While not-for-profit entities generally aren’t concerned with income tax law changes, some of the provisions of the Tax Cuts and Jobs Act that went into effect January 1, 2018, can have a significant impact on them. One such change could create Unrelated Business Taxable Income (UBTI) even if the nonprofit hasn’t previously been subject to this tax.
One of the provisions under the new tax act denies employers a deduction for providing “qualified transportation fringe” benefits. Qualified transportation fringe benefits are defined as:
- Transportation in a commuter highway vehicle.
- Any transit pass.
- Qualified parking.
- Any qualified bicycle commuting reimbursement.
In an attempt to equalize the treatment of these items between for-profit and not-for-profit entities, lawmakers enacted this law requiring nonprofit entities to increase its unrelated business taxable income by disallowed fringe. In other words, if a not-for-profit entity provides its employees with a qualified transportation fringe benefit, a portion of that benefit could potentially create unrelated business taxable income for the nonprofit entity.
On December 10, 2018, the IRS issued Notice 2018-99, which provides interim guidance in the determination of parking expenses for “qualified transportation fringes.” This notice provides detailed guidance on what types of expenses should be included in the determination of “qualified parking” as well as a methodology for allocating those expenses among several categories (“reserved employee spot”, “not reserved employee spots”, “general public”, “reserved nonemployee spots”, etc.). The allocation of the expenses among these categories is critical in determining the applicability and impact on UBTI.
Recognizing that this guidance is coming at the end of the year, the notice allows entities until March 31, 2019, to make changes in “reserved employee spots” that affect these calculations for years ending before January 1, 2019. This deferral will give entities the option of revising policies to account for this guidance and possibly limit their exposure to this issue.
This is a complicated issue where every entity will have a unique set of facts and circumstances. This will require the gathering of data that may not be immediately available and the assessment of how each organizations situation fits under the provided framework. Contact CRI to help evaluate your situation.