BY KEN BERRY, J.D. – CPA PRACTICE ADVISOR TAX CORRESPONDENT ON DEC 17, 2018
A provision buried deep in the Tax Cuts and Jobs Aft (TCJA) enacted late last year could cause tax problems for nonprofit organizations offering transportation fringe benefits after 2017. Now that the year is almost over, the IRS has finally issued some relief in the form of proposed regulations (IRS Notice 2018-99, 12/10/18).
Notably, the new proposed regs allow a nonprofit to retroactively avoid additional tax liability.
Prior to the TCJA, nonprofits and for-profit entities could provide certain transportation benefits to employees that were excluded from tax, up to a stated monthly amount, and deductible by the organization. The maximum exclusion, which was indexed for inflation, was $260 per month in 2018. This encompassed three main benefits:
1. Mass transit passes: A transit pass includes any pass, token, fare card, voucher or similar item entitling a person to ride free of charge or at a reduced rate on mass transit or in a vehicle seating at least six adults (not including the driver) if a person in the business of transporting persons for pay or hire operates it. Mass transit may be publicly or privately operated and includes transportation by bus, rail or ferry.
2. Commuter highway vehicle expenses: A commuter highway vehicle is any highway vehicle that seats at least six adults (not including the driver). It must be reasonably expected that at least 80% of the vehicle mileage will be for transporting employees between their homes and workplaces with employees occupying at least one-half the vehicle’s seats (not including the driver’s seat).
3. Qualified parking fees: This includes employer-provided parking for employees on or near the business premises. It also covers fees for parking on or near the location from which employees commute to work using mass transit, commuter highway vehicles or carpools (e.g., at the lot for a train station).
Both the tax exclusion for these transportation benefits and the corresponding deduction have been eliminated by the TCJA, beginning in 2018. Furthermore, the value of transportation benefits provided to employees must now be added to the computation of “unrelated business income tax” (UBIT). This tax generally applies to income that isn’t related to the organization’s tax-exempt function.
Because of the tax rate changes in the TCJA, a charity could owe a tax of 21% on the transportation fringe benefits. The UBIT provision is effective for amounts paid after 2017.
In the new Notice, the IRS acknowledges that nonprofits may have already adopted methods for valuing nondeductible parking expenses. As a result, it says that an organization may now rely on the interim guidance or use any “reasonable method for determining nondeductible parking expenses. It also provides a unique option.
New rule: Nonprofits have until March 31, 2019 to change their parking arrangements to reduce or eliminate the number of parking spots reserved for employees. With this change, tax-exempt organizations can effectively reduce their potential UBIT liability. In some cases, a nonprofit may not even have to file a Form 990-T. This relief applies retroactive to January 1, 2018.
The UBIT provision has drawn the wrath of a number of high-profile nonprofit organizations and associations ranging from the Boys and Girls Clubs of America to the National Council of Nonprofits to Jewish Federation Services. Although the new guidance falls short of the outright repeal requested by some, it does provide more leeway.
“Treasury is sensitive to the concerns of the tax exempt community, and hopes this guidance can significantly limit the impact on non-profit groups,” said Treasury Secretary Steven Mnuchin in a news release. “Treasury is offering tax exempt organizations a roadmap for navigating their responsibilities. The guidance issued today aims to provide flexibility while minimizing the burden on non-profit groups that provide employee parking.”
But this may not be the end of the matter. Proposed legislation that would repeal the UBIT provision is expected to be reviewed in the next session of Congress. The reversal appears to have some bipartisan support. We will keep you posted on any important new developments.