On December 20, 2019, the Taxpayer Certainty and Disaster Tax Relief Act of 2019 (the “Act”) was signed into law as part of a larger appropriations bill. Among other things, the Act repeals a provision of the Tax Cuts and Jobs Act of 2017 (the “TCJA”) that rendered a tax-exempt organization’s expenses related to qualified transportation fringe benefits taxable as unrelated business income.
Unrelated business taxable income, or “UBTI,” is defined as gross income derived by a tax-exempt organization from a trade or business, regularly carried on by it, the conduct of which is not substantially related to the performance of the organization’s tax-exempt functions. UBTI is generally taxed at a flat rate of 21%.
Under Internal Revenue Code (“Code”) § 132(f), “qualified transportation fringe” includes any of the following provided by an employer to an employee: transportation in a commuter highway vehicle in connection with traveling between the employee’s home and place of employment; any transit pass; parking on or near work premises; and any qualified bicycle commuting reimbursement. Prior to the TCJA, costs incurred by a nonprofit employer to provide qualified transportation fringe benefits were not taxable. In 2017, the TCJA amended the Code to add a new § 512(a)(7), which explicitly included expenses related to the following as UBTI of a tax-exempt employer: (a) the provision of qualified transportation fringe, (b) any parking facility used in connection with qualified parking, or (c) any on-premises athletic facility.
The change wrought by the TJCA meant that tax-exempt employers providing transportation fringe benefits or on-premises athletic facilities to employees were subject to a 21% tax on all related expenses, and they had to consider such additional cost in planning their benefit programs. In addition, some laws enacted by municipalities, including New York City’s Affordable Transit Act and Washington DC’s The DC Commuter Benefits Law, require for-profit and nonprofit employers to offer commuter benefits to employees, which may include qualified transportation fringe. Organizations in such jurisdictions had the added duty of ensuring that any adjustments made in response to new Code § 512(a)(7) were in compliance with applicable local law. Section 302 of the Act repeals Code § 512(a)(7), once again excluding expenses related to qualified transportation fringe benefits from UBTI. That section retroactively applies to amounts paid or incurred as of December 31, 2017 (the effective date of the relevant provisions of the TCJA). Organizations that incurred tax under Code § 512(a)(7) in taxable year 2018 and/or 2019 may claim a refund of taxes paid by filing an amended Form 990-T Exempt Organization Business Income Tax Return and following the IRS guidance found here.
– A. Benion