Nonprofit Tax Alert: Changes to Tax Treatment of Qualified Transportation Fringe Benefits

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Dear Artists and Arts Administrators:

I am sharing a very important and impactful change in the tax laws. It affects not-for-profit organizations who reimburse employees for transportation expenses.  It started in 2018 and is in effect now!  PLEASE INVESTIGATE if this is news to you.  It will cost participating organizations significant dollars.  Call your auditor and get advice.  If I discover a loophole or workaround I will let you know.

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 among 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.

What was the situation before?

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. This didn’t really effect EOs as they are tax-exempt.

What is changing for 2018?

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.

How will this affect you?

Employers will still be able to offer qualified transportation benefits, including parking and transit passes, to employees up to $260 per month (for 2018) without any tax effect on the employees. However, the costs of providing qualified transportation benefits, whether through a pretax salary reduction plan or paid directly by the employer, are subject to the 21% UBI tax, which will be reportable as unrelated business income on Form 990-T.

Essentially, EOs that continue to offer the benefit will have to pay $54.60 on every $260 monthly benefit provided ($260 x 21%), which is equal to an annual cost of $655.20 in UBIT tax per employee. To further complicate the issue, NYC nonprofit employers with 20 or more full-time employees (“FTEs”) are required by law to offer a pre-tax transit benefits program, so they cannot simply choose to discontinue offering the benefits. However, if a NYC nonprofit employer has fewer than 20 FTEs, it could choose to discontinue the pre-tax program, which would result in less tax savings on the employee side. 

In addition, if an EO expects to owe more than $500 in UBIT tax for 2018, it should make quarterly estimated tax payments to avoid interest/penalties. 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.