IRS Provides Transportation Benefits Relief to Nonprofits
Responding to calls for action from the not-for-profit sector, the IRS released interim guidance in late 2018 on new tax rules relating to transportation fringe benefits. Under the Tax Cuts and Jobs Act (TCJA), providing such benefits could cause unrelated business income tax (UBIT) complications. But the new guidance provides one solution for nonprofits that act before April 1, 2019.
Reviewing Pre-TCJA Rules
Before the TCJA became law, both for-profit and nonprofit entities could offer tax-free transportation benefits to employees. The following types of expenses were deductible by the employer, up to a stated monthly limit:
1. Mass transit passes. This 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 professionally operated vehicle seating at least six adults (not including the driver). Bus, rail, and ferry passes qualify.
2. Commuter highway vehicle expenses. A commuter highway vehicle is defined as seating at least six adults (not including the driver). At least 80% of the vehicle mileage should be for transporting employees between their homes and workplaces, and employees must occupy at least 50% of the vehicle's seats (not including the driver's seat).
3. Qualified parking fees. This benefit covers employer-provided parking for employees on or near work premises. It also applies to fees for parking on or near the location from which employees commute to work using mass transit, commuter highway vehicles or carpools (for example, a parking lot at a train station). However, it doesn't extend to parking at or near employees' homes.
After several tax law changes, the maximum monthly tax exclusion for employees for each type of benefit was $260 per month in 2018. The maximum rises to $265 for 2019. The TCJA repeals this transportation fringe benefit deduction starting in 2018. However, you may still be able to offer these benefits to employees tax-free.
Parsing New Provisions
The elimination of the transportation fringe benefit deduction has received plenty of publicity. But another TCJA provision has largely flown under the public's radar: Not-for-profits must count disallowed deduction amounts paid for transportation fringe benefits in their UBIT calculations. UBIT applies to business income that isn't related to the organization's tax-exempt function. Thus, by continuing to provide some of the same transportation benefits offered to employees in the past, nonprofits may be liable for additional tax.
Several large nonprofit organizations — including the Boys & Girls Clubs of America, Goodwill Industries, Jewish Federation Services and the National Council of Nonprofits — have voiced opposition to the change and requested relief. Some have called for an outright repeal. They object to rules requiring not-for-profits to assign value to parking spaces provided to employees. Not only does such value assignments trigger UBIT complications, but they're also burdensome and time-consuming.
The IRS acknowledges the difficulties introduced by the TCJA. In its interim guidance, it notes that many not-for-profits have already adopted methods for valuing nondeductible parking expenses. Accordingly, the IRS has created a safe-harbor rule allowing organizations to rely on the interim guidance or to use any “reasonable method” for determining nondeductible parking expenses. Not-for-profits can also take the unusual option of “going back in time.”
What does this mean? Your nonprofit has until March 31, 2019 to change its parking arrangements to reduce or eliminate the number of parking spots reserved for employees and effectively avoid extra UBIT liability. You may not even need to file a Form 990-T. The relief applies retroactively to January 1, 2018.
The IRS has further issued guidance granting estimated tax penalty relief for 2018 to organizations that provide these benefits and weren't required to file a Form 990-T last year. Nonprofits that don't exceed the $1,000 threshold for UBIT won't be required to report or pay UBIT relating to transportation benefits.
Dealing with Uncertainty
We may not have heard the last word on how transportation benefits can trigger unrelated business income tax. There's some bipartisan support in Congress to eliminate or modify TCJA provisions that potentially raise the tax burden on nonprofits. Significantly, House Ways and Means Committee Chairman Kevin Brady (R-TX) proposed a repeal of the provision late last year. Senators James Lankford (R-OK) and Chris Coons (D-DE) have been urging Congress to delay implementation of related TCJA rules. Stay tuned.
In the meantime, if you're unsure how the TCJA affects your organization's transportation benefits program or whether you potentially owe UBIT, talk with a professional advisor. When it comes to the IRS, it's almost always better to be safe than sorry.