Significant Changes Regarding Fringe Benefits Under The New Tax Law
The Tax Cuts and Jobs Act was signed into law on December 22, 2017, and went into effect for taxable years starting January 1, 2018. Among its many changes to the tax code are certain provisions prohibiting tax exempt organizations from deducting expenses for certain fringe benefits provided to their employees. The change puts tax exempt organizations on a level playing field with for-profit entities with regard to certain employee benefits.
Effective January 1, 2018, employers in the tax-exempt sector may no longer deduct expenses for direct payments or reimbursements made to employees as certain employer-provided fringe benefits, including qualified transportation benefits, parking facilities, and on-premises athletic facilities. A qualified transportation fringe benefit encompasses all commuting benefits provided by an employer, including mass transit passes, parking passes, buses, and van pools. Unrelated Business Income Tax (“UBTI”) must now be paid on the amounts the exempt employer spends on all of these benefits. Reimbursements to employees who commute to work via bicycle and transportation provided to ensure employee safety are still deductible.
Many people, including tax specialists, found the treatment of fringe benefits under the new law to be confusing and vague. In response, the Internal Revenue Service recently released an updated Publication 15-B, “Employer’s Tax Guide to Fringe Benefits,” to provide clarification to employers on how the Service interprets the new tax law’s provisions on fringe benefits. Unfortunately, the guidance leaves many questions unanswered, especially for nonprofit organizations. The guidance does directly address the treatment of pre-tax compensation reduction agreements. Specifically, the guidance confirms (much to employers’ disappointment) that employers must pay UBIT not only on subsidies paid to employees for transportation and parking benefits, but also to employee deferrals through pre-tax compensation reduction agreements (i.e., transportation costs paid for by employees themselves through pre-tax payroll deductions). The new guidance does not, however, offer clarification regarding on-premise athletic facilities, leaving many to wonder if the requirement on the employer to pay UBIT is triggered if the gym is simply on the employer’s property but is not operated by the employer.
The new tax law and associated guidance has resulted in a mad rush by tax-exempt organizations to try to recalculate their taxes owed. As a result, on March 28th, the American Society of Association Executives (“ASAE”) submitted a letter to Treasury Secretary Steven Mnuchin making him aware of the upheaval the changes have caused association employers. Further, the ASAE letter asks the Treasury to delay implementation of the new tax rules until further guidance is released clarifying how tax exempt employers are to determine the increased tax costs resulting from offering transportation and parking benefits, as well as on-premise athletic facilities.
To summarize, many questions remain regarding these new requirements including (i) whether an exempt employer should pay cash to its employees in lieu of the benefit; (ii) whether athletic and parking facilities included as part of the employer’s lease agreement with its landlord should be taxed and, if so, how; and (iii) what impact state laws requiring certain fringe benefits will have. Future guidance from the IRS is expected regarding these new requirements. Until the IRS provides additional guidance, all exempt employers should consider how to best address these changes. One option is to treat the benefits as taxable compensation to its employees, which could subject both the employee and the employer to tax payments. Another option is to continue to provide the fringe benefit, and subject the cost of the benefit to UBIT.