Action Item: Do You Need to Make Estimated Payments?
Before April 15th, 2018 all nonprofits need to ask themselves, “Does my organization provide any nontaxable benefits to employees, contractors, partners, or directors, including:”
- Transportation in a commuter highway vehicle if such transportation is in connection with travel between the employee’s residence and place of employment
- Any transit pass
- Qualified parking
The taxable part of this question that is catching many nonprofits in the greater DC metro area by surprise is the inclusion of qualified parking and metro fare card program, Commuter Benefits Plan. Recent guidance from the Internal Revenue Service (IRS) has made it clear that the Metro fare card program is taxable under the new law, despite the fact that it is being provided through a salary reduction program. Simply put, if a nonprofit provides a nontaxable benefit for parking or transit passes, it is likely to be subject to this new unrelated business income tax created by the new tax law.
It is time sensitive that organizations look at their fringe benefit programs now and determine if this new UBI tax will apply to them. The new tax is effective for benefits provided starting January 1, 2018, and estimated payments may be required. If determined to be applicable, the first estimated payment installment is due on April 15th, 2018 and must be made electronically using the federal EFTPS. However, if an organization’s estimate of total tax for the entire year is below $500, they are not required to make estimated payments. The state tax estimates depend on the DC metro jurisdiction the nonprofit is located in, DC, MD, or VA.
The fallouts from the Tax Cuts and Jobs Act of 2017 are still coming into focus the IRS has not yet issued regulations helping to explain how to apply, calculate and report the new taxes imposed by it. These regulations can typically take months, sometimes years, to develop. However, over the last few weeks the IRS has published the 2018 version of the Employer’s Tax Guide to Fringe Benefits, Publication 15-B, ) and it is updated for the new law (go to page 21, and see the area called “TIP”). This publication provides some clarity on the piece of the tax law that says for certain nontaxable benefits provided to a person who performs services for an organization, the amount of the benefit will be subject to unrelated business income tax, or UBI tax. The new UBI tax is imposed at a federal rate of 21%. State taxes are also involved as UBI is taxable, unless the state has passed their own law to exempt this particular area from UBI). This new tax will most definitely apply to nonprofit organizations who provide nontaxable parking and metro fare card benefits. These benefits are subject to the UBI tax whether they are paid directly, through a reimbursement arrangement, or through a compensation reduction agreement.
Contact our nonprofit tax specialists if you have any questions at 301.231.6200.