Due to the changes in the Federal Tax Law, nonprofit employers will have to pay a 21% Unrelated Business Income Tax (UBIT) on transportation benefits including parking and transit passes provided to employees starting January 1, 2018. Employers are NOT prohibited from providing these benefits, but the effect the tax could have on your nonprofit’s finances should be considered. Some employers will continue to pay for employee transportation benefits and thus pay the tax because they feel that transportation benefits are necessary to attract and retain quality employees.
UBIT on pre-tax transportation benefits
Employers will still be able to offer qualified transportation benefits, including parking and transit passes, to employees up to $260 per month (for 2018) without any tax effect on the employees. Qualified transportation benefits in excess of $260 should be included in the employee’s wages. The costs of providing qualified transportation benefits, whether through a pretax plan or paid directly by the employer are subject to the 21% UBI tax. What was not clear up until very recently was whether pre-tax transportation benefits are subject to UBIT. The guidance included in the 2018 version of Publication 15-B, Employer’s Tax Guide to Fringe Benefits, makes it clear that nonprofit employers should pay UBIT on pre-tax transportation benefits.
The IRS may require employers that have bundled employee parking and office space into one lease agreement to establish a fair value of the parking spaces and pay UBIT on the estimated value.
There continues to be no penalties for travel costs including mileage and parking from the main workplace to a temporary work location. Employers can also continue to pay for parking for customers/clients without penalty.
The effective date of this change is January 1, 2018 regardless of the nonprofit’s fiscal year. Nonprofits that will be subject to UBIT should consider making estimated tax payments. Estimated tax payments are required when total estimated tax for the year is $500 or more.
Estimated income taxes are paid in installments by the 15th day of the fourth, sixth, ninth, and twelfth month of the tax year.
Sample payment schedule
Tax Year-End – December
April 15, June 15, September 15, December 15
Tax Year-End – June
October 15, December 15, March 15, June 15
EFTPS payment system enrollment
If a nonprofit has not previously paid federal income taxes, it will need to enroll in the federal “EFTPS” payment system to remit estimate or tax payments. The EFTPS system can be found at this link: https://www.eftps.gov/eftps/
Consider estimated state tax payments
Wisconsin generally adheres to the Federal definition of UBI, so it is probable there will be a similar state tax on transportation benefits. Therefore, nonprofits should also consider making estimated state tax payments. Many states, including Wisconsin, require the use of electronic income tax payments. Wisconsin’s electronic tax payment system can be found at this link: https://tap.revenue.wi.gov/
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About the Author
Kyle Ager, CPA, CFE is a manager in Wegner CPAs’ assurance department. Kyle has experience working with a number of not-for-profit organizations in different niches as well as employee benefit plans. These engagements have allowed him to gain a wide variety of knowledge and experience to bring to your engagement.