The 2017 tax act removed the employer deduction for amounts paid toward fringe transportation benefits for employees by amending §274. In what was supposed to be a matching move to put exempt organizations that do not pay income taxes on the same footing, the 2017 tax act also added a tax to exempt organizations that pay for such benefits for their employees, in the form of an addition to unrelated business taxable income (UBTI). While the amount paid is added to the unrelated business taxable income, the rate paid is the same as corporations pay on their income, 21%. Logically, on a policy level, this makes sense. However, in a panel discussion at the Georgetown conference, “Representing and Managing Tax-Exempt Organizations,” both Gordon Clay, Senior Legislation Counsel with the Joint Committee on Taxation, and Veena Murthy, Legislation Counsel for the Joint Committee on Taxation, concluded that the application of the addition would be such that an exempt organization would pay the tax on the contribution to fringe transportation benefits paid not just by the organization but amounts contributed by the employee as well. The theory was that the wages were an amount ‘paid by the employer.’
Let’s see how this works for an employee, Kate, at Corporate America, Inc., and Kyle, an employee at Exempt Organization, Inc.
Kate and Kyle contribute $75 each towards their transportation benefits with pre-tax dollars. Both Corporate America and Exempt Organization contribute $125 towards Kate’s and Kyle’s transportation benefits, respectively.
Corporate America and Exempt Organization each pay $125 towards the transportation benefits for each of their employees. Corporate America cannot deduct the expense because of §274(a)(4), and thus pays a tax of $26.25 on the $125. Exempt Organization does not pay income tax, but pays tax on its UBTI, which now has fringe transportation benefit payments added to the UBTI under §512(a)(7). Thus, Exempt Organization pays a tax of $26.25 on the $125 it paid towards Kyle’s transportation benefit.
Kate and Kyle each contribute $75 toward their benefits and continue to enjoy the §132 exclusion from income for the amount contributed (as well as for the amounts their employers contribute). In both cases, the $75 was paid to the employee as wages, and each is an expense for his or her employer. Corporate America gets to deduct the $75 as a trade or business expense under §162 because it is part of the wages paid to Kate, an ordinary business expense. Thus, Corporate America has a tax savings of $15.75 (21% of $75). Exempt Organization does not get the deduction, but it also pays no income tax.
However, the interpretation offered at the conference by the members of the Joint Committee on Taxation means that the $75 Kyle paid from his wages would be taxed, and that tax would be paid by Exempt Organization.
I can summarize this situation as follows:
|Amount Paid||Amount Paid||Taxed?||Rate?||Employer Expense||Tax Due|
|Kate||$ 75.00||No||$ 75.00|
|Corporate America||Deduction||-21%||$ (15.75)|
|Corporate America||$ 125.00||No deduction||21%||$ 125.00||$ 26.25|
|TOTAL||$ 200.00||$ 10.50|
|Kyle||$ 75.00||No||$ 75.00|
|EO||$ 125.00||Taxed||21%||$ 125.00||$ 26.25|
|TOTAL||$ 200.00||$ 42.00|
Thus, both Corporate America and the Exempt Organization have expenses of $200 each, but the tax results for those expenditures are far from equal. Exempt Organization pays an additional $31.50 in tax, compared to Corporate America. Even if Exempt Organization did not have to pay tax on Kyle’s contribution, it would still be paying more tax because it does not receive the deduction that Corporate America received because of its trade or business expense.
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