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The 2017 Tax Cuts and Jobs Act that was enacted late in 2017 made several changes to the tax laws affecting tax‑exempt organizations. These changes will result in some nonprofit organizations paying federal tax for the first time.
The transportation and fringe benefits included:
- Payment of qualified transportation fringe benefits
- Costs associated with any parking facility used to provide employee parking
- Costs associated with any on‑premises athletic facility
A "qualified transportation fringe benefit" includes anything provided by the employer to an employee for commuter transportation including buses, van pools, transit passes, parking passes or reimbursements, and bicycle commuting reimbursements.
Under the old rules, nonprofit employers could provide these benefits to employees as tax‑free items. Starting in 2018, if an organization wants to continue providing these benefits tax‑free to employees, the organization is required to include the value of the benefits as UBTI and pay tax on them. It is likely that some administrative expenses can be allocated to reduce actual tax paid.
As in the past, under this scenario the employees would not incur taxable income and would not be subject to any additional personal income tax. If the organization wants to avoid this new tax, it can provide the benefits as taxable items to the employees (and include the cost of the benefits in the employees’ Forms W‑2), or it can stop providing the benefits (and consider adjusting the employees’ wages accordingly). Further complicating this issue is the local laws in the San Francisco Bay area that require certain employers to maintain qualified transportation fringe benefit programs under Code Section 132(f). Therefore, it will not be easy for certain employers to simply discontinue transportation fringe programs to avoid UBTI.
If the organization chooses to treat these benefits as taxable wages, the organization is not required to pay tax on the benefits. However, the organization will be subject to higher FICA and Medicare payroll taxes and the employees will have increased personal income taxes.
The stated purpose of this rule is to put tax‑exempt organizations on par with taxable organizations. Under the new tax law, for‑profit entities are no longer allowed to deduct the fringe benefits listed above that are provided tax‑free to their employees.
Other provisions in the tax act that may apply to your organization:
- There is a new 1.4% excise tax on net investment income of certain private colleges and universities. This applies to colleges and universities who have more than 500 students and hold investments in excess of $500,000 per student.
- There is a new 21% excise tax on annual compensation paid in excess of $1 million to the organization’s top five highest compensated employees.
- Unrelated Business Taxable Income (“UBTI”) tax rate at a flat 21% for any UBTI over the $1,000 standard deduction.
- The 80% charitable contribution deduction for amounts paid to colleges in exchange for preferential seating at college athletic events (or in exchange for the ability to purchase tickets to those events) has been eliminated.
- Organizations with multiple unrelated business activities are no longer allowed to offset UBTI from activities that generate profits with losses from other unprofitable activities. Each unrelated activity is now viewed separately for unrelated business income tax purposes. Any losses incurred must be carried forward to future years and can only be used to offset profits generated in the same unrelated activity.
Organizations that have never filed Form 990‑T before, or that filed but had zero tax due in the previous year, are not protected under the "last‑year’s tax safe harbor" and may need to make estimated tax payments. For 2018 calendar year entities, the due dates for estimated tax payments are April 17, June 15, September 17, and December 17, 2018.
If you believe your organization will be subject to tax under these new rules, please contact us so we can help you determine whether advance estimated tax payments should be made to avoid or minimize underpayment penalties.