New Tax on Transportation and Parking Benefits is Problematic for Nonprofits
An under-the-radar provision in the Tax Cuts and Jobs Act that was passed and signed into law in December 2017 imposes a new tax on nonprofits that provide transportation and parking benefits to their employees. Nonprofits that provide these benefits to their employees are now required to pay unrelated business income tax (UBIT) on these expenses and must file Form 990-T with the IRS.
Why was this tax imposed on nonprofits?
Prior to the passage of the Tax Cuts and Jobs Act, certain for-profit businesses were able to claim a corporate income tax deduction for the amount they spend on qualified transportation and parking benefits for their employees. The Tax Cuts and Jobs Act eliminated this corporate tax deduction as a way of raising revenue. Since tax-exempt nonprofits were not eligible for this tax deduction, Congress decided to impose a new tax on these organizations to correspond to the loss of deductibility of these expenses for businesses.
What is covered by the tax?
According to Section 512(a)(7) of the Internal Revenue Code (where this tax is codified), the tax applies to:
- Qualified transportation expenses, which includes transit passes, payment for parking, and transportation provided by an employer in a commuter highway vehicle; and
- Parking facilities related qualified parking expenses.
A recent update to IRS Publication 15-B indicates that nonprofits are liable for UBIT on qualified parking regardless of whether they pay for their employees’ parking directly or whether they reimburse their employees for regular parking expenses.
There are two important limitations to qualified transportation expenses that could reduce UBIT liability for some nonprofits:
- Reimbursement for occasional parking expenses when employees are traveling would not be covered; and
- There is a limit of $260 per month in covered expenses per employee. This means that nonprofits would never need to UBIT on more than $260 per month per employee for these expenses.
What are the problems with this new law?
This new tax is problematic for several reasons:
- Nonprofits are (rightly) confused about how (and whether) this tax applies to parking benefits they provide for their employees.The IRS has not issued guidance answering many questions related to the determination of whether these benefits are taxable for certain types of parking or transportation arrangements.
- This creates a new (an unexpected) filing burden for many nonprofits, since tax-exempt organizations that provide these parking and transportation benefits will now need to file Form 990-T. Many of these nonprofits may be unaware of this new tax and may have never had to file Form 990-T nor pay UBIT before if they do not regularly conduct taxable business activities that are unrelated to their missions.
- This sets a precedent of applying an income tax to nonprofits’ expenses. While the Tax Cuts and Jobs Act eliminated businesses’ ability to deduct these parking and transportation expenses, it is counterintuitive to require nonprofits to pay a tax on expenses related to certain employee benefits. Further, this could encourage policymakers to begin to explore taxing other legitimate business expenses of otherwise tax-exempt nonprofits.
What can be done to fix this?
Because the new tax is part of the Internal Revenue Code, it can only be changed through legislation. It is possible, but unlikely, that Congress will pass additoinal tax legislation in 2018. In the meantime, the Internal Revenue Service has the opportunity to provide clarification about the applicability of this tax to various situations. The IRS also could delay implementation until clarifying guidance has been issued.
The Center and the National Council of Nonprofits (among many other organizations) have asked the U.S. Department of Treasury and the Internal Revenue Service to delay the implementation of these two new unrelated business income (UBIT) provisions.We have heard from several nonprofits – particularly those in urban parts of the state – that this new tax will be burdensome to their operations. Let us know if your nonprofit would be affected by this new tax.