Nonprofit employers now face a tax liability if they offer their employees transportation benefits under the new tax law.
Since the early 1990s, the Internal Revenue Code has encouraged employers to offer qualified transportation benefits to employees. For this purpose, qualified transportation benefits include parking at or near the workplace, van pools, and transit passes.
The Tax Cuts and Jobs Act of 2017 (Act), signed into law in December 2017 (with most provisions going into effect on January 1, 2018), changed the federal tax law for tax-exempt organizations providing employer-provided transportation fringe benefits.
Where Have We Been
Prior to the Act, qualified transportation fringe benefits were, generally, tax-free to the employees (up to a monthly maximum amount which, in 2017, was $255/month combined for transit passes and qualified van pools and $255/month for qualified parking). This was true for tax-exempt employers and taxable employers alike, with the latter enjoying a tax deduction for funds spent by the employer to provide their employees with transportation fringe benefits.
The Act eliminates the taxable employer’s deduction, except to the extent necessary to ensure the safety of an employee, and requires that tax-exempt employers treat funds spent to provide their employees with transportation fringe benefits as unrelated business income, which is taxed at the corporate rate (21% under the Act). Importantly, under the Act, qualified transportation fringe benefits remain tax-free to employees of both taxable and tax-exempt employers.
Tax-exempt employers with tight operating budgets should consider discontinuing the provision of transportation benefits to employees or switching to employee-funded programs. This is where the employer contributes no money toward the employee’s commuting costs, but the employee is permitted to designate a portion of his or her pre-tax salary to pay for his or her qualified transportation costs.
Before discontinuing or altering their transportation benefit programs, tax-exempt employers must determine whether they are subject to state and local laws that require employers to provide transportation benefits to their employees. For example, the Sustainable DC Omnibus Amendment Act of 2014 requires Washington, DC employers with 20 or more employees to provide certain transportation benefits to their employees.
Moreover, before discontinuing or altering transportation benefit programs, tax-exempt employers should determine whether they are eligible for state tax credits that could help offset their new federal liability. For instance, Maryland offers employers a Maryland Commuter Tax Credit for 50% of the amount of the transportation benefit given to employees up to a maximum credit of $50 per employee per month.
An experienced advisor can help tax-exempt employers determine how to best move forward under the new tax rules.