The Tax Cuts and Jobs Act signed into law by the President on December 22, 2017 made significant changes to Qualified Transportation Fringe Benefits. Employers may still provide tax-free qualified transportation fringe benefits to employees for parking, transit and commuter highway vehicles, however, the expenses will no longer be considered to be an allowable business expense for purposes of calculating taxable income.
For the first time on December 10, 2018 the IRS released interim guidance to taxpayers regarding the deductibility of commuter benefits for for-profit entities and the inclusion of non-deductible commuter expenses as unrelated business income for purposes of calculating the Unrelated Business Income Tax (UBIT) for non-profit organizations. Unfortunately, the interim guidance is a little late considering the Tax Cuts and Jobs Act was passed in 2017 and became effective January 1, 2018. Now, all entities who offer commuter benefits, including “parking” to their employees will be required to scramble almost a year later to determine what if any effect it will have on their bottom-line.
The Tax Cuts and Jobs Act precludes employers from deducting qualified transportation fringe benefits expenses paid or incurred after December 31, 2017. These include van pools, transit passes, bicycle commuting, and qualified parking. In the past, employers always had to calculate whether their miscellaneous transit fringe expenses were reasonable and hence deductible, however this new law imposes significant changes almost completely eliminating the deductibility of any transit expenses for commuters. Regardless of whether the employer reimburses the employee through a qualified plan or not, the transit expenses are now considered commuter expenses and not deductible except in very specific situations.
Starting January 1, 2018, employers are no longer able to take any deduction for the reimbursement of commuter transit expenses including transit passes, van pools including company provided transportation from transit depots to the place of work, and parking including parking passes or company owned parking lots, with limited exceptions.
Transit Passes – Under the new tax law, there is no deduction for the cost of providing transit passes tax free to employees. Employers are still able to provide transit passes up to $260 per month tax free to their employees, but will not be allowed to deduct the expense in arriving at taxable income. Employers are allowed to include the costs of the transit passes in the employees’ W-2 income and then take an authorized deduction for the income that was taxed to the employee.
Van Pools – Under the new tax law, there is no deduction for the cost of providing reimbursement to employees for van pool services, whether or not it is a qualified reimbursement plan, or for directly providing van pool services themselves, if the cost is not taxable to the employees. Employers are still able to provide van pool services and reimbursements up to $260 per month tax free to their employees, but will not be allowed to deduct the expense in arriving at taxable income. Employers are allowed to include the costs of the van pool services or reimbursements in the employees’ W-2 income and then take an authorized deduction for the income that was taxed to the employee.
Bicycle Commuting – Under the new tax law, there is no deduction for the cost of providing a bicycle commuting reimbursement tax free to employees. Employers are still able to reimburse bicycle commuting expenses up to $240 per year tax free to their employees, but will not be allowed to deduct the expense in arriving at taxable income. Employers are allowed to include the costs of the bicycle commuting reimbursement in the employees’ W-2 income and then take an authorized deduction for the income that was taxed to the employee.
Employee Provided Parking may now be considered a non-deductible qualified transportation fringe benefit expense.
There are two scenarios and each has a different calculation in determining the deductibility of the reimbursements and amount that is allowed to be considered a tax free transit fringe benefit.
Employer Pays a Third Party for Employee Parking Spaces –
Employers are not authorized a deduction for the direct payment or reimbursement of employee parking to a third party. The entire cost of providing parking to employees at a non-employer owned lot are not allowed as a deduction in arriving at taxable income. Employers are still able to directly provide parking passes or reimbursements to third party owned facilities up to $260 per month tax free to their employees, but will not be allowed to deduct the expense in arriving at taxable income. Employers are allowed to deduct the costs of the third party parking facilities in arriving at taxable income provided the costs are included in the employees’ W-2 income.
Employer Owns, leases, or rents a parking lot, garage or other facility –
According to the IRS, until it issues further guidance, employers may use any reasonable method to calculate the disallowance in cases where the employer owns or leases the parking lot. The IRS has provided a four-step reasonable method:
- Calculate the disallowance for reserved employee spots. For this step, any employee spots that are restricted for employee use (i.e. not available for the public) are automatically not deductible.
- Determine the primary use of the remaining spots (for the general public (over 50 percent) or for employees). If 50% or more of the net parking spaces (total spaces less those reserved for employees of the company), are available for use by the public, whether or not they are vacant or occupied, then the net cost of the parking lot or facility would be available for deduction.
- Calculate the allowance for reserved nonemployee spots. If the net parking spaces are not available to the public more than 50% of the time, the employer will need to calculate the average use of the net parking spaces between employees and those available to the public.
- Determine the remaining use and allocable expenses. After calculating the proportionate amount of usage, the employer would be able to deduct that portion of expenses available for use by the public.
The IRS will issue further guidance on these and other issues in the form of proposed regulations at a later date. We will keep you informed as we get this material from the IRS.
Impact to Nonprofit Organizations
The Tax Cuts and Jobs Act added a section which requires exempt organizations to increase Unrelated Business Income by any amount for which a deduction is not allowable as qualified transportation fringes including transit passes, van pools, bicycle commuting and parking facilities incurred after December 31, 2017. See individual sections above for more information on each of the commuter expense types.
Therefore, nonprofit organizations may have to file a Form 990-T, Exempt Organization Business Income Tax Return, if the amount of unallowable commuter expenses and any other unrelated business income is greater than $1,000. As you can see, this is not a large number and has the potential to impact many nonprofit organizations including charities, religious entities, colleges and universities, etc.
Until the IRS releases further guidance, a tax-exempt organization with only one unrelated trade or business can reduce the increase to UBTI to the extent that the deductions directly connected with carrying on the unrelated trade or business exceed the gross income derived from the unrelated trade or business.
The IRS has recognized that this may cause some exempt organizations to owe unrelated business income tax and have to pay estimated income tax for the first time. These organizations would not be able to use the safe harbor from the last year and m ay need more time to comply with estimated tax payment requirements. To combat this, the IRS has provided transitional estimated tax penalty relief to tax-exempt organizations that offer qualified transportation fringe benefit expenses and were not required to file a Form 990-T, Exempt Organization Business Income Tax Return, last filing season.
Be sure to speak with your financial advisers about how this impacts your specific situation.