IRS Publication 15-B Offers Additional Guidance on Qualified Transportation Fringe Benefits
The Tax Cuts and Jobs Act of 2017 that was signed into law on December 22, 2017 contains several provisions, including some related to qualified transportation fringe benefits.
Qualified transportation fringe benefits, also known as commuter tax benefits, allow employees to pay for qualified commuting expenses on a tax-free basis. Employers traditionally offered this benefit in several ways. For example, employers could pay for qualified commuting expenses directly for employees, reimburse employees for these expenses (reimbursement arrangement), or withhold a portion of an employee’s salary to pay for these expenses through commuter expense accounts (compensation reduction agreement). Common qualified commuting expenses include transit passes, van-pooling accounts and parking accounts.
Prior to this legislation, employers were able to provide these benefits to employees and deduct them as expenses from their (the employer’s) taxable income. Moreover, as mentioned, the employees who received these benefits would not be subject to income taxation on these amounts, as it was considered a non-taxable fringe benefit. The major change is that, after December 31, 2017, employers can no longer deduct the costs associated with these qualified transportation fringe benefits. Please note that nothing inherently changes for employees—employees can still “purchase” these qualified commuting expenses tax-free to them as long as their employers continue to offer these benefits. Again, the change affects the employers. We’ll discuss this in more detail below.
There is a discrepancy in the change between the for-profit and nonprofit sectors. The major change in the for-profit sector is that the tax deduction was completely eliminated. Conversely, in the nonprofit sector, these amounts became taxable to employers as Unrelated Business Income (UBI). In summary, for-profit employers are now paying income tax on these amounts since they are no longer able to deduct them as expenses. Consequently, to create parity between for-profit and nonprofit employers, nonprofits now must account for these amounts as taxable UBI. Ultimately, it can be surmised that both the for-profit and nonprofit sector employers will see an increase in costs as a result of this change; those costs are just incurred in different ways.
Since the signing of the Tax Cuts and Jobs Act, the Internal Revenue Service (IRS) released Publication 15-B, which offers some guidance and clarification on several items. While the Publication notes that employers are still able to provide these tax-free benefits to their employees, as noted above, it also clarifies that qualified transportation benefits are not deductible by the employer regardless of whether the employer pays for them (either directly or through a bona fide reimbursement arrangement) or if the employee pays for them through a compensation reduction agreement.
Although the Publication does not directly discuss the impact of this on UBI, it stands to reason that qualified transportation fringe benefits provided, even via a compensation reduction agreement, would be considered subject to UBI tax by the IRS.
Nonprofits should consider the tax effect of continuing to provide these qualified transportation fringe benefits to their employees, either directly or through compensation reduction agreements. Going forward, the amounts provided will be subject to the 21% corporate tax rate. As an alternative, if a nonprofit decides to stop providing these benefits, that nonprofit can consider increasing employee wages as an offset.
Regardless of how a nonprofit decides to proceed, it is imperative to review these changes and current arrangements now rather than at the end of the year. No nonprofit would want to be surprised by a larger Unrelated Business Income Tax (UBIT) liability.
BBD can help you calculate your UBIT and advise you on your choices as well as prepare your Unrelated Business Taxable Income Return should you have a filing requirement. Contact Jen Solot, a Tax Director in BBD’s Not-For-Profit Group, for assistance.