
Is your organization ready for the new tax changes regarding fringe benefits? Know what the changes are and how they affect your organization and your donors.The government’s introduction of the Tax Cuts and Jobs Act (TCJA) introduces new concerns and impacts nonprofits.
Fringe benefits come under several classifications. In the category of transportation, consider whether your organization pays for parking, comps for Uber rides, or pays for public transit rides. The new TCJA changed rules affecting transportation and on-site physical fitness facilities. If your organization is involved with any of these transportation activities, you may need to file IRS Form 990-T and file quarterly payments.
Recent changes in the Internal Revenue Code put into place requirements for not-for-profit organizations to file an IRS Form 990-T and pay Unrelated Business Income Tax (UBIT). The TCJA, effective January 1, 2018, revoked the organization’s business tax deduction for specific transportation benefits.
This tax penalty limits nonprofit deductions and impacts:
Parking reimbursements
On-premises gym facilities
Qualified transportation benefits not included in an employee’s taxable income
TCJA does not influence pre-tax cafeteria plans, compensation reduction agreements that exclude payments from W-2s, and a parking/commuting expense plan. However, the TCJA revised the UBIT regulations to read that qualified transportation benefits, including parking, that a nonprofit organization grants to employees, are now considered UBIT and subject to tax at the rate of 21%.
According to Section 132(f)(5)(C), Treasury Regulation Section 1.132-9(b), and Q&A 4(a), qualified parking is employer-provided parking at or near the place of work, near a location where employees use commuter transportation such as rapid transit, or ride in a van pool. The updated rules cover when the organization pays directly to a parking facility attendant or reimbursement to the employee, or provides a parking lot owned by the organization.
Because of these new directives, not-for-profit organizations now need to file IRS Form 990-T when the yearly value of the qualified transportation benefits passes $1,000; and the organization pays quarterly estimated taxes if these taxes are more than $500.
Nonprofits are now wondering if they will be able to provide parking or transportation benefits. Can tax-exempt organizations provide parking or transportation benefits without incurring UBIT? To avoid UBIT liability, the organization shall include the cost of the benefits as taxable elements to the employees, or stop providing the benefits. For specific details on these changes, go to IRS Publication 15-B (2017), Employer’s Tax Guide to Fringe Benefits.
The TCJA has a negative impact on your donors. TCJA takes away the income tax incentive to give to nonprofit organizations. While deductions for individuals go to $12,000 per person and $24,000 for joint filers, the TCJA puts an annual limitation on the state and local tax deduction at $10,000 for individual and joint filers. With this change, many people will not itemize their deductions. When someone does not itemize, he is not likely to consider charitable deductions. The taxpayer receives no benefit from a charitable contribution unless they itemize their deductions.
Because there is a cap on standard and local deductions, it is possible that most people will take the standard deduction. The value of the charitable deduction decreases. Even if an individual takes a charitable deduction, he will save less tax.
This TCJA reduces the incentive to give. It is a possibility that reducing the tax incentive will result in fewer people contributing to nonprofits.
Taxpayers may give in new ways in an effort to work their way around the new procedures. These taxpayers may group smaller donations into a large donation in one year--rather than giving the amount over several years. Doing this would amount to larger tax savings than the standard deduction. Dedicated contributors give regardless of the tax benefit. These supporters would likely continue giving as they always have.
The TCJA also provides open-ended charitable giving for higher income individuals. For these taxpayers, the limit on cash donations is now 60% of adjusted gross income. Upper income citizens may be more inclined to make charitable donations.
This TCJA also impacts estate and gift tax inducements to give to nonprofits. The TCJA increases the gift tax exclusion. The wealthy use the estate planning approach that lowers estate and gift taxes by making testamentary endowments for charitable organizations. These arrangements are fully deductible for estate and gift tax intentions. The wealthy taxpayer chooses to give his money to a charity rather than the Federal government.
Your accountant needs to stay on-top of the evolving UBIT regulations. The updated rules impose UBIT on most tax-exempt organizations. Today, the UBIT must be calculated on each individual trade or business activity. Organizations can no longer combine UBIT and this may increase UBIT for some not-for-profits. Remember, the TCJA impacts the fringe benefits of paying for on-site gym facilities and parking expenses for staff.
Your tax-exempt organization must also keep records of all originations of UBIT. Also, the organization should consider whether benefits given to employees are subject to UBIT. Perhaps, paying increased income to employees in lieu of the value of benefits may be a shrewd tax move.
If your organization has high-paid executive staff, you may be impacted by the new executive compensation ruling. If compensation goes over $1 million for your five highest-compensated employees, the IRS requires a 21% excise tax on this pay.
In the educational arena, there is a new 1.4% excise tax on net investment earnings. These revenues include rents, dividends, interest, royalties, endowment earnings, and capital gain net income for not-for-profit private colleges and universities with minimum assets of $500,000 per full-time student with more than 500 full-time students--50% of these students bring in the United states. This new tax does not apply to public colleges and universities.
These private educational institutions need to have their accountants analyze their assets and determine if they would count toward the student and asset minimums. It is important to evaluate how the institution will use the assets to carry out its educational projects.
And, while talking of educational assets and tax situations, the TCJA has removed the deduction for gifting seats at school sporting events.
With the TCJA and other government changes in regulations, it is more important than ever that your organization in concert with your nonprofit accountant stays informed and on-top of governmental changes to the laws. Communicate and collaborate with your specialized accountant to set the best tax position for your organization.
Do you have question about the TCJA and its influence on your organization? Do you need to know more about the IRS Form 990-T? Let TBFoster help prepare or review your Form 990 and Form 990-T.
Keep in touch with our blog. We have ideas to share and solutions to management and organizational questions. If you have questions about any other not-for-profit industry topics, contact our not-for-profit team leader at trent@tbfosteraccounting.com.
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