As expected, the IRS has clarified the interpretation of its unrelated business income (UBI) regulations and confirmed the taxation of qualified transportation benefits, whether provided directly by you, through a bona fide reimbursement arrangement, or through a compensation reduction agreement. For-profit entities are no longer able to deduct these qualified fringe benefits programs for their employees and non-profit entities are now required to report them as UBI.
Under the new guidance, clarified in the most recent revision of Publication 15-B, Employer’s Tax Guide to Fringe Benefits (for use in 2018), the IRS broadly defines pre-tax deferrals through cafeteria plans as a type of compensation reduction agreement. The new guidance requires tax exempt organizations to pick up these amounts as UBI and pay tax at the applicable corporate tax rates, which starting in 2018 will be a flat 21%.
The fringe benefit exclusion rules still apply and the payments may be excluded from your employee’s wages, but to the extent that no taxes are paid on these benefits (by your employees), they are subject to UBIT for the non-profit organization.
The effective date for these regulations is January 1, 2018. AAFCPAs advises nonprofits with 3/31/18 and 6/30/18 year ends to plan accordingly, as this will likely require many clients to file a 2017 Form 990-T. Further, AAFCPAs advises clients to consider estimated quarterly tax deposits if the tax payments are significant.
The tax practice of AAFCPAs will continue to monitor the legislative process and keep you informed as significant changes occur or provisions become clarified. If you have any questions regarding the impact of the new tax law under your organization’s specific circumstances, please contact your AAFCPAs partner, or Joshua England, JD, LLM at 774.512.4109, firstname.lastname@example.org.