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Certain Fringe Benefits for Not-for-Profits Taxed as Unrelated Business Income

As a follow-up to our article released earlier this year and as we approach year-end, the IRS has released a draft 2018 Form 990-T, Exempt Organization Business Income Tax Return, and instructions, which incorporate provisions introduced by the Tax Cuts and Jobs Act related to certain employee fringe benefits provided by tax-exempt employers.

Effective for amounts paid or incurred after December 31, 2017, under new Internal Revenue Code (“IRC”) §512(a)(7), certain employee fringe benefits for not-for-profits are treated as unrelated business income unless they would otherwise be deductible under IRC §274. These fringe benefit expenses include any:

  • Qualified transportation fringe benefit (IRC §132(f)); or
  • Parking facility used in connection with qualified parking (IRC §132(f)(5)(C)).

To be deductible under IRC §274 and, thus, for unrelated business income purposes, these fringe benefit expenses must be “directly connected” or “associated” with the taxpayer’s trade or business. In the event they are not “directly connected” or “associated” with a trade or business, they are to be treated as taxable for for-profit employers and as unrelated business income for tax-exempt employers.

Webinar: Is Your Not-for-Profit Impacted by Fringe Benefits?

A qualified transportation fringe benefit includes commuter highway vehicles, transit passes (i.e. pass, token, fare card), qualified parking and any qualified bicycle commuting reimbursement.

Qualified parking is parking provided to an employee on or near the business premises of the employer or on or near a location from which the employee commutes to work by (1) mass transit; (2) any person that is in the business of transporting persons for compensation or for hire; (3) in a commuter highway vehicle; or (4) by carpool.

This provision was introduced as part of the TCJA and treats these fringe benefits, for tax-exempt employers, as unrelated business income subject to a 21% corporate tax rate. This type of reporting was introduced in an attempt to put tax-exempt organizations on a level playing field with for-profit employers as for-profit employers are no longer permitted to deduct these benefits unless they are “directly connected” or “associated” with the taxpayer’s trade or business. As we indicated in our earlier article, the tax upon employers applies even if the employees’ funds were used to pay for the benefits through a salary reduction plan.

Based on recent developments with the release of the draft 2018 Form 990-T wherein this provision has not yet been delayed or repealed as previously discussed as an option by the IRS, we recommend that you consider making a 4th quarter estimated tax payment for the estimated amount due under the tax. For calendar year organizations, 4th quarter estimated tax payments are due on or before Monday, December 17. For questions or assistance, please contact your Withum Tax Advisor or a member of our Not-for-Profit Tax Services Group by filling out the form below.

 

Tax Reform Affects Taxable Fringe Benefits

 

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