The creation of the IRC §512(a)(7) had a strong impact tax-exempt organizations. When the Tax Cuts and Jobs Act “TCJA” was signed into law in 2017, it added Internal Revenue Code “IRC” §274(a) which states that no deduction will be allowed for expenses of qualified transportation fringe benefits (“QTF”) provided by an employer to its employees. IRC §512(a)(7) which requires tax-exempt employers (including multiemployer benefit plans) to treat QTFs disallowed under IRC §274 as unrelated business taxable income (“UBTI”).
The TCJA added §512(a)(7) to the IRC, which, effective for amounts paid or incurred after December 31, 2017, certain employee fringe benefits for tax-exempt organizations are treated as UBTI unless they would otherwise be deductible under IRC §274. QTFs include (1) transportation in a commuter highway vehicle between the employee’s residence and place of employment; (2) mass transit passes; and (3) qualified parking. Qualified parking is further defined under IRC §132(f)(5)(c) as parking provided to an employee on or near the business premises of the employer or on or near a location from which the employee commutes to work.
During 2018, under IRC §132(a)(5), the maximum amount of a QTF that could be provided to an employee and excluded from the employee’s gross income was $260 per month. This amount increased to $265 per month for calendar year 2019. Any QTF provided to an employee in excess of this amount is taxable compensation reportable on Form W-2, Wage and Tax Statement.
Under IRC §274(e)(2), QTF expenses are deductible to the extent the fair market value of the QTF exceeds the limit discussed above in IRC §132(a)(5). This is so because any amount by which the QTF exceeds these limits is includible as taxable compensation to the employee.
IRC §274(e)(7) provides an exception to the disallowance under IRC §274(a) if the goods, services or facilities expenses of the taxpayer are also made available to the general public.
With the introduction by the TCJA of IRC §512(a)(7), tax-exempt organizations were required, effective January 1, 2018, to treat, as UBTI, amounts that are determined to be nondeductible under IRC §274 and paid by the tax-exempt organization for any QTF defined in IRC §132(f) above or any parking facility used in connection with qualified parking.
While many are hopeful for the repeal of IRC §512(a)(7), the outcome is still unknown. For now, most tax-exempt organizations have chosen to take the conservative approach and continue to treat any QTF and parking benefits that are disallowed under IRC §274 as UBTI and report these amounts on their Form 990-T, Exempt Organization Business Income Tax Return.