Recently, MSI's Washington DC accounting member Rubino & Company published an article which addressed the effect of The Tax Cuts and Jobs Act of 2017 on tax exempt organizations. The most controversial of these provisions is the imposition of unrelated business income tax (UBIT) on the amount of certain employer-paid fringe benefits (transportation, parking, and gym membership).
In the article, we indicated that tax exempt employers may be able to reimburse employees for commuting and parking through a qualified pre-tax compensation reduction agreement (CRA) to avoid this tax. Based on our discussions with the IRS prior to issuing the article, however, we added that this was at the time an unsettled area because the IRS is revisiting the allowability of such plans for these costs. Well, the IRS revisited the matter.
The law states the following-
“Unrelated business taxable income of an organization 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))…”
The controversy has centered on the intended meaning of the phrase “paid or incurred by such organization.”
Jenny Herrera of our firm attended a nonprofit law and tax conference in late March. Janine Cook, IRS Deputy Associate Chief Counsel (tax exempt and government entities) indicated that the IRS updated Publication 15-b to clarify that even if the benefit is provided under a CRA, the payment will still result on UBI for the organization.
We are reaching out to our tax exempt clients to inform the following steps that should be taken now:
