by Stanley Woo, CPA
Due to the changes in the Federal tax law brought on by the 2017 Tax Cuts and Jobs Act, the transportation fringe benefits provided by an employer to employees are no longer deductible by the employer. This change in the law will impact employers in the for-profit sector and surprisingly, employers in the not-for-profit sector.
For non-profit organizations, the transportation fringe benefits provided to employees are now reportable as unrelated business income. The nonprofit employers will have to pay a 21% Unrelated Business Income Tax (UBIT) on Qualified Transportation Fringe Benefits (QTFB) provided to employees starting January 1, 2018.
Qualified Transportation Fringe Benefits would include the following provided by an employer to an employee:
- Transportation in a commuter highway vehicle
- Transit pass
- Qualified parking
- Qualified bicycle commuting reimbursement
Employers will still be able to provide QTFB to employees up to $260 per month for 2018 without any tax effect on the employees. The costs of providing QTFB, whether through a pretax cafeteria plan or paid directly by the employer are subject to the 21% UBIT. The effective date of this change is January 1, 2018 regardless of the nonprofit’s fiscal year.
Nonprofits that will be subject to UBIT should consider making estimated tax payments. Estimated tax payments are required when total estimated tax for the tax year is $500 or more. If a nonprofit has not previously paid federal income taxes, it will need to enroll in the Federal EFTPS payment system to remit its tax payments.
Nonprofits that will be subject to UBIT will be required to file Federal Form 990-T, Exempt Organization Business Income Tax Return.
California has not yet conformed to the changes in the Federal law. Therefore, for state tax reporting purposes, QTFB will not be treated as unrelated business income until there is state conformity.
Find more about tax law changes to fringe benefits with our 2018-2019 Tax Planning Guide.