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The Impact of the New Tax Legislation on Transportation Benefits and What It Means for Not-for-Profits

Transportation impact not-for-profits

Not-for-profit organizations may find themselves facing questions about something unexpected – taxes! The Tax Cuts and Jobs Act, the tax legislation passed in late 2017, contained a significant modification to the deductibility of certain benefits for not-for-profit organizations including employee parking and transportation benefits. Under the new law, not-for-profit entities that used to be allowed to provide tax free transportation benefits for employee parking and transit passes can no longer do so. The cost to not-for-profit groups is 21% of the value of the benefit. This is a UBIT tax based on the new federal corporate tax rate. It will be accounted for on a 990-T, a form that most not-for-profits have not previously been required to file.

As a result of the potential impact to their bottom line, some eligible not-for-profits (see note below about DC-based groups) may choose to evaluate whether they wish to continue providing transportation benefits to their staff. This applies even if the not-for-profit offers this benefit to employees tax-free through a compensation reduction agreement.

This new UBIT tax applies to the value of all transportation benefits paid by a not-for-profit on behalf of employees associated with commuting to work and is effective beginning January 1, 2018. This does not apply to business travel. The 21% tax should be multiplied by the cost (value) of all transportation benefits provided and remitted to the federal government (and presumably state governments, when applicable) on a quarterly basis. For organizations currently filing a 990-T, it would mean increasing the estimated taxes paid quarterly to include the new taxes due.

If an organization does not provide the transportation benefits directly but allows the employee to participate in a pre-tax plan (compensation reduction agreement) the amount the employee reduces taxable compensation by using the pre-tax plan to pay commuting expenses is still taxable to the organization in the same way as paying it directly. Therefore, the use of a pre-tax plan for transportation benefits does not avoid the tax for the organization. This is according to the IRS publication Publication 15-B, Employer’s Tax Guide to Fringe Benefits.

A possible solution is to raise the salaries of employees to cover the cost of parking and transit expenses so the not-for-profits can avoid the additional 21 % tax on this benefit and can account for the expense as salary/compensation, subject to FICA. The employee would then become responsible for paying their own parking and transit expenses which would not be deductible to them.

However, the District of Columbia requires employers with 20 or more employees located in Washington, DC to offer commuter transit benefits to their employees (DC Omnibus Amendment Act of 2014). For DC, employers must offer one of three options which include a pre-tax option, an Employer Paid benefit and an Employer provided transit service such as a bus operated by the Employer. Clearly this is in conflict with the new Federal tax law.

CBM has fielded questions about the new tax law from several clients. Our professionals continue to pursue the best understanding possible of this legislation for any significant changes that may influence decision-making on the part of not-for-profit organizations.

As a final note about the new legislation, we are monitoring areas where the IRS has not yet provided complete clarity including the lack of a clear policy on penalties charged against not-for-profit groups that don’t pay their estimated taxes in 2018. Until an IRS policy has been clearly stated, we recommend paying those estimated taxes.

Of course you’re always welcome to discuss this matter with us. Please feel free to call if you have any questions.

Councilor, Buchanan & Mitchell (CBM) is a professional services firm delivering tax, accounting and business advisory expertise throughout the Mid-Atlantic region from offices in Bethesda, MD and Washington, DC.   

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