By Lisa W. Heller, Tax Senior Manager
On December 22, 2017, H.R. 1 (also known as the Tax Cuts and Jobs Act) was signed into law. This new law provides sweeping changes affecting practically all taxpayers, including those in the nonprofit realm. One of the more drastic changes affecting nonprofits relates to the tax treatment of certain fringe benefits expenses.
These changes became effective on January 1, 2018, only ten days after the new law was signed. Therefore, it’s important to know how this change will affect your organization, so that you can determine the best course of action going forward.
The new law disallows a tax deduction for certain employer-paid transportation, parking, and on-site health club benefits paid or incurred, beginning in 2018. The following employer-paid fringe benefits are included in this provision:
- Qualified transportation and commuting fringe benefits described in IRC §132(f), including:
- Any transit pass;
- Any qualified bicycle commuting reimbursement; and
- Transportation in a commuter highway transportation vehicle between the employee’s residence and workplace paid by the employer.
- Qualified parking as defined in IRC §132(f)(5)(C).
- On-premises athletic facilities as defined in IRC §132(j)(4)(B).
Both taxable and tax-exempt organizations are now subject to tax on these types of benefit expenses. Previously, taxable companies were able to deduct these types of expenses on their tax returns, and now they cannot, so their taxable income increases accordingly.
Exempt organizations typically do not claim tax deductions for business expenses, except those that are associated with unrelated business income (“UBI”). The new law states that beginning in 2018, tax-exempt organizations paying for these benefits must include these expense amounts as UBI. This provision is intended to achieve parity with taxable companies that are also affected by the new legislation. Note that this addback does not apply to amounts paid or incurred in direct connection with an unrelated trade or business regularly carried on by the organization.
Exempt organizations paying these expenses for any of its employees – even for only one employee – will need to determine the taxable impact of this arrangement, beginning in 2018. In some cases, organizations will need to file Form 990-T for the first time, to report these amounts and pay the required tax. Form 990-T has an annual specific deduction of $1,000; so any of these amounts paid in excess of $1,000 for the year are subject to UBI tax.
Fiscal year taxpayers will need to pay particular attention here. Due to the effective date of this provision, fiscal year taxpayers will need to track and report any such expenses that were paid or incurred after December 31, 2017. These organizations will need to include these amounts as UBI for a partial tax year, presumably on Form 990-T covering the fiscal year that includes December 31, 2017.
Exempt organizations currently paying these benefit amounts for its employees should consider how to handle these benefits going forward. They can either:
- Continue to pay directly for these benefits, and report any resulting UBI and pay tax on the value of these benefits; or
- Start paying the value of these benefits as reportable W-2 compensation to their employees, and avoid UBI exposure.
Should your organization choose to stop paying directly for these benefits, and instead start paying the value of these benefits directly to employees, these amounts will be considered taxable compensation to the employees. These amounts are subject to federal and state income tax, as well as to employer and employee-level employment taxes, such as FICA and FUTA/SUTA.
Employees can eliminate some of the resulting tax burden by electing to pay for these benefits under an employer-sponsored, qualified transportation and parking fringe benefit plan. Amounts paid for benefits in this manner are still available using pretax dollars, up to the legal monthly limit. For 2018, the monthly limit on the amount that may be excluded from an employee’s income for qualified transit and vanpool benefits is $260, and is also $260 for qualified parking benefits – up to $520 per employee per month for both benefits.
An “on-premises athletic facility” for purposes of the new law is one that is operated by your organization and is primarily used only by your employees and their family members. Therefore, expenses relating to most in-office gyms that are operated and maintained by a third party (such as a landlord or building management company) are not subject to UBI under the new law. In addition, based on the wording of the new law, it appears that these expenses would only be subject to UBI if the facility is not open to all employees, as in the case of an executive gym or squash court. Therefore, at this time we believe that most athletic facilities will not meet the criteria for taxation under the new law.
Exempt organizations currently offering these benefits to employees tax-free will need to decide whether to keep their existing arrangements, or to switch to a new one. Any of these options has tax consequences, as well as business and employee-relations considerations.
Additional guidance in this area is definitely needed, and we expect that it will be forthcoming. The new law specifically states that guidance may be issued with respect the appropriate allocation of depreciation and other costs with respect to facilities used for parking or for on-premises athletic facilities. We will keep you posted as additional information becomes available.
Please consult any member of the Tate & Tryon tax team if you have any questions regarding this matter.
Lisa Heller is a Senior Manager with Tate & Tryon’s Exempt Organizations Tax Services Department. She can be reached at [email protected].