By: Philip Hackney
In the new tax act of 2017, Congress imposed an unrelated business income tax on transportation, parking, and athletic facility fringe benefits that a nonprofit provides to its employees. I write because I suspect there are universities or hospitals or other large nonprofits out there (pension funds maybe) that offer these types of fringe benefits that are unaware that they must pay UBIT on the total value of these benefits at the end of the year. The law went into effect for taxable years starting January 1, 2018.
In Section 13703 of the bill, Congress promulgated the following new rule: UBIT “shall be increased by any amount for which a deduction is not allowable under this chapter by reason of section 274 and which is paid or incurred by such organization for any qualified transportation fringe (as defined in section 132(f)), any parking facility used in connection with qualified parking (as defined in section 132(f)(5)(C)), or any on-premises
athletic facility (as defined in section 132(j)(4)(B)).”
Another amendment to UBIT under Section 13702 of the bill will make this provision have more bite too. New section 512(a)(6) provides that a nonprofit must assess and pay tax on each individual unrelated business activity. This provision prevents the nonprofit from using a loss in one unrelated business activity to offset a gain in another. This is not unlike passive activity loss rules under section 469 in a sense. However, all passive activities can be used to offset other passive activities. On the whole, this likely makes nonprofits worse off than other typically situated investors, and is likely causing many nonprofits to reconsider how their UBIT activity is organized. Curious whether the IRS will pass regulations similar to passive activity legislation that allows a loss to be taken once a particular activity is sold. Lacking this provision penalizes nonprofits unfairly I think.
Nevertheless, the point for bringing this up is that there will be no way to use other losses to offset this particular activity. (What I mean by that is that the amount will be considered income simply as a result of its being paid. This is an odd conception of income). It’s also hard for me to think of ways to allocate costs like depreciation towards these activities to limit the tax.
Thus, any nonprofit out there, or state college or university, or pension fund that offers any of these types of fringe benefits without remuneration from their employee needs to evaluate how to adapt to this change in circumstance. Otherwise, they are likely accumulating a bill of 21% times the amount of these fringe benefits.
Because these benefits remain excludable from the employees income, it would seem that the best strategy will involve paying the employee a little more and then charging the employee pre-tax for these benefits. Be interested to hear if anyone has come up with a method for adapting to the change. My guess is that this is not a long term harm to nonprofits, but it is a trap for those who fail to adjust in the first or second years of the change. Not a great way to do legislation.
A side note is that previously for amounts under $50,000, a nonprofit faced a marginal rate of 15% under section 11 of the Code. Section 13001 of the Tax Act eliminates the progressive rates of the former corporate Code and makes it one flat rate of 21%. Once a nonprofit gets about $50,000 of UBIT, it then will have a rate cut generally.
In the bill, Congress maintained an employee’s right to exclude these amounts from income, but eliminated the ability of employers to deduct these amounts. This is probably the right result, otherwise there is a double deduction going on. It appears to me that there was an effort to make for profit and nonprofit employers pay the same costs associated with these types of fringe benefits. Probably not a bad idea on the whole. Nevertheless, I suspect there are workarounds for wealthier employees and that the less wealthy employees will bear the brunt of this change unfairly.
These are preliminary thoughts only. Would love to hear thoughts out there on these new UBIT provisions and their impact on nonprofit activities.
The Surly Subgroup 
You quote Section 13703, but it’s one of those cross-referencing kinds of sections that need unpacking. What’s actually changed? Is it something about deducting employee fringe benefits, or something about taxing profits, or something about taxing gross income, and does it apply if the gym or parking lot is used by non-employees as well as employees? In particular, if Parking Operations is a stand-alone operation, making zero profit each year, as it is at Indiana University, is it now going to pay tax?
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So, prior to this Tax Act, all employers could deduct the specific amounts at issue: parking, transportation and athletic facility fringe. So, if your employer paid for your transportation to get to work, you as employee could exclude the amount and the employer could deduct it too. The new bill changes that with respect to the employer side of things. An employer can no longer deduct those amounts. So, just thinking about for profit employers, this means to the extent they were providing these fringe benefits free of charge and were deducting the amounts from their taxes and continue to do so today, they will have a smaller deduction against their taxes and will consequently pay more in tax. Now, those for profit employers could keep essentially the same regime by paying employee a little more and then charging for the benefit. The employer could just take the employee payment out of the employees salary pre-tax and deduct the same amount because nothing stops them from deducting employee salary.
What is the impact of all that on nonprofit employers? A nonprofit employer never needed to deduct those amounts. They could just provide the benefit and the employee could exclude parking, transportation, and athletic facilities from tax. But, now, if they maintain this same arrangement described above for the for profit employer, i.e. provide the benefit, do not charge for it, they will now incur a 21% tax on the amount of the benefit. The nonprofit employer now needs to revise their structure for the provision of these benefits like I described above: raise the employees salary, deduct that addtional amount, charge employee pre tax for the provision of the benefit.
