Pre-Tax Travel Expense Changes and the Impact to Nonprofits
The Tax Cut and Jobs Act of 2017 added the following provision to the Internal Revenue Code that will cause many tax-exempt organizations to pay the unrelated business income tax (UBIT):
Internal Revenue Code (IRC) Section 512(a)(7): Certain qualified transportation fringe benefits, including those relating to parking garages, must be reported as unrelated business income (UBI).
All tax-exempt organizations will have to include as Unrelated Business Taxable Income (UBTI) any amounts paid or incurred for any Qualified Transportation Fringe Benefit, including the following:
- A ride in a commuter highway vehicle between the employee’s home and work place
- A transit pass
- Qualified parking
These employee fringe benefits are still excluded from an employee’s income. Employers can generally exclude the value of transportation benefits provided to an employee during 2018 from the employee’s wages up to the following limits:
- $260 per month for combined commuter highway vehicle transportation and transit passes
- $260 per month for qualified parking
Even if the benefit is provided under a Compensation Reduction Agreement, the payment will still result on UBTI for the organization. The only way the organization can avoid counting these benefits is to have the employee pay for the benefits with after-tax dollars. This provision was an attempt to put exempt organizations on the same footing as taxable organizations that will no longer be able to deduct these costs. The provision is effective for amounts paid or incurred after December 31, 2017.
What’s the Impact?
Effective January 1, 2018, nonprofit employers have to pay a 21% UBTI on transportation benefits provided to employees. Nonprofits should carefully consider the effect the tax has on their finances weighed against the advantage of providing these benefits to attract and retain quality employees.
What Should You Do?
For tax-exempt organizations, the next steps should be to determine whether you provide these transportation and parking benefits, and if so, to how many employees, what kind and how much?
The MFA Companies can work with you to calculate estimated tax payments for unrelated business income and the state, if applicable. We can also prepare or review your 2018 Form 990-T. If your organization has not filed Form 990-T in the past, we can assist in enrolling the organization in the Electronic Federal Tax Payment System in order to remit its taxes.
If you have any questions regarding these changes, please contact a member of our Nonprofit Team today.
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