The changes introduced in the tax reform bill passed in December of 2017 caused quite a stir, and nonprofits have certainly taken notice. One of the provisions in particular may pack more of a punch than initially thought. With the Tax Cuts and Jobs Act (TCJA), Congress disallowed entity-level deductions for expenses that are more personal in nature, including some meals and entertainment expenses and certain fringe benefits. Employer-provided qualified transportation fringe benefits (QTFBs) is an expense category that is now ineligible for a business-level deduction. From now until the end of tax year 2025, QTFBs will not be deductible on nonprofits’ returns, and those amounts will instead be classified as “unrelated business income.” These two changes combined may push more compliance burdens onto nonprofits than they had anticipated.
Treatment of Qualified Transportation Fringe Benefits
QTFBs are employer-sponsored plans that reimburse employees for up to $260 per month of transportation costs that they incur to travel to work. Eligible expenses have historically been the following:
- Parking fees
- Transit passes
- Uber or Lyft fares
- Bicycle expenses, such as the purchase, maintenance, repair, or storage of a bicycle that is used for commuting
- Commuter highway vehicle expenses
When reimbursed under a QTFB plan, these expenses were deductible to the nonprofit and nontaxable to the employee. Unfortunately, the TCJA has changed this rule. While nonprofits can continue to provide these benefits (with the exception of bicycle expenses) to employees tax-free, they cannot take a deduction for the expense. Nonprofits can only deduct QTFBs if they treat the benefits as taxable W-2 wages to the employee, circumventing the objective of the benefit in the first place. And the grievance does not stop there; providing these benefits may also serve them with a tax bill, or at the very least, a new filing requirement.
QTFBs and Unrelated Business Income
When nonprofits choose to provide QTFBs to their employees, they must classify those amounts as unrelated business income. Unrelated business income is taxable to nonprofits and must be reported on Form 990-T, Exempt Organization Business Income Tax Return. For the 2018 tax year, the tax rate for a nonprofit’s business income is 21%, placing nonprofits on the same playing field as for-profit entities. The tax itself will certainly be a liability, but so will the compliance requirements. Many small- and mid-sized nonprofits do not already file Form 990-T and will find it burdensome and expensive to do so.
A Bit of Good News
The tax law states that nonprofits with unrelated business income from different trades or businesses cannot net the profits from one business with the losses of another. When the TCJA was first passed and this new rule about QTFBs was discovered, nonprofits and their tax experts were frustrated that this income could not be netted with expenses from another business sector. Lobbying groups worked together to advocate for a rule change, and fortunately, it worked. In August, the IRS released a notice that stated unrelated business income from QTFBs could be netted with any other unrelated business income. This may not be the perfect solution for nonprofits, but it might help a few dodge a tax bill.
This rule change does not just affect nonprofits; QTFBs are disallowed for all private-sector entities, even those who are for-profit. Unfortunately, the rule change is expected to disproportionately affect nonprofits. It places a new filing requirement on their plate, and it may also serve them with a tax bill they had not anticipated. If you are concerned about how this part of the TCJA will impact your nonprofit, please contact the BSSF nonprofit team.