Under the Tax Cuts and Jobs Act, non-profits that make certain fringe benefits available to their employees will now need to pay tax on these benefits as if they were unrelated business income.
The Act states that exempt organizations are subject to unrelated business income tax on qualified transportation fringe benefits, on-premises athletic facilities, and parking facilities used for qualified parking. Due to a drafting glitch, it is unclear whether the tax actually applies to anything other than qualified transportation fringe benefits. This category encompasses transit passes, qualified parking, and transportation in certain commuter highway vehicles.
For the first time, UBIT applies not to income, but to expenses. Congress seems to have been trying here to put non-profits on equal footing with taxable organizations that can no longer deduct these benefits under tax reform. However, there are many things exempt organizations can’t deduct -- because they don’t pay tax -- and they do not give rise to unrelated business taxes. Singling out these particular benefits is quite peculiar.
There are many unanswered questions about how to compute UBIT in this context. Does the fair market value govern, or the cost to provide these benefits? Is there any de minimis exclusion? There may be many situations where the administrative burden of providing these benefits exceeds the cost. What about facilities that are generally open to the public and also used by employees? How does this work in the context of employee salary reduction arrangements?
There are two easy (and unsatisfactory) ways for institutions to avoid paying this tax. The first, is to treat the fringe benefits as compensation income to the employees. The second is to charge employees for the benefits.
Whether the law makes sense or not, non-profits will need to review their fringe benefit programs and start paying for all periods after December 31, 2017 (not just tax years commencing after that date).