One Effect of the Recent Tax Reform on Not-for-Profit Organizations
By Howard J. Kass, CPA, CGMA, AEP®
As often as employers are maligned, there are times where they try to do the right thing for their employees. To be fair, many times, an employer may take an action or incur an expense that benefits its employees, knowing that the employer will benefit by a tax deduction for incurring an expense. In some cases, Congress encourages such behavior by explicitly permitting favorable tax treatment for certain programs.
One such case was a set of fringe benefits known as the “qualified transportation fringe” benefits that, in fact, received a double-barreled tax benefit for years, by virtue of Internal Revenue Code Section (IRC) 132(f)(5)(C). Under that section, employers were allowed to take a deduction for, among other things, qualified parking fringe benefits that they provided to their employees. What, exactly, was a qualified parking fringe benefit? Under IRC 132(f)(5)(C), “qualified parking” meant 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 transportation described in Code Sec. 132(f)(5)(A) (relating to “transit passes”), in a commuter highway vehicle, or by carpool.
At the same time the employer received a deduction, these fringe benefits were tax-free to the employee. The result? There was a tax benefit to both the employer and the employee for these fringe benefits.
What was the public-policy reason for allowing this fringe benefit? To make it more affordable for employers to attract employees to work in locations where there was no available free parking.
So, where is the punishment, you ask? Enter the Tax Cuts and Jobs Act of 2017 (TCJA).
Among the myriad changes to taxation as we knew it under the old law was a little-known change to the treatment of qualified fringe benefits discussed above. In fact, the new law disallows a deduction for expenses associated with providing any qualified transportation fringe to employees of the taxpayer, including the qualified parking fringe benefit mentioned above.
So, you’re probably saying to yourself that the employee is still receiving the benefit tax-free, so this was probably a reasonably equitable change in law, right? If this provision only affected for-profit employers, I’d probably agree with that logic. However, there are many not-for-profit employers who provided these fringe benefits to their employees. How were they affected?
A short primer on taxation of tax-exempt organizations is in order here. In most cases, tax-exempt organizations (often referred to as not-for-profits) are not subject to any income tax and, when they incur expenses, such as the fringe benefits being discussed here, they receive no tax benefit by incurring those expenses.
When is a tax-exempt organization subject to income tax? When it has Unrelated Business Taxable Income (UBTI) resulting from the operation of some business activity that meets the requirements for being taxable. Otherwise, a tax-exempt organization pays no income tax and receives no tax benefit by incurring any expense, including a fringe benefit.
So, you ask again, where is the punishment???
One of the changes under the TCJA was the addition of a new code section that applies to tax-exempt organizations. Under that new code section, a tax-exempt organization must now include as UBTI any amount for which a deduction is no longer allowed under the Code, and which is paid by the organization for any qualified transportation fringe, any parking facility used in connection with qualified parking, or any on-premises athletic facility. So, in effect, such an organization has had an entire class of deductions, for which it never received a tax benefit, disallowed in such a way as to create an income tax liability for the organization as UBTI, even if the organization has no Unrelated Business Activity! And, to rub just a little more salt into the wound, form 990-T will now have to be filed by the organization with the IRS, in addition to form 990!
Now, you’re probably asking yourself what the logic of this change is. The reality is that there is no logic. In passing this massive tax cut, Congress had to do so under a set of rules known as “Reconciliation” in order to avoid having to overcome a filibuster in the Senate. For this bill to fit into the Reconciliation rules, required that it could not create a spending deficit any greater than $1.5 trillion (yes, trillion, with a T). This provision was included solely to fit within the $1.5 trillion limit.
So, now, it should be clear exactly what the punishment is. If a tax-exempt organization wants to attract employees in spite of having an inconvenient location with costly parking, it must pay an income tax to do so. For many small nonprofits, this can make the difference between a balanced and an unbalanced budget, which could have a negative domino effect reverberating long into the future.
