Its intentions are good, but the 2017 Tax Cuts and Jobs Act (TCJA) can have a negative effect on non-profit organizations in at least a couple ways. We’ll take a look at how one of the new provisions of the TCJA complicates the provision of what might be a much-needed benefit for some of your employees.
The IRS explains the tax code change, known as section 512(a)(7), under the heading “Increase in unrelated business taxable income by disallowed fringe.” This new Internal Revenue Code section states that a transportation fringe benefit for the employees of tax-exempt organizations will now be treated as unrelated business taxable income (UBTI).
In New York City, as well as in other large urban centers, transportation fringe benefits are quite common or even mandated. These benefits can take the form of company-paid transit passes, paid carpooling to and from work or free parking on company or employer-paid lots or in garages.
Employers offer this fringe benefit as a way of reducing the often steep daily transportation costs between home and the workplace. The change brought about by TCJA is that these expenses will no longer be deductible at the federal level by the employer. The costs must now be reported to the IRS as unrelated business income and taxed as such.
This provision was enacted with the TCJA at the end of 2017 and will first be felt during tax year 2018.
As with most tax rulings, there are exceptions. But it’s difficult to see how they might help alleviate the impact of 512(a)(7) on your tax-exempt organization.
For instance, you can still deduct the expenses incurred in providing transportation benefits for employees whose safety might otherwise be compromised. This would include those commuting at night through unsafe neighborhoods, but that’s only a theory. The IRS has offered no further guidance on what conditions might or might not earn this exception.
Also keep in mind that this tax code change doesn’t consider longstanding expense deductions for business travel.
Your Next Move
If you haven’t already, you should immediately gauge how this ruling might impact your organization. Depending on your degree of involvement with employee transportation benefits, it might be advisable that you start making estimated quarterly payments of this tax.
If you have not filed a Form 990-T in the past, you should enroll in the Electronic Federal Tax Payment System in order to remit the taxes.
But before you do anything, consult your trusted tax advisor, discuss your current situation and decide together what makes the most sense for your organization going forward.
Linda Curro is a Tax Manager at Wiss & Company, LLP. She has over seventeen years’ experience in public accounting, with a specialty that includes applying for tax-exempt status for new organizations, filing Federal 990 and 990T returns and multiple state registrations. Reach her at LCurro@wiss.visioncreativegroup.com or (973) 994-9400.