Congress Repeals Nonprofit Employee Benefits Tax

by: Smith and Howard

December 31, 2019

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In 2017, Congress passed the Tax Cuts and Jobs Act. The tax law required associations and other tax-exempt organizations, such as churches, synagogues, hospitals and colleges, to pay a 21 percent unrelated business income tax (UBIT) on employee benefits, such as parking and transportation. Nonprofits grappled with the question of how to calculate their parking tax.

The 21 percent tax also applied to mass-transit benefits such as subway passes, though the new regulations focused on parking. The provision was added because the legislation eliminated tax breaks for transportation-related fringe benefits from for-profit companies, and legislators wanted to treat all employers equally.

After two years of advocacy by nonprofits to repeal what was considered by many to be a harmful tax, Congress has recognized that nonprofit employee benefits like parking and transit assistance are not a trade or business conducted for the production of income and therefore should not be regarded as taxable under the UBIT statute.

As part of a massive, bipartisan year-end spending and tax package signed into law on December 20, Congress repealed that tax. Once the bill is enacted, repeal of the fringe benefits tax will be retroactive for taxes that nonprofits have paid or accrued after December 31, 2017.

While this move will be a relief to many, The NonProfit Times points out that the process to get that money back is not yet clear and what’s not retroactive is the expense that charities might have incurred to calculate the tax.

Other elements of the new tax package, including existing breaks that have been extended and significant changes that may affect retirement planning, can be found here.

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