In all, this was a change that just taxes the folks who either are unaware of the change, or have difficulty adjusting to the change. Harms efficiency and fairness. Should collect little in tax. Provides little improvement in incentives. Forces companies to pay more to accountants and attorneys to fix their situation.
Does that help?
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Thanks. That helps. So if we have a university gym, used only by employees, that costs $100,000/year, the university must pay $21,000 tax, and the employees pay zero tax. If they charge the employees $100,000 to use it, then the university pays zero tax, and the employees also pay zero tax.
Before the tax bill, though, the university could charge nothing and the employees would pay no tax.
This seems like a good-government change, though. Before, the employees were getting a fringe benefit that wasn’t taxed like their salary was. Now, the university doesn’t have any incentive to put compensation into the form of untaxed gym membership instead of taxed cash. And that should have real effects— we’d expect universities to provide fewer fringe benefits and more cash to employees.
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On first glance it seems like it makes sense, but when you see what happens, it makes little sense to make the change. It is to make the change for change sake only because if everyone adjusts as you would expect, then there is no difference between pre tax bill and post tax bill, only a change in form. Pre tax bill employer provided athletic facility for free. Now they say I will give you 100 if you give me 100. Those are the same thing in financial terms. The only thing that is changed is we have to move money around. I think it is also still exempt from payroll tax, though would have to check on that, as that would be a real change. It may change some state tax circumstances too.
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It’s not the same, because before, the employer paid 100 for parking for the employee. Now, the employer has to pay 130 to the employee, the employee gets taxed 30, and the employee is left with 100 to pay the employer 100 for parking. They used to have untaxed compensation; now they don’t. Am I missing something?
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As to your question about parking lot being operated by a university, I think there may be an opportunity to offset the unrelated taxable income created by the fringe benefits by deductions on the lot if they are available. Have to think about that some more. Might work the same with I suppose both transportation and athletic facilities. Think we would have to have some examples to work through the language of the legislation. The key is these fringe benefits were NOT treated as unrelated business taxable income before, now free fringe benefits of parking, transportation, and athletic facilities are explicitly, oddly (because not income at all), treated as Unrelated Business Taxable Income.
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Yes. You are missing the change employer can make to avoid the tax. Before employer provided $100 through gym benefit and employee made 1000 plus the non taxed benefit. Now employer would be taxed at $21 if he maintained the same system. But, if the employer pays employee $1,100 and charges employee $100 for gym benefit. Employee still has $1000 income and employer still has $1,100 deduction and no tax. Gets same situation as before by a small tweak.
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The employee has to pay income tax, so under the new rule, the employer has to pay him about $1,130 to leave the employee with $1,000 and a gym membership. The employer, a non-profit, doesn’t get any value from a deduction.
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No. The employee still has the 132 exclusion. Thus, when employer pays employee $1,100, he takes out $100 of that income pre tax to pay for the athletic facility benefit. Employee only has $1,000 in income just like the original scenario. And you are right that the nonprofit has no benefit from a deduction in this case.
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From my accountant: Some organizations may consider the option of discontinuing this benefit for employees. However, since 2016, under the NYC Commuter Benefits Law, organizations with 20 or more full-time non-union employees in New York City are required to offer their full-time employees the opportunity to use pre-tax income to purchase qualified transportation fringe benefits, and therefore do not have the option of discontinuing this benefit.
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Yes that’s the intent all along, to mess with people who live in cities, and the companies they work for, defund public transit and transportation used by the poorest people to boot, and in the process grab whatever tax dollars you can get to give to the richest in the land.. I’m feeling great again
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Does this affect only employers who subsidize parking? What about employers who offer no subsidy but simply facilitate pre-tax deduction for parking costs? My non-profit employer doesn’t pay for my parking, they just make it cheaper for me to pay.
Until now, that is. Today my employer discontinued parking benefits due to what they call “new tax regulations that prevent and/or heavily penalize organizations like ours from providing commuter benefits on a pre-tax basis,” further claiming that this is not a voluntary change, it is a result of the tax law and not a policy shift on the employer’s part. From what I read here, that is untrue – employers do have a choice and could continue to offer it? Yeah they would incur a tax burden but they do indeed have a choice to continue offering this benefit, right? And would they incur the same tax liability of they are not subsidizing the cost, merely deducting the full monthly cost through the payroll vendor?
They did not do anything about the public transportation benefits nor the gym. I don’t get it.
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Why not let the church pay for the parking lot and assume costs for maintaining thru donations thus seperating church and state???
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