Does your not-for-profit provide transportation fringe benefits to staffers? In 2017, the Tax Cuts and Jobs Act (TCJA) repealed a tax law that would have imposed unrelated business income tax (UBIT) on organizations that provide such benefits. However, though transportation benefits remain exempt from tax for participating employees, nonprofits can no longer deduct the costs.
Let’s take a closer look at the available transportation benefits and changes to tax law in this area.
3 Main Types
Nonprofit entities (as well as for-profit businesses) may offer transportation benefits to employees, tax-free, up to a stated monthly limit. For these purposes, the three main benefits are:
1. Mass transit passes. These include any pass, token, fare card, voucher or similar item entitling a person to ride free of charge or at a reduced rate on mass transit. The term also applies to passes for vehicles seating at least six adults (not including the driver) if it’s operated by a person in the business of transporting people for pay. This includes transportation by bus, rail or ferry.
2. Commuter highway vehicle expenses. This refers to any highway vehicle seating at least six adults (not including the driver). At least 80% of the vanpooling mileage should be for transporting employees between their homes and workplaces, with employees occupying at least 50% of the vehicle’s seats (not including the driver’s seat).
3. Qualified parking fees. This benefit covers employer-provided fees for employees parking on or near the business premises. It also applies to fees for parking on or near the location from which employees commute to work using mass transit, commuter highway vehicles or carpools (for example, a lot at a train station). However, it doesn’t extend to parking at or near the employee’s home.
Monthly limits for all three types are adjusted annually for inflation. For 2023, the combined limit for mass transit passes and vanpooling benefits is $300 — up from $280 in 2022. The monthly limit for parking fees in 2023 is also $300.
Before the TCJA, the qualified transportation benefits described above were tax-free to participating employees and tax-deductible by the nonprofit employer. However, the TCJA cracked down on transportation benefits in a couple significant ways.
For one, the TCJA generally eliminates the deduction for transportation benefits provided by employers. (There’s at least one notable exception — see “Bicycle Commuting Benefits: Stop and Go” at right.) Thus, your nonprofit can no longer deduct the cost of these benefits and, unlike many other TCJA provisions, the change is permanent.
The TCJA also in most cases imposes the UBIT on nonprofits when they receive income derived from activities that aren’t related to their tax-exempt function. For example, if the campus bookstore of a nonprofit college sells merchandise and clothing emblazoned with the school’s mascot, resulting income would be subject to UBIT (at a rate of 21%).
Reversal of Fortune
One TCJA provision related to transportation benefits has changed since the TCJA was signed into law. Originally, nonprofits were required to count toward UBIT amounts paid for disallowed deductions for transportation fringe benefits (such as entertainment expenses). The UBIT didn’t include amounts paid or incurred in connection with an unrelated business regularly carried out by the organization. In other words, by continuing to provide transportation benefits to employees