Tax-Exempt Organizations, Unrelated Business Income Tax and the New Tax Act
Author: Angela Juvelis, Audit Manager
Included in the Tax Cuts and Jobs Act of 2017 (the Act) is a provision which may have a significant impact on certain tax-exempt organizations. Tax-exempt organizations that provide qualified transportation fringe benefits (i.e. transit passes and parking) and on-premises athletic facilities are now required to pay an “unrelated business income tax” (UBIT) on the cost of these benefits provided they are not deductible under IRC section 274. This applies to all transportation fringe benefits paid or incurred after December 31, 2017.
The following has been added to subsection (a) of section 512 of the Internal Revenue Code, section 512(a)(7):
“Increase in unrelated business taxable income by disallowed fringe – Unrelated business taxable income of an organization shall be increased by any amount for which a deduction is not allowable under this chapter by reason of section 274 and which is paid or incurred by such organization for any qualified transportation fringe (as defined in section 132(f)), any parking facility used in connection with qualified parking (as defined in section 132(f)(5)(C)), or any on-premises athletic facility (as defined in section 132(j)(4)(B)). The preceding sentence shall not apply to the extent the amount paid or incurred is directly connected with an unrelated trade or business which is regularly carried on by the organization. The Secretary shall issue such regulations or other guidance as may be necessary or appropriate to carry out the purposes of this paragraph, including regulations or other guidance providing for the appropriate allocation of depreciation and other costs with respect to facilities used for parking or for on-premises athletic facilities.”
Since qualified transit and parking fringe benefits are no longer tax deductible for taxable entities, to create uniformity, these same items will be taxable for tax-exempt organizations at 21%. Many states charge a UBIT based on the federal filings so organizations will also need to consider the impact of both the federal and state taxes when evaluating the cost of this change.
The IRS typically has a safe-harbor rule with regard to estimated tax payments. If no taxes were due in the prior year, the organization or individual would most likely not be required to make an estimated tax payment. This is not the case with UBIT related to these transportation fringe benefits. If a tax-exempt organization expects its UBIT for the year to be $500 or more, the organization will need to pay estimated quarterly payments by filing a Form 990-W. The filing deadline for Form 990-T for non-profits (except for section 401(a) or 408(a) trusts) with a December 31, 2018 year end is May 15, 2019 with an extended due date of November 15, 2019. Therefore, quarterly estimates are due on April 15, June 15, September 15 and December 15. The filing deadline for Form 990-T for section 401(a) or 408(a) trusts have an initial due date of April 15 with an extended due date of October 15.
Employers may still provide tax-free qualified transportation fringe benefits to employees for parking and transportation fringe benefits but the employer cannot deduct the expense unless the employer includes the transportation fringe benefits on the employee’s W-2 as taxable wages.
Some organizations may consider discontinuing these transportation benefits for its employees. However, due to state and local laws, not all organizations have this option. For example, per the Sustainable DC Omnibus Amendment Act of 2014, employers with 20 or more employees located in Washington, D.C. are required to offer commuter transit benefits to their employees. Under the NYC Commuter Benefits Law, employers with 20 or more full-time non-union employees in New York City must offer their full-time employees the opportunity to use pre-tax income to pay for their commute, and therefore do not have the option of discontinuing this benefit.
Tax-exempt organizations which have never filed a 990-T may now be required to do so. The AICPA and other industry associations have requested additional guidance and clarification from the Treasury and IRS to assist organizations in complying with the Act.
At Buchbinder, our professionals are investing significant time in understanding tax reform and other developments in the non-profit sector. When it comes to your accounting needs and financial security, we have you covered. Do not let the passage of the Tax Cuts and Jobs Act and ever-changing regulations spell uncertainty for your organization. We are here to answer your questions and help in any way that we can.
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