Tax Cuts and Jobs Act Changes to Qualified Transportation Fringe Benefits and the Resulting Impact on Tax-Exempt Organizations.

AuthorSosnojf, Connor M.

    Transportation to and from one's place of employment is an important cost that most workers consider when choosing where to work. This may be particularly true for workers who seek employment in charitable or non-profit work. Section 132(f) of the Internal Revenue Code (the "Code") incentivizes employers to provide employees with parking and transportation to attract potential employees to their business and ease the burden of commuting. (1) This tax provision serves various policy rationales by allowing employees to exclude from their income transportation benefits received from their employer up to a monthly maximum. (2) Allowing employees to exclude some of these costs eases the burden of commuting, especially in areas where parking is expensive.

    Before the Tax Cuts and Jobs Act of 2017 (the "Act"), employers had an incentive to offer parking and transportation benefits to employees, as they were deductible to the employer and excludable by the employee. (3) In 2017, however, Congress passed the Act, and President Trump signed it into law. (4) The sweeping changes to the Code focused primarily on reducing the maximum tax rate for corporations. (5) The effects of the Act generally favor raising revenue in the short-term over the long-term consequences of the changes. (6) Although most changes to the Code expire without renewal in 2026, (7) some changes have strikingly altered the Code, including a stark and sudden change to the deductibility of qualified transportation fringe expenses borne by organizations who provide employees with parking. (8) This change, added as Code Section 274(a)(4), provides that employers, including non-profits, may no longer deduct the costs associated with providing qualified transportation to employees. (9) Now, non-profits providing Qualified Transportation Fringe Benefits must pay taxes on the costs associated with providing the benefit in the form of "unrelated business taxable income," which is taxed at twenty-one percent. (10)

    Organizations initially struggled with their approach to this new tax provision. For-profit employers realized the difficulty in calculating the expenses for which they are now taxed, but tax-exempt and non-profit employers failed to understand why they were being taxed at all, as they are tax-exempt organizations. (11) Entities, including non-profit organizations like religious institutions and charities, who fail to pay the proper additional tax on qualified transportation benefits appear to be subject to an additional penalty tax under Section 6655 of the Code. (12)

    In an effort to smooth this transition and relieve some of the burden on these entities, the Internal Revenue Service (the "Service") issued Notice 2018-99 and Notice 2018-100 to address Qualified Transportation Fringe Benefit changes and instruct affected organizations on paying the proper amount of taxes, so as to avoid a penalty for failing to pay income tax. (13) The Service's published notices clarified much of the confusion, but there is still fallout over the future implications of these changes and the underlying policy rationales for imposing a tax on tax-exempt and non-profit organizations. This Note explains how newly added Code Section 274(a)(4) changes tax law and argues that this change is short-sighted because it seeks simply to raise revenue while ignoring potential ill effects on employees, employers, and tax-exempt and non-profit organizations.

    First, Part II of this Note discusses the legal background and relevant Code sections that lay the foundation for the tax treatment of fringe benefits, unrelated business taxable income, and penalties imposed for failure to properly pay estimated income tax. Part III of this Note examines the recent changes to the Code under the Act and the resulting impact on both for-profit and non-profit entities. In Part IV, this Note argues that the taxation of Qualified Transportation Fringe Benefits to tax-exempt organizations, such as nonprofits, is antithetical to the U.S. tax scheme and counterproductive to the purpose of a tax exemption.


    This section seeks to develop a legal foundation for understanding Qualified

    Transportation Fringe Benefits, unrelated business taxable income, and Section 6655 of the Code, which details a penalty for failure to pay estimated income tax. This legal background is critical to understanding how recent changes under the Act have altered the landscape impacting for-profit and nonprofit entities seeking to provide Qualified Transportation Benefits to their employees.

