Important Change for Nonprofits: Certain Fringe Benefits are Now Taxable
Some nonprofits may be surprised to find out the recent tax reform legislation can subject them to unrelated business income taxes for providing certain fringe benefits to employees, including religious organizations. Fringe benefits in this case are referring to items an employer can pay for an employee, but do not have to count as taxable compensation to the employee.
The three benefits taxable to nonprofits are 1) transportation benefits, like transit passes and commuter benefits; 2) qualified parking, which is the cost of vehicle parking provided to employees on or near the employer’s premises; as well as car pool and public transportation lots; and 3) the cost of any gym or other athletic facility owned and operated by the employer for use by employees and their families. There have been questions over how to value these items. The Treasury Department is supposed to issue regulations later this year to clarify. To avoid any tax liability, the organization can report the amounts as taxable compensation to the employee and report it on the employee’s W-2.
Unrelated business income taxes only apply if unrelated business income (including the value of these benefits) exceeds $1,000. The tax will be assessed on the Form 990-T - normally filed with the organization’s Form 990 - at a rate of twenty-one (21%) of the benefits paid. Churches and other organizations not required to file Form 990 still must file Form 990-T to report unrelated business income and pay associated taxes if they exceed the $1,000 threshold.