The Administrative Impact of the New QTF Rules

Among the most significant changes of the Tax Cuts and Jobs Act to non-profit organizations was new Code Section 512(a)(7), which increased unrelated business taxable income (UBTI) with respect to qualified transportation fringes (QTFs) paid by tax-exempt organizations by the amount of disallowable fringe deduction. QTF refers to costs incurred related to providing parking or transportation benefits to employees, regardless if paid by the employer or withheld from an employee’s compensation on a pre-tax basis. The treatment of QTFs as an addition to UBTI caught many organizations off–guard, as well as raised valid questions about possible penalties associated with the underpayment of estimated income tax payments, EFTPS registration, and the deductibility of other expenses.

Tax-exempt organizations must file Form 990-T, Exempt Organization Income Tax Return, if their gross income from unrelated trades and business activities equals $1,000 or more. The increase in QTF UBTI falls under the same threshold, making $1,000 or more a reportable UBTI. Additionally, the IRS requires organizations to make quarterly estimated tax payments on their required annual tax obligation to avoid underpayment penalties. This provision could potentially have placed tax-exempt organizations providing qualified transportation fringes and whose taxable years ended after December 31, 2017, at risk of underpayment penalty.

Many affected exempt organizations will be filing their Form 990-T for the first time and may not be aware of the new estimated income tax payment requirement. To allow adjustment to the new law, the IRS issued a waiver under Notice 2018-100, Relief from Additions to Tax for Underpayment of Estimated Income Tax for Tax-Exempt Organizations That Provide Certain Qualified Transportation Fringes. Thus, tax-exempt organizations that provide QTFs and were not required to file Form 990-T for the taxable year preceding the organization’s first taxable year are not subject to interest and penalties for nonpayment of estimated taxes. This only applies to calendar and fiscal year 2018 filers. Tax-exempt organizations can claim the waiver under this notice by writing “Notice 2018-100” on the top of their Form 990-T.

Many nonprofits have never had taxable income to report and are not set up to make tax payments. Since federal tax payments are required to be made electronically, exempt organizations will have to enroll in the U.S. Department of the Treasury Electronic Federal Tax Payment System (EFTPS). It should be noted that it takes five to seven business days to receive a PIN and enrollment number via U.S. mail. In case the payment needs to be made before the PIN is issued, organizations can make a payment via phone within two days of completing their enrollment. Finally, same-day wire payments made through financial institutions are also permissible with additional fees applied.

Another relevant question with regard to QTF UBTI is the deductibility of other expenses. The 2017 Form 990-T reported the amount attributed to qualified transportation fringes above expenses on line 12 as “other income,” allowing for the deduction of other expenses such as state taxes, tax preparation fees, and charitable contributions. However, on the 2018 Form 990-T, QTF UBTI is added to the bottom on line 34 as “amounts paid for disallowable fringes.” This difference in reporting currently leaves non-profit organizations affected by the new law with only the specific $1,000 allowable deduction available to offset the taxable income. Various groups have provided comments requesting that the form be modified to allow these directly related expenses.

There has been a lot of discussion in Congress regarding the elimination of the QTF provisions. In December, the outgoing Chairman of the House Ways and Means Committee released the Tax Technical and Clerical Corrections Act, which specifically requested the full repeal of Code Section 512(a)(7). However, due to changes in the political makeup after the November elections, these changes were never voted on and were not implemented. As of today, we are left with the law as written, but continue to monitor the various legislative efforts that may change this law in the future.

If you have any questions about the QTF provisions or how they may affect your non for profit entity, please contact your Marcum tax advisor.