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Employee Transportation Benefits Are Now Taxable

If your 501(c)(3) nonprofit provides transportation or commuter benefits to its employees, be aware that you may have to pay new taxes to the IRS in 2018 and file additional tax forms.

The Tax Cuts and Jobs Act of 2017 made transportation benefits subject to unrelated business income tax (“UBIT”) for nonprofits, meaning that nonprofits will be required to pay tax on the value of these benefits at the flat corporate rate (currently 21%). Affected benefits include metro/SmarTrip Cards, vanpool/shuttle services, and parking benefits that are either (a) provided directly by employers, as in when employers purchase transit cards for employees, reimburse employees for the cost of transportation services, or provide free/subsidized parking; or (b) that are funded by elective, pre-tax contributions which are deducted from an employee's salary and then used to buy transportation services. Since 2016, D.C. law has required all employers with 20 or more employees to provide either employer-paid/employer-provided transportation benefits or to sponsor an employee-paid, pre-tax transportation benefit program.

Before 2018, neither employees nor employers paid federal taxes on the value of these transportation benefits. Under the new 2018 changes, nonprofits will now pay UBIT on the value of these transportation benefits under either the employer-paid/employer-provided model or the employee-paid, deductions-based model. For example, if a nonprofit allows its employees to deduct a set pre-tax amount from their monthly paychecks for use on transportation services, it must now pay UBIT at 21% on the combined value of those employee deductions. Likewise, if a nonprofit pays for employee parking spaces as part of its lease or buys SmartTrip cards for its employees, it must now pay UBIT on the value of those benefits.

The new changes cover transportation benefits provided by nonprofits beginning January 1, 2018. Any nonprofit with unrelated business income (including transportation benefits) of $1,000 or more must file Form 990-T and pay any UBIT due when it files its Form 990. In addition, under DC law, the tax-exempt organization will be subject to local taxes on any UBIT it incurs. Finally, if a nonprofit organization expects to pay $500 or more in UBIT in 2018, it must make estimated tax payments using Form 990-W on a quarterly basis throughout 2018.

For more information about these new UBIT obligations, see our legal alert: The IRS Makes It Clear - Tax-Exempt Organizations Must Pay Tax on Employee Transportation Benefits.