Tax Reform Changes to Fringe Benefits & Its Impact on Tax-Exempt Organizations
The 2017 Tax Cuts and Jobs Act which was signed into law in December has several provisions which affect associations. A number of our members have expressed their concern about the taxation of fringe benefits included in Section 13703 of the Act.
For for-profit businesses, the Act eliminated deductions for some fringe benefits, including qualified commuting benefits, and on-premises gyms and other athletic facilities. In order to achieve parity with non-profits, the Act states that a non-profit has to increase their unrelated business taxable income (UBIT) by the amounts spent by the organization on these expenses. These means that these expenses will be subject to the 21% business tax on UBIT.
For commuting benefits, the business tax only applies to subsidies provided to employees. For example, if the association gives each employee $100 per month to help reduce the cost of mass transit, commuter buses, and van pools, and $100 per month to help reduce the cost of parking, then the $200 per month each employee receives is UBIT. Section 13703 also applies if the association pays for parking for some or all of its employees.
The Act does not apply to the pre-tax payroll deductions that each employee may make. So, if the association participates in a program that allows for pre-tax payroll deductions for qualified commuting and parking expenses, but the association does not provide subsidies to its employees, there is no additional UBIT for that association.
For on-premises gyms, the IRS Code defines an "on-premises athletic facility" as any gym or other athletic facility (i) which is located on the premises of the employer, (ii) which is operated by the employer, and (iii) substantially all the use of which is by employees of the employer, their spouses, and their dependent children. If the association owns its building, which includes a gym that is only available to its employees, then any expenses relating to the gym would increase the association’s UBIT.
However, if the association leases space in a building which offers a gym at no charge for use by all of the building tenants, it appears that the Act would not consider a portion of the rent expense relating to the gym to be UBIT. The Act also would not seem to affect associations that pay for or reimburse its employees for gym membership as part of a wellness program.
The Act also states that the Secretary of the Treasury shall issue such regulations or other guidance as may be necessary or appropriate to carry out the purposes of Act, including regulations or other guidance providing for the appropriate allocation of depreciation and other costs with respect to facilities used for parking or for on-premises athletic facilities. There may then be an opportunity under any proposed regulations to offset the new UBIT with other expenses incurred to deliver the fringe benefits to employees. If you are interested in weighing in with the Treasury Department contact the ASAE Public Policy team at . ASAE will be closely monitoring any developments in this area.
ASAE encourages you to consult with your tax and legal advisors about the implications of the Tax Cut and Jobs Act on your organization.