information on other impacts of the Act on tax-exempt organizations, please feel free to contact us.