January 16, 2019
At the end of 2017, there was a lot of debate and political posturing about how to pass tax reform. Concerns about which individual and business tax incentives should be eliminated, bolstered and changed dominated the media. While it was clear the overall focus was on a broad tax reduction, it was the resolution of specific details that created the challenge. There were many important changes to the tax code including an overall reduction in the tax rate, the introduction of the qualified business income deduction and changes to the meals and entertainment deduction. One area where many (especially nonprofit organizations) will be impacted is with the changes to deductions for fringe benefits. Starting in 2018, entity level deductions for qualified transportation fringe benefit programs (QFTBs) is no longer permitted. This means that QFTBs will not be deductible on nonprofit’s returns and will be treated as unrelated business income instead. To help clients, prospects and others understand the change and impact on their situation, Wilson Lewis has provided a summary of key details below.
What are Qualified Fringe Benefit Programs?
These are employer-sponsored programs that reimburse eligible employees for up to $260 per month of qualifying transportation costs incurred for travel to and from work. Examples of these benefits include parking and transit passes, bicycle expenses (purchase, maintenance, and repair) and commuter highway vehicle expenses.
What Changed?
Prior to tax reform, any qualifying expenses reimbursed through a QFTB plan were deductible to the employee and the employer (nonprofit organization) as well. Tax reform changed the rules still allowing employees to take the deduction for qualifying expenses (except for bicycles), but nonprofits are no longer allowed to take a deduction for the expense. Unfortunately, they can only take the deduction if benefits are treated as taxable W-2 wages to employees, which defeats the purpose of having the program in the first place. If the organization wants to continue offering the benefit program, they will need to classify and report it as Unrelated Business Income.
UBI Example
The monthly limits which can be excluded from an employee’s income for qualified parking benefits is $260. This means that per employee the benefit would be $3,120 per year and the unrelated business income would be taxed at 21% or $655.20. This means that if an organization has 50 employees taking advantage of the program, they could be liable for $32,760 in additional taxes. If an organization provides additional QTFBs the amount could be more!
Reporting Unrelated Business Income
If a nonprofit organization wants to continue offering this benefit, they must classify the amounts as unrelated business income. Unfortunately, it will need to be reported on IRS Form 990-T and is subject to the 21% business level tax (the same rate as their for-profit counterparts). What makes this change more challenging is that many growing nonprofits currently don’t file Form 990-T and will need to bear the additional complexities and expenses of doing so.
Contact Us
Tax reform offered both business and individual taxpayers several tax savings opportunities. Unfortunately, it came at the cost of select benefit programs. While the change impacts both for-profit and nonprofit organizations, it appears it will result in a more burdensome change for nonprofits. If you have questions about QTFBs and your nonprofit’s tax treatment of them or need assistance with another audit or tax issue, Wilson Lewis can help! For additional information call us at 770-476-1004 or click here to contact us. We look forward to speaking with you soon.