Provisions in the Tax Cuts and Jobs Act (TCJA), passed late in December 2017, eliminated the deductibility of qualified transportation expenses incurred by business employers. After December 31, 2017, amounts paid or incurred for qualified transportation fringe benefit or parking facilities used in connection with qualified parking will no longer be deductible business expenses. This means there are potential increases in taxable business income that could result in a larger tax liability for your organization.
Tax-exempt entities might be wondering why that matters, especially if the entities have not had unrelated business income tax in the past. With the new tax act, there is a provision added for tax-exempt organizations in an attempt to bring equality to for-profit and tax-exempt employers. Tax-exempt organizations must now include any amounts paid for certain fringe benefits offered to employees if the amount would not be deductible under Internal Revenue Code (IRC) section 274. This includes expenses for qualified transportation fringe benefits and parking facilities used in connection with qualified parking, but it does not include on-premises athletic facilities since IRC §274 was not updated to reflect the new tax-exempt provision created under IRC section 512(a)(7).
Qualified parking benefits are still excludable from employee wages up to the allowable limit of $260 per month for 2018. However, the amounts incurred or paid by tax-exempt employers for the qualified transportation fringe benefits are now required to be included in unrelated business income. Qualified transportation fringe benefits include providing benefits for transportation to and from work in a commuter highway vehicle, transit passes, qualified parking, and qualified bicycle-commuting reimbursement. If tax-exempt organizations are providing these benefits for their employees, they can expect to have taxable income in 2018 subject to a flat 21% income tax.
Qualified parking includes providing parking on premises the entity owns or leases. If the organization has free parking for employees, the parking lot privileges may need to be valued and the cost associated included in unrelated business income. Examining rates for commercial lots nearby is the first step to determining the potential parking value. If commercial parking is available in the area free of charge (i.e. typically seen in rural areas), parking can be valued at zero ($0). However, if preferential reserved spaces with more favorable locations than spaces available to employees, the $0 fair market value rule does not apply. Additionally, the value of parking is based on the right to use and not the actual or perceived use of the parking lot spots.
Items to consider:
- Fiscal year filers will need to keep track of amounts paid before and after December 31, 2017
- Values will need assigned to commuter highway vehicles, parking facilities, and preferential parking spots
- Consider providing the benefits to employees as taxable income
- Consider discontinuing benefits completely
- Consider discontinuing benefits and replacing with other allowable fringe benefits
- Consider discontinuing benefits and adjusting employee income
When considering continuing or terminating fringe benefits, calculating potential outcomes can help bring perspective to the decision. Paying the unrelated business income tax of 21% could potentially be a better business decision than paying payroll taxes on the additional wages and removing an employee benefit.
Please contact your local Blue & Co. advisor for additional analysis or questions surrounding the TCJA.
Additional Resources:
Internal Revenue Code Section 274(a)(4)
Internal Revenue Code Section 512(a)(7)
Internal Revenue Code Section 132(f)
Regulation Section 1.61-21