    1. Qualified Transportation Fringe Benefits

      Under the Code, fringe benefits are defined as "a form of pay (including property, services, cash or cash equivalent), in addition to stated pay for the performance of services." (14) While the Code provides that all income is taxable unless an exclusion applies, (15) Section 132 of the Code explains that "fringe benefits" are excludable from gross income when the employee receiving the benefit(s) meets certain conditions. (16) These fringe benefits are excluded from gross income to serve policy rationales of fairness and to incentivize certain business behaviors by allowing employers to deduct the costs of the benefits they offer to their employees. (17) The Qualified Transportation Fringe Benefit has incentivized employers to provide transportation or reimbursement for transportation to its employees. (18)

      Section 132(f)(1) of the Code details three (19) types of Qualified Transportation Benefits that businesses may provide tax-free. (20) The first type involves usage of a commuter highway vehicle, whereby an employee rideshares with at least six other adults to work in a vehicle and at least eighty percent of the mileage of that vehicle is dedicated to transporting employees of the business between their residences and place of employment. (21) Second, transit passes are another type of Qualified Transportation Fringe Benefit. (22) Transit passes include passes or vouchers redeemed by employees for mass transportation, such as trains or buses. (23) The third Qualified Transportation Fringe Benefit is qualified parking, which includes "parking provided to an employee on or near the business premises of the employer or on or near a location from which the employee commutes to work by transportation in a commuter highway vehicle." (24)

      Importantly, there is a monthly cap on the amount an employee may exclude from his or her income for Qualified Transportation Fringe Benefits. (25) In 2018, this monthly maximum, indexed for inflation, was $175 per employee per month for the aggregate of commuter highway vehicles and transit passes and $175 per month for qualified parking. (26) To the extent that an employer provides benefits that exceed the monthly maximum amount, the excess must be included in the employee's gross income. (27)

    2. Tax-Exempt Status, Unrelated Business Taxable Income, and Form 990-T

      A variety of organizations, are tax exempt. (28) Section 501 of the Code lists the various types of organizations that may qualify for tax-exempt status. (29)

      Some examples include religious, charitable, scientific, educational, and athletic organizations, as well as labor organizations, business leagues, recreational clubs, employee associations, and fraternal societies. (30) Section 501 of the Code details specific requirements for how each listed entity may qualify as a tax-exempt organization. (31)

      To understand the impact of the Act's changes to the Qualified Transportation Fringe Benefits and the way the changes impact tax-exempt organizations, it is important to understand the mechanisms by which organizations may need to pay taxes, despite their tax-exempt status. Unrelated business taxable income ("UBTI") allows the Service to assess taxes on tax-exempt businesses when they engage in activities that do not fall within their primary reason for being tax-exempt. (32) Specifically, UBTI is "income... from a trade or business ... regularly carried on," (33) which is not substantially related to the purpose that is the basis of the organization's exemption. (34) Originating in 1950, UBTI serves the purpose of ensuring tax-exempt organizations operate within the parameters of their purpose. (35) Not all forms of income unrelated to the tax-exempt purpose of an organization are assessed as UBTI, such as where the income is passive (36) or involves the sale or exchange of capital assets. (37) However, a variety of transactions may qualify as UBTI, such as making private loans, the frequent purchase and sale of real property, and margin trading on stock purchases. (38) Income generated from activities deemed to be UBTI will be taxed at rates of up to thirty-seven percent when the income exceeds $12,500. (39) UBTI in excess of $1,000 must be reported on IRS Form 990-T. (40) Part IV of this note will address how recent changes to the Code will now require many tax-exempt organizations to file a Form 990-T for the first time, as they will be taxed on qualified transportation going forward.

    3. Internal Revenue Code Section 6655

      For corporate entities, Section 6655(a) imposes a penalty for "failure to make a sufficient and timely payment of estimated income tax." (41) A corporation must pay a portion of its estimated yearly income tax quarterly. (42) Organizations must pay this estimated tax when they expect "tax for the year to be $500 or more." (43) Corporations, trusts, and tax-exempt organizations are required to pay their estimated income tax of twenty-five percent of their annual payment in four quarterly installments. (44) These estimated income tax payments are typically meant to amount to the lesser of 100% of the entities tax for that year, or "10 percent of the tax shown on the taxpayer's return for the preceding taxable year, so long as the preceding taxable year was a full twelve months long." (45)

      When entities fail to pay their estimated income tax...

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