Nonprofit Employers Subject to New Tax Requirements for Transportation BenefitsBy Robert Lyons | May 25, 2018
In a previous article entitled IRS Guidance on New Rules for UBIT, we reviewed the unofficial comments coming out of the IRS on the new Unrelated Business Income Tax (UBIT) rules under the Tax Cuts and Jobs Act, including its impact on employers’ treatment of transportation fringe benefits. Until final guidance is released, the best preventative measure to take - in anticipation of the 21% UBIT on these benefits - is in the form of quarterly estimated tax payments, starting on June 15, 2018.
This article provides additional guidance for nonprofit organizations that are currently subject, or anticipate being subject, to the corporate level tax on transportation benefits.
There has been much discussion and little guidance on the part of the Internal Revenue Service concerning the Tax Cuts and Jobs Act (hereafter, “the Act”). One thing we do know for sure concerns nonprofit employers’ treatment of transportation fringe benefits and its relationship to unrelated business income.
Nonprofit employers will now have to pay a 21% Unrelated Business Income Tax (UBIT) on transportation fringe benefits (i.e. parking and transit passes) provided to employees on or after January 1, 2018 – regardless of the fiscal or calendar-year reporting period of the nonprofit.
Much of the confusion concerning these benefits revolved around the treatment of the employee’s pre-tax payments. In the 2018 version of Publication 15-B Employer’s Tax Guide to Fringe Benefits, however, it is clear that employers are taxed on the cost of providing qualified transportation benefits. These costs are subject to the 21% tax whether the employer pays the cost directly or the employee participates in a pre-tax plan.
If an employer provides for a pre-tax transportation fringe benefit of $200 per month to offset transit passes, the employee would continue to treat the benefit as a tax-free fringe. In 2017, the employer would have taken the deduction for paying for the passes. Beginning in 2018, as a result of the Act, the employee is still allowed to treat the $200 as a tax-free reimbursement, but the employer must report the $200 as unrelated business income and is not allowed to claim the deduction for the payment of the passes. This would presumably be treated as a reconciling item, pending future guidance.
There are several other areas that remain unclear and pending further guidance as well, such as bundled employee parking and office space, in regards to the portion representing the estimated fair market value of the parking space.
As a result of this change, many employers have decided to end their fringe benefit programs. However, this is not an option in New York City, Washington D.C. and San Francisco, which have mandatory transit programs for large employers (over 20 employees). These employers are required to allow employees to elect participation in a pre-tax program.
Quarterly Estimated Payments Due June 15
With the inclusion of pre-tax transportation benefits, more nonprofits will be faced with making quarterly estimated tax payments. These payments are due for calendar year filers on April 15, June 15, September 15 and December 15.
To date, the IRS has provided no guidance on how the taxes are to be paid other than inclusion on the Form 990-T. Presumably, these payments will be transmitted through the Electronic Federal Tax Payment System (EFTPS). If an organization has not yet set this up, it should consider enrolling at https://www.eftps.gov/eftps/.
Estimated taxes for the current year would be reported differently depending on whether the organization has filed a Form 990-T for 2017 or anticipates UBIT of $1,000,000 or more for any of the immediate preceding years. If an organization anticipates more than $500 in taxes owed, it should consider making quarterly payments.
If this is the first time the organization has made estimated payments, then the payments would be based on the anticipated tax. Generally, the base for reporting is the 21% tax on the anticipated annual amount divided by four.
Since little to no guidance was available as of April 15 of this year, June 15 would be the first payment period. Organizations should consider paying both the first and second estimate with the June 15 payment to avoid underpayment penalties. With the lack of IRS guidance, it is unknown whether there will be any penalty relief for the first year.
If an organization has previously filed Form 990-T for 2017, it is permitted to base the payments on the total taxes the organization paid in the prior year, unless it had unrelated business income of $1,000,000 or more for any of the three immediate past years. The latter is a safe harbor for prior year filers. An organization may want to pay higher estimates in order to avoid a large tax bill at the end of their year.
The IRS has not given specific guidance on the estimated payment requirements for taxes associated with transportation fringes or athletic facilities. Until further guidance is offered, it is in the organization’s best interest to follow standard procedures for payment of tax associated with Form 990-T.
This information is based on the corporate form of doing business. If a nonprofit is operating in the form of a trust, it would be subject to trust tax rates and not the corporate rates.
About Robert Lyons
Robert (Rob) Lyons, CPA, MST, is a Tax Director, Exempt Organizations in the Nonprofit, Government & Healthcare Group at Marks Paneth LLP. Mr. Lyons brings to this role the skills he has developed during more than 30 years of providing tax and consulting services to his clients in the nonprofit, higher education, and public sector industries. His experience includes handling substantial exempt organization tax issues. Mr. Lyons has testified in front of the House and Ways Committee in... READ MORE +