Under the 2017 tax bill, Congress requires charities to pay unrelated business income tax (UBIT) for the cost of the following fringe benefits if the charity offers these benefits tax-free to its employees:
26 U.S.C. § 512(a)(7). If UBIT applies, the tax rate on the employer is 21% of the cost of the fringe benefits. For many charities, this law change may be the only reason that the non-profit will have to pay the UBIT. Many non-profits will report this UBIT on Form 990-T.
This 2018 tax law change is designed to equalize the tax treatment of for-profit and non-profit employers. For example, if a for-profit employer wants to offer employee the three fringe benefits tax-free to the employee, the for-profit employer loses the compensation deduction for the cost of the benefits. Congress believed that non-profit employers should suffer the same “punishment.” Because non-profits do not pay tax, Congress made non-profit employers pay the UBIT instead.
To avoid the UBIT, non-profit employers should investigate changing the payroll tax for transportation fringe benefits before the last pay period in 2018. If the employer does not want to pay the UBIT, the employer will have to tell employees that the transportation fringe benefits will be taxable in 2018 and subject to social security tax, unemployment tax, and wage withholding. That change will require both the employer and employee pay more in payroll taxes. If the employer has any union employees, the change to the payroll treatment of the fringe benefits should not be made until labor law counsel is consulted.
Strassburger McKenna Gutnick & Gefsky can help you with non-profit tax planning. Please contact John Kelly, firstname.lastname@example.org or Dave Pollack, email@example.com at (412) 281-5423 for help with tax matters.
This post is provided for informational purposes only. Nothing in this post creates an attorney client relationship. Many of the rules discussed above have complicated exceptions. Please consult with your tax advisor before you implement any tax planning idea.