From time to time, CNE invites local experts to share their knowledge with the nonprofit community. This week Victoria Jones, CPA shares some insights on recent changes to federal tax law and what this means for nonprofits.
Nonprofit organizations are generally aware that provisions of the 2017 Tax Cuts and Jobs Act are expected to have significant impacts on charitable giving. But it may be a surprise that the cost of certain qualified transportation fringe benefits is now treated as unrelated business income and can result in a nonprofit owing tax. Yes, that’s right — expenses paid by the nonprofit may result in taxable unrelated business income!
A new paragraph added as a result of the Tax Cuts and Jobs Act — Internal Revenue Code, section 512(a)(7) — provides that expenses paid or incurred by a tax-exempt organization for qualified transportation fringe benefits, a parking facility used in connection with qualified parking or any on-premises athletic facility, provided that such amounts are not deductible under section 274, are unrelated business taxable income.
Under the new section 512(a)(7), if a nonprofit employer continues to treat qualified transportation fringe benefits as something other than taxable compensation to the employee, it must now pay tax on such amounts as unrelated business income.
This means the nonprofit has to file Form 990-T which reports the amounts paid or incurred and pay tax at the applicable rate (corporate tax rate of 21% beginning with tax year 2018 if the nonprofit is a corporation; trust tax rate as high as 37% if the nonprofit is organized as a trust).
A nonprofit employer that provides such fringe benefits has two options: 1) continue to provide the fringe benefit tax-free to its employees and pay the associated tax liability or 2) treat the benefit to employees as taxable compensation, subjecting employees to income tax and half of employment taxes on such amounts, with the nonprofit employer also paying its half of payroll taxes.
Victoria Jones, CPA is Principal at Jones & Company CPA, LLC. Read her full article on these recent changes to the tax code. Curious about how your financial systems are running? Consider a Financial Health Review with CNE.