Effective since January 1, 2018 and under guidance of the Tax Cuts and Jobs Act of 2017, tax-exempt organizations will pay an Unrelated Business Income Tax (UBIT) on qualified transportation fringe benefits for employees. The flat UBIT of 21 percent for these benefits will affect organizations whose employers offer employee transportation benefits. In addition, the IRS may require employers that provide employee parking to establish a fair market value for the parking space and pay UBIT on the estimated value. In early July, the House of Representatives introduced a bill that would essentially repeal the requirement for not-for-profit organizations to pay UBIT on transportation fringe benefits and parking.
What are Transportation Fringe Benefits?
Transportation fringe benefits are voluntary benefits that provide a reduction to employees’ travel expenses for work-related costs. Transportation benefits are often valued by employees and help employers attract and retain skilled workers—many employers may choose to continue offering this benefit despite the expense.
Tax-Exempt Organization Requirements
Currently, not-for-profit organizations are required to file income tax returns and payment of UBIT when their UBI is $1,000 or more; organizations that previously haven’t had any UBI but presently offer transportation fringe benefits will be required to start reporting. As this will be new to many organizations, careful attention should be paid.
This requirement applies to expenses such as commuting, parking, and transit. Please note that there is not a penalty placed on travel costs for travel from a primary workplace to a temporary work space.
As stated, the House of Representatives’ bill intends to repeal the UBIT requirement that not-for-profit organizations with transportation fringe benefits will face. It aims to repeal the conditions that read, “increase unrelated business taxable income by the amount of expenses paid or incurred by an organization for certain fringe benefits for which a tax deduction is not allowed, including benefits relating to transportation, parking, or an on-premises athletic facility.” Also mentioned in the bill is a repeal that could have some UBIT implications and reads, “require organizations with more than one unrelated trade or business to compute unrelated business taxable income separately for each trade or business.”
During this time, employers or employees with questions on the taxation of transportation fringe benefits and employee parking for tax-exempt organizations are encouraged to reach out to Sikich’s not-for-profit industry experts and tax professionals for assistance with reporting and tax implications.