Earlier this week, the IRS announced a reprieve to nonprofit organizations with regards to taxing fringe benefits. This comes as good news to those nonprofits concerned about the Tax Cuts and Jobs Act of 2017, which President Trump signed into law in December of last year.
Due to overwhelming pressure placed on top Republican leaders from nonprofit organizations, as well as opposition from the Senate, requests were made to the Treasury Department to delay the implementation of the tax until 2019.
While the reprieve is specific to the 2018 tax year; it will remain in place until such time as when Congress changes the law.
The reprieve offers a financial break to nonprofit organizations specific to calculating the cost of their qualified transportation and commuting benefits. This financial break also extends to penalties that would otherwise be assessed in the event of under-calculating these expenses.
The new law includes a provision that imposes a 21 percent tax rate on certain fringe benefits for employees of nonprofit organizations, effective January 1, 2018. These benefits, under Internal Revenue Code sections 132(f) include:
- Qualified transportation and commuting
- Transit passes
- Transportation in a commuter highway transportation vehicle between the employee’s home and workplace paid by the employer
- Qualified parking
- Onsite athletic facility
According to estimates from the nonpartisan congressional Joint Committee on Taxation, the new law, specific to disallowing transportation deductions, will save some $17.7 billion over a ten-year period, though these figures include both nonprofits and for-profit organizations. Of course these figures will now have to be adjusted given this reprieve.
Fringe benefits typically represent special perks above and beyond the standard employee benefits package. Available in various shapes and forms, these perks, intended to retain, attract, and reward top talent can include healthcare memberships, sporting event tickets, employee discounts and much more.
The level and richness of employee fringe benefits varies from company to company, but the goals of these perks are universal, intended to motivate employees and to drive specific results.
Traditionally, not-for-profit groups are exempt from state and federal taxation, and while these groups are responsible for payroll, income and local sales taxes, losing their tax deduction on fringe benefits alone will be inconsequential.
Where the concern comes into play is how the new law is structured to address these benefits should employers treat them as nontaxable employee benefits. Under the new law, the value of the benefits will be subject to unrelated business income tax.
Prior to the new law, certain transportation benefits were tax exempt to employees and tax deductible to employers of nonprofit organizations. The new law, however, stipulates that these benefits will be subject to taxation, with a caveat on employers providing these benefits as tax-free options to their employees.
This means that employers must decide to either treat these benefits as part of their employees’ taxable compensation, whereby withholding income tax on the value of the benefit from the employees, and paying employer payroll taxes. Going this route, employers will avoid the issue of paying unrelated business income tax on the value of those tax-free benefits. Alternatively, employers can maintain the status quo and treat the benefits as non-taxable to its employees and pay unrelated business income tax on the value of the benefits.
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