A little-noticed provision in the Tax Cuts and Jobs Act (TCJA) could significantly impact tax-exempt organizations by increasing their unrelated business income tax (UBIT). New section 512(a)(7) specifically targets transportation fringe benefits provided by tax-exempts to employees by, somewhat unusually, including in unrelated business taxable income (UBTI) certain fringe benefit amounts that would be disallowed as deductions to a taxable entity.
The new provision works in tandem with new section 274(a)(4), which disallows a deduction for certain transportation fringe benefits. This can be problematic when it comes to parking arrangements and facilities and transit passes to name a few common transportation fringe benefits tax-exempts provide to employees, and it arguably captures pre-tax arrangements as well as employer-funded plans. Unfortunately, there is much that is unclear, and numerous groups have pushed for immediate guidance, or a delay in implementation, if not outright repeal.1
The new provision is somewhat unusual in that it frames an income inclusion in terms of an expense amount —including, in a tax-exempt’s UBTI, certain transportation fringe benefit amounts disallowed under section 274(a)(4). Important aspects include the following:
Regulatory guidance is authorized and needed but is not on Treasury’s priority list.
Both taxable entities and tax-exempts may provide transportation benefits, including parking – on owned or leased property – and transit pass and voucher programs. Parking arrangements may be reserved for employees (e.g. a church pastor or hospital staff) but shared with others, exclusively for employees, or not reserved at all. Costs of the plan may vary as well. Parking may be free, employees may pay for parking pre-tax or after-tax, or employers may pay for parking. Similarly, with respect to transit passes, employers may pay or employees may bear that cost on a pre-tax basis.
Section 132 excludes from gross income many of these transportation-related fringe benefits. Prior to the TCJA, these costs were deductible, but new section 274(a)(4) now disallows these deductions. And the TCJA’s new section 512(a)(7), makes this an issue for tax-exempts.
Understanding the new provision starts with section 274(a)(4), which disallows a deduction for any “qualified transportation fringe” (QTF). QTF, in turn, is defined in section 132, which, as mentioned, excludes certain fringe benefits, including QTFs, from gross income. Under section 132(f), QTFs include “qualified parking” and “transit passes.” Qualified parking generally includes parking provided to employees at or near the employer’s business. Transit passes include passes, fare cards or similar items used for mass transit.
Section 512(a)(7) is intended to align taxable and tax-exempt entities in the treatment of transportation fringe benefits. Section 274(a)(4) denies the deduction to taxable entities, and section 512(a)(7) subjects tax-exempts to tax on the amount of what would be, to a taxable entity, the disallowed expenditure. It increases a tax-exempt’s UBTI by certain amounts:
By its terms, section 512(a)(7) applies with respect to amounts paid or incurred for “any [QTF], any parking facility used in connection with qualified parking, ... or any on-premises athletic facility ... .” The statute authorizes regulations, but none have been issued to date.
Clarity is Lacking
Unfortunately, the statutory language is uncertain in at least two respects:
Struggle to Comply
The provision raises numerous questions for tax-exempts, many of which are struggling to comply. It is not clear, for example, whether:
Clearly, guidance is needed, but according to Treasury’s Priority Guidance Plan, the priority is on new section 512(a)(6), not 512(a)(7).7
Here is the potential impact on the tax-exempt community:
Obviously, the application of section 512(a)(7) will depend on the tax-exempt’s unique facts and circumstances.
Questions? Contact Michael Eagan at 212.699.8831 | firstname.lastname@example.org or reach out to your Berdon tax advisor.
Berdon LLP New York Accountants
1 See, for example, https://www.councilofnonprofits.org/sites/default/files/documents/final-ubit-letter-of-national-council-of-nonprofits-6-21-2018.pdf.
2 The American Bar Association (ABA) has recommended guidance mitigating the burden on tax-exempts subject to a Form 990-T filing requirement solely because of section 512(a)(7) by allowing such organizations to complete only certain sections of the form.
3 Estimated payments are required if expected tax exceeds $500.
4 This disparity between sections 512(a)(7) and 274(a)(4) with respect to parking facilities is related to the legislative evolution of the statute. The final section 512(a)(7) reflects the original House version (the Senate had no counterpart), whereas the final section 274(a)(4) reflects the Senate version (rather than the House version, which had included similar language to section 512(a)(7)).
5 As noted by the Council of Nonprofits, see note 1, the IRS apparently views employee-funded plans as subject to section 512(a)(7). The NY State Bar Association, in a report to Treasury with comments on provisions in the TCJA affecting tax-exempts, noted that this is the more “reasonable” interpretation of section 512(a)(7) in light of the legislative history and purpose.
6 The ABA believes a reasonable reading of both section 274(a)(4) and section 512(a)(7) excludes such overhead costs from the UBTI inclusion.
7 Section 512(a)(6) requires the calculation of UBIT on an activity-by-activity rather than aggregated basis. Guidance on section 512(a)(6) – in the form of Notice 2018-67 – was issued on August 21, 2018.