Underpayment Penalty Relief for Nonprofits Subject to New Qualified Transportation Fringe Tax

January 2, 2019

Internal Revenue Service (IRS) Notice 2018-100 offers transitional relief to nonprofits from underpayment penalties related to the new qualified transportation tax. The new tax is applicable to nonprofits that provide certain benefits to employees, effective on January 1, 2018.

The general tax rules provide that taxpayers must make four quarterly estimated payments during the year on taxes owed and not withheld. The quarterly estimated payments are to be made at an amount equal to 25% of the annual amount owed, or in certain situations, an annualized amount can be used. Penalties will be assessed if those payments are either not made or underpaid.

The relief applies to nonprofits that provide the qualified transportation fringe in question, and was not required to file a Form 990-T for their immediate past year. The relief is limited to nonprofits that timely file Form 990-T and timely pay the amount owed for the taxable year for which relief is granted.

The federal Tax Cuts and Jobs Act (TCJA), which went into effect on January 1, 2018, caught a number of taxpayers by surprise, and many have not paid or were late paying their estimated tax payments during 2018. A major surprise in the new tax law is the stipulation that parking and transportation benefits are considered taxable, even when provided to employees through a bona fide cash reimbursement arrangement.

Given the quick, three-month timeline between the passage of the TCJA and when the first estimate would be due, the waiver of penalties on the estimates is only fair. Because of the unusual nature of the new tax, the greater community of nonprofits has been slow to accept and act on it. If nonprofits responded timely to the new law, it would mean the first estimated tax payment to the Treasury would have been paid on April 17, 2018 for calendar year filers. Compliance statistics are not available, but a strong assumption is that “not many” nonprofits made estimated payments by April 15, 2018. This is, therefore, welcome news that the IRS is providing a process for relief from underpayment penalties.

For more information, contact Kathy Cuddapah or one of our tax advisors at 301.231.6200.