Because of the new tax law provisions that were enacted late last year through the Tax Cuts and Jobs Act of 2017, many nonprofit organizations are being caught by surprise by their need to pay quarterly estimated taxes. The first quarterly payment was due April 17, 2018 and the next quarterly payment is due June 15, 2018.
New Tax on Certain Fringe Benefits
By now, most nonprofit, tax-exempt organizations understand that the 2017 tax law imposes a new tax burden on them if they offer certain fringe benefits. Effective January 1, 2018, transportation fringe benefits such as parking and public transit benefits provided by employers are subject to the Unrelated Business Income Tax (UBIT).1 This is the case regardless of whether the employer is paying for these benefits at the employer's expense, or merely withholding the cost of these benefits from the employee's salary so that the employee can obtain the benefits on a pre-tax basis.
In other words, if the nonprofit employer has 500 employees and is offering each employee an employer-paid benefit of $100 per month to apply toward parking or transit, the employer is spending $600,000 on that benefit ($100 per month x 12 months x 500 employees). That $600,000 will now be subject to UBIT at the corporate income tax rate, which is now a flat 21% instead of the previous top rate of 35%.2 Applying the 21% tax rate, the tax on $600,000 would be $126,000.
The same result applies if the nonprofit employer is simply withholding an average of $100 per month from each employee for transit or parking as part of a salary reduction plan: the employer will still owe tax of $126,000, even though the employer is not paying any benefit. Further, in a number of large cities, the employer has no choice: in the District of Columbia, New York City, San Francisco, among others, employers of a certain size are required to allow employees to elect pretax payment of commuter benefits. While the employer does not have to pay payroll taxes on the employee's salary reduction amount, the federal payroll tax rates are significantly lower than the UBIT rate of 21%.
Filing Quarterly Estimated Taxes for Fringe Benefit UBIT
While there are many questions yet unanswered about the details of the taxation of these benefits, and the Internal Revenue Service (IRS) is striving to provide guidance, amounts paid on or after January 1, 2018 are subject to the new tax, regardless of the organization's fiscal year, and nonprofit organizations need to comply. If your organization anticipates owing more than $500 in tax, it should make quarterly estimated tax payments. These tax payments are transmitted through the Electronic Federal Tax Payment System (EFTPS) and generally are due April 15, June 15, September 15, and December 15 (this year, April 17, June 15, September 17, and December 17). The IRS provides Form 990-W as a worksheet to help organizations calculate their quarterly estimated tax payments, however, the Form 990-W does not contain specific instructions regarding the UBIT treatment of fringe benefits.
Your nonprofit's responsibilities differ depending on whether it reported a liability for UBIT on its most recently filed Form 990-T, as follows:
No UBIT liability for 2017 taxable year:
If the nonprofit organization did not file a 990-T last year, or filed a 990-T that reported no UBIT liability, it will need to make estimated tax payments in 2018 based on its expected UBIT liability for 2018, if it anticipates that such liability will exceed $500. This may result in significant required quarterly tax payments.
UBIT liability for 2017 taxable year:
If the nonprofit organization filed a Form 990-T with the IRS last year that reported tax liability, then it is entitled to base its quarterly estimated tax payments on the total taxes the organization paid last year, unless it had unrelated business taxable income of $1,000,000 or more for any of the three immediately preceding taxable years. The organization may use this method even if it already knows that it will have a significantly higher tax liability this year as compared to last year. The organization may choose to pay higher quarterly estimated taxes to avoid a large tax payment when it files its Form 990-T, but that decision is optional.
Interest on Underpayment of Estimated Taxes
If an organization failed to make the required quarterly payment for the first quarter, or underpaid the required quarterly payment, the IRS will likely impose interest on the amount of the underpayment. Interest on underpayments is figured separately for each installment due date. As such, an organization may owe interest for an earlier due date even if it pays enough tax on a subsequent date to make up the underpayment. Nonetheless, nonprofit organizations that had an estimated tax liability for the first quarter but did not make a payment should include the amount they should have paid in the first quarter when making their second-quarter payment to stop the running of interest on the first-quarter underpayment.
It remains to be seen whether employers will cut back on transportation fringe benefits, whether on an employer-paid or employee-paid basis, in light of this new and unexpected tax burden. Where possible, employers may choose to increase salaries instead of providing transportation fringe benefits. As noted above, employers in certain metropolitan areas do not have the option to eliminate the benefits if they are employee-paid, so those employers must prepare to pay the tax.