The sweeping Tax Cuts and Jobs Act of 2017 (TCJA) included a number of changes that affect tax-exempt organizations, including tax treatment of fringe benefits related to transportation and parking expenses. As a result of the updated tax code, many nonprofits could face an increase in unrelated business taxable income (UBTI). Some organizations that until now were not required to file Form 990-T, Exempt Organization Business Income Tax Return, will have to add the form to their mandated reporting.
Unsurprisingly, the nonprofit community immediately began voicing objections to the change. This month – almost a year after the TCJA became law – the IRS provided interim guidance with rules to lessen the impacts on nonprofits and help these organizations determine how to calculate the law’s effects on UBTI.
The IRS acknowledged that since the guidance comes in December, some organizations have already formulated their own strategies for navigating the accounting challenges. Consequently, nonprofits have the option to follow the interim guidance or use any reasonable method to establish the amount of nondeductible parking and transportation expenses, until the agency issues further guidance.
A key element of the interim guidance is a provision allowing organizations to retroactively reduce the amount of employer-provided nondeductible parking expenses. This rule gives nonprofits until March 31 of 2019 to make changes to their parking policy and apply the changes as of January 1, 2018, when the TCJA took effect.
Another significant feature of the interim guidance is a safe harbor method for determining nondeductible qualified transportation fringe benefit expenses, designed to minimize the UBTI burden that now falls on nonprofits as a result of TCJA tax changes.
A subsequent IRS notice also offers relief from estimated tax penalties. For nonprofits that do provide the newly taxed benefits but were not required to report UBTI on Form 990-T in the previous filing season, this relief will prevent the organizations from incurring penalties for failure to pay estimated taxes on the UBTI that the parking provisions in the updated tax code created for 2018.
Nonprofits with annual UBTI below the $1000 threshold that triggers mandatory UBTI reporting are not required to file Form 990-T or pay the associated tax.
While the new guidance and related penalty relief may soften the blow, nonprofits still face a challenge in determining and paying potential UBTI expenses related to the parking perks they have traditionally provided for employees. The nonprofit community continues to push for a full repeal of the section of the tax code that creates the new tax on transportation benefits these organizations provide.
The nonprofit accounting professionals at HBP can’t change the law, unfortunately, but we can help you determine the simplest and most cost-efficient way for your organization to comply with it. Please contact our nonprofit accounting team today to discuss your specific situation and learn more about the TCJA’s effects on your tax filing and reporting requirements.