Should Your Nonprofit Organization Offer Transportation Fringe Benefits in 2018?
June 15, 2018
Offering transportation fringe benefits is one way to provide your employees with a valuable perk. However, under the Tax Cuts and Jobs Act (TCJA), doing so in 2018 may be more costly for nonprofit organizations than ever before.
A look at what’s changed:
As of January 1, 2018, the new tax law requires exempt organization employers to pay unrelated business income tax (UBIT) on the value of qualified transportation fringe benefits. To be clear, the IRS defines these as benefits offered to employees on a pre-tax basis that are related to transportation to and from the employer’s location and the employee’s residence. This includes reimbursements for passes or fees incurred from mass transit, parking, or even qualified bicycle commuting.
How the new tax law could affect an exempt organization’s tax liability:
Say your nonprofit offers 20 employees monthly parking passes to park in a nearby parking facility. The value of the pass is $100 per month per employee, which means you would incur a cost of $2,000 each month, or $24,000 each year, to provide this benefit. Previously, you could do this without a UBIT tax consequence. But now things are different, thanks to the TCJA. Starting in 2018, the $24,000 reimbursement is subject to UBIT, which means you must file IRS Form 990-T to account for this tax liability. With the $1,000 exclusion offered in the UBIT calculation, the taxable income is $23,000. This amount, when taxed at the corporate rate of 21 percent, gives you a $4,830 UBIT liability.
What should your nonprofit do next?
There are a few options to consider. You could continue to offer transportation fringe benefits on a tax-free basis to your employees and simply pay the associated UBIT tax. Or, you could include the benefits (i.e., the reimbursements) in your employees’ taxable compensation. This would save you from the UBIT liability, but it would be subject to your employees’ personal income tax as well as FICA and Medicare taxes. Finally, you could stop offering the reimbursement altogether.
Determine the best course of action for your nonprofit
If you haven’t already, it’s important to make a decision as soon as possible about how you will handle transportation fringe benefits this year and adjust your organization’s policies if necessary. A CPA who specializes in nonprofit consulting can help you evaluate your options and determine which is best for your organization. If you’d like help in making this decision, or if you have questions about this topic, please email me at firstname.lastname@example.org, or give me a call at 952-715-3064.