Attention Not-for-Profits: Transportation Fringe Benefits Are Now Taxable

The Tax Cuts and Jobs Act of 2017 contains a provision that requires tax-exempt organizations to recognize as income certain fringe benefits offered to their employees and pay a tax on that unrelated business income (“UBI”). This change became effective January 1, 2018. It is important for tax-exempt organizations to understand how and why these fringe benefits will now result in UBI.

The new law impacts the tax treatment of certain fringe benefits.  An amount paid or incurred for any qualified transportation fringe benefits for which a deduction is not allowable, such as: transit checks, a parking facility used in connection with qualified parking, or on-premise athletic facilities, would increase unrelated business taxable income.

The impact of this new provision will effectively create unrelated business taxable income subject to a flat unrelated business income tax (“UBIT”) of 21%. This applies even when the organization has no unrelated trade or business and is paying these specific fringe benefits to employees who are conducting the charitable activities of the organization.

For tax-exempt organizations who currently have very little or no unrelated business income, treating transportation fringe benefits as unrelated business income will likely result in new reporting and potential tax liability implications.  Tax-exempt organizations with at least $1,000 of unrelated business income are required to file IRS Form 990-T, Exempt Organization Business Income Tax Return, along with payment of UBIT on net taxable income.

Now for the possible good news: H.R. 6037 has been introduced in the House of Representatives, which would repeal the following in the Tax Cuts and Jobs Act:

• the requirement that unrelated business taxable income be computed separately for each trade or business activity, and
• the increase of unrelated business taxable income by certain disallowed fringe benefits.

If H.R. 6037 doesn’t pass, tax-exempt organizations with transportation fringe benefits affected by the new tax treatment will need to consider their options whether to (a) treat the benefit as taxable compensation to the employee, thus avoiding the imposition of the unrelated business tax; (b) continue to pay the benefit to the employees and incur the tax; or (c) discontinue payment of the benefit entirely.

For more about UBIT, please see the following Understanding Unrelated Business Income.