Repealed Tax on Transportation and Parking Benefits was Problematic for Nonprofits
In December 2017, Congress repealed an under-the-radar provision in the Tax Cuts and Jobs Act (which was passed and signed into law in December 2017) that had imposed a new tax on nonprofits that provide transportation and parking benefits to their employees. Many nonprofits that provided these benefits to their employees in 2018 and 2019 paid unrelated business income tax (UBIT) on these expenses and filed Form 990-T with the IRS. Because the tax was repealed retroactively, these nonprofits may now seek refunds of the taxes they paid.
How can a nonprofit claim a refund of taxes paid for parking or transporation benefits?
Nonprofits that paid this tax in 2017 or 2018 can get a refund by filing an amended Form 990-T with the IRS and writing “Amended Return” (or “Amended Return – Section 512(a)(7) Repeal” if the amended return is only being filed to claim a refund for of unrelated business income tax (UBIT) paid for parking and transportation expenses). Nonprofits may file for refunds within three years of the filing date of their Form 990-T or within two years of the time they paid the tax, whichever is later. The IRS has issued guidance with more information for nonprofits seeking refunds.
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 was 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 were the problems with this new law?
This new tax was 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.