03/29/2018

The Impact of Tax Reform on Employee Transportation Benefits

The rules went into effect Jan. 1, 2018

Recently, it was brought to the attention of the Ohio Society of Association Executives (OSAE) that new guidance recently issued by the U.S. Treasury Department will affect how tax-exempt organizations calculate federal taxes on transportation and parking benefits provided to their employees.
 
As you may know, these new rules regarding fringe benefits apply to all employers, not just those in the tax-exempt sector. The Tax Cuts and Jobs Act (TCJA) enacted at the end of 2017 renders certain employer-provided fringe benefits non-deductible. To provide parity between tax-exempt organizations and for-profit corporations, Section 512(a)(7) of the new law subjects tax-exempt organizations to unrelated business income tax (UBIT) on the value of certain employee fringe benefits, including transportation, parking facilities and on-premises athletic facilities. A qualified transportation fringe benefit includes anything provided by the employer to an employee for commuting, including mass transit passes, parking passes or reimbursements, buses, van pools and the like. Thus, starting in 2018, organizations that want to continue to provide transportation and parking benefits tax-free to employees must pay UBIT on the value of those benefits.
 
What comes as some surprise to many tax-exempt employers is that the new guidance issued by Treasury makes clear that employers should pay UBIT not just on direct payments for transportation and parking benefits, but also on amounts paid by employees through elective salary deferral via a compensation reduction agreement. Because employees pay for transportation themselves in this arrangement, many tax-exempt employers have not previously viewed salary deferrals for commuting costs as a fringe benefit.
 
“The fact that providing a pre-tax compensation reduction agreement now has negative tax consequences for tax-exempt employers was unexpected and will have many organizations scrambling to recalculate their tax liability for transportation and parking benefits utilized by their employees this tax year,” wrote the American Society of Association Executives (ASAE) in a letter delivered to Treasury Secretary Steven Mnuchin yesterday. To view the letter, please select this link.
 
Given that the new tax rules are in effect for the current year and tax-exempt employers still do not fully understand how to determine the added tax costs associated with providing certain fringe benefits, ASAE has urged Treasury to delay implementation of these new rules until such time as additional guidance can be developed and shared with employers. ASAE believes additional clarity is also needed for employers that have on-premises athletic facilities, which are also deemed fringe benefits to employees.
 
Again, these new rules apply to all employers. For associations and other nonprofits seeking to understand how the new tax law changes their tax liability, the latest Treasury guidance addressing the tax treatment of transportation and parking benefits adds to the general confusion and need for further clarification from the administration. OSAE and ASAE encourage you to submit your own letter to Treasury if you have similar concerns about this issue. Comments can be submitted through the IRS web portal here, or via letter.

ASAE is encouraging those who submit to feel free to use their letter as a model. If you have specific questions that ASAE can help answer, please contact ASAE’s public policy team at publicpolicy@asaecenter.org.