April 9, 2018
Despite all the attention around the Tax Cuts and Jobs Act (TCJA), many questions remain unanswered with respect to the new tax law enacted in December. Among the most commonly asked questions is whether post-December 31, 2017 parking/commuting expense payments made by employers from employee salary deferrals are unrelated business income (UBI). While an Internal Revenue Service (IRS) spokesperson recently stated that guidance is expected in June 2018, the IRS has not yet issued any official guidance on this issue. In the meantime, the IRS has updated Publication 15-B, Employer’s Guide to Fringe Benefits, in a manner that sets forth what we believe to be the current IRS position regarding pre-tax benefits. Set out below are key considerations and practical recommendations to help you prepare your organization for the potential impact of these provisions.
Key Considerations and Practical Recommendations
The Publication 15-B update only addresses the tax consequences for for-profit employers and provides that no deduction is allowed by for-profit employers for providing qualified transportation fringe benefits (e.g. parking and transit passes), whether provided directly by the employer or through a salary reduction arrangement. However, the update implies that, because such payments from the deferrals will be treated as paid by the employer, these payments will also increase UBI for tax-exempt organizations. The publication is not official guidance and there are those who believe that based on a literal reading of the new statutes, payments from pre-tax deferrals should not be reported as UBI. We know that the IRS will likely be receiving comments from various trade associations which may advocate against the current IRS position. What the IRS will do when it issues official guidance remains to be seen.
We recommend that clients evaluate the potential impact of these provisions, including the need to make estimated payments on this UBI. It is clear that any amount paid for by the employer for qualified transportation fringe benefits and treated as a tax-free benefit will increase the tax-exempt’s UBI. It would be advisable to include pre-tax deferrals in the analysis under a “worst case scenario”.
Complications of a Fiscal Year-End Other Than December 31
The provision is effective for amounts paid or incurred after December 31, 2017, and the tax rate for tax years beginning after that date will be a flat 21%. However, the issue becomes a little more complicated for an organization with a fiscal year-end other than December 31. For example, an organization with a June 30th year-end could have a liability for amounts paid or incurred from January 1, 2018 through June 30, 2018. We believe the rate of tax on this will be at the “old” graduated rates because the tax year began July 1, 2017 (before the post-December 31, 2017 effective date). If the total UBI is less than approximately $90,000, the organization would have a lower tax liability under the old graduated rates for the year ended June 30, 2018.
A related question arises with respect to the need to make estimated payments. We believe that due to the timing and confusion the new tax law has created in this and other areas, there may be some limited administrative relief granted on the imposition of penalties. However, no one can guarantee such relief will be granted and, without such relief, an organization may incur interest and/or penalties for not making estimated payments. Many organizations are taking a “wait and see” approach until more official guidance is issued and comments have been considered.
Each organization should evaluate its potential liability and the necessity to make estimated payments related to this liability. We will keep you updated on the developments, but if you have questions on how this new provision impacts your organization, please contact us at email@example.com, firstname.lastname@example.org or 301-951-9090.