Tax reform for tax-exempt organizations: Taxability of transportation fringe benefits

As part of the Tax Cuts and Jobs Act (the Act) passed Dec. 22, 2017, section 512(a)(7) was added that increases unrelated business taxable income by amounts paid or incurred for any qualified transportation fringe benefits (as defined in section 132(f)) and for any on-premises athletic facility (as defined in section 132(j)(3)(B)). Given the timing of the passage of the Act, organizations did not have sufficient time to consider options or implement changes to qualified transportation fringe benefits provided to their employees or concerning on-premises athletic facilities.

This new provision is applicable for amounts paid or incurred after Dec. 31, 2017, so it affects organizations with fiscal years ending in 2018. Organizations that do not currently file a Form 990-T for unrelated business taxable income may be blindsided by the impact of this new section if these benefits are offered to employees.

Qualified transportation benefits include the following:

  1. Transportation in a commuter highway vehicle if such transportation is in connection with travel between the employer’s residence and place of employment
    1. Commuter highway vehicles are defined as:
      1. Seating capacity of at least six adults (not including the driver)
      2. At least 80 percent of the mileage use can reasonably be for the purposes of transporting employees in connection with travel between their residences and their place of employment and on trips during which the number of employees transported for such purposes is at least 50 percent of the adult seating capacity of such vehicle (not including the driver)
  2. Any transit pass
    1. Includes any pass, token, fare card, voucher or similar item entitling a person to transportation if such transportation is on mass transit facilities (whether or not publicly owned) or provided by any person in the business of transporting persons for compensation or hire if such transportation is provided in a commuter vehicle
    2. Commuter highway vehicle, bus, light rail, subway, etc.
  3. Qualified parking
    1. 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 mass transportation; but does not include parking on or near property used by the employee for residential purposes
  4. A facility used in connection with qualified parking
  5. On-site athletic facilities
    1. Any gym or other athletic facility which is located on the premises of the employer; operated by the employer; and substantially all the use of which is by employees of the employer, their spouses, and their dependent children, and discriminates in favor of highly compensated employees

Qualified transportation benefits may be provided in a number of formats including the following:

  1. At the employer’s expense including subsidized transit passes, commuter highway vehicle transport, parking facilities (whether rented or owned)
  2. As a pre-tax benefit to employees through qualified salary reduction arrangements
  3. A combination of employer and employee paid benefits

How will organizations calculate the expenses paid or incurred for qualified transportation fringe benefits and on-site athletic facilities?

The IRS indicated that it is working on guidance for calculating the “amounts paid or incurred” in connection with the provision of these benefits to assist taxpayers with estimating their overall tax exposure. In the interim, it will still be necessary for organizations to evaluate their current benefit plans to identify potential expenses that fall under the new code section and to calculate estimated tax liabilities and make estimated payments. 

How will the tax liability be calculated?

The expenses that will be added back to unrelated business taxable income for qualified transportation fringe benefits and on-site athletic facilities will be subject to the newly enacted federal corporate rate of 21 percent as well as the state tax rate (unless otherwise exempted) which may be as high as 10 percent.

For more information on this topic, or to learn how Baker Tilly tax specialists can help, contact our team.