The Tax Cuts and Jobs Act (TCJA) dealt several blows to the nonprofit sector. One of them is that, effective January 1, 2018, nonprofit employers are subject to tax on transportation fringe benefits provided to employees. The IRS recently released Notices 2018-99 and 2018- 100 to provide guidance on this issue.
This guidance may clarify matters for entities that aren’t subject to the tax, but it will likely leave other organizations to make required calculations using methodologies that aren’t fully defined. For example, although the tax on transit benefits and third-party paid parking is straightforward, the steps the IRS provides to compute liability related to these benefits aren’t.
New tax = smaller budget
Since the early 1990s, the Internal Revenue Code has encouraged both nonprofit and for-profit employers to offer employees qualified transportation benefits — including workplace parking (whether in a paid facility or free lot), vanpools and transit passes. These benefits used to be excluded from taxable salaries up to a stated monthly amount ($260 in 2018), and for-profit organizations could deduct the benefits they provided to employees.
After the TCJA, transportation benefits remain tax-free to employees. However, tax-exempt employers now must treat transportation benefit expenses as unrelated business income (UBI), which is taxed at the 21% corporate tax rate. State income tax may also be assessed.
Because the law became effective for 2018, organizations with noncalendar year-ends should take note: Tax could accrue for the portion of 2018 included in your nonprofit’s fiscal year.
There’s an exception if the transportation is necessary to ensure a worker’s safety — for example, if a staffer is working late and needs to take a taxi home. Another provision allows that parking other than that reserved for your employees is exempt from tax if over 50% of it is made available to the general public.
Consequences and alternatives
A January 2019 survey conducted by Independent Sector, the Urban Institute and George Washington University found that the new tax will deprive nonprofit budgets of an average of $12,000 a year. Not surprisingly, some organizations are considering discontinuing offering transportation benefits to employees.
Before your nonprofit takes that step, make sure you review all potential consequences. Changing your benefits package may not make sense if fringe benefits provide a competitive advantage in attracting and retaining skilled staffers. And some state and local laws — such as Washington D.C.’s Sustainable DC Omnibus Amendment Act — require employers to provide transportation benefits to employees. Also, some states (including Maryland and Washington) help defray costs with tax credits for qualified employers.
If you intend to keep offering transportation benefits, review IRS Notice 2018-99 (or talk to your tax advisor). It explains how to determine taxable parking expenses. It also makes an unexpected offer: If your nonprofit currently provides parking and is willing to reduce the number of spots reserved for employees by March 31, 2019, you can retroactively lower (to January 1, 2018) the amount of unrelated business income tax (UBIT) you owe.
If you have questions about how this guidance will affect your nonprofit, contact us today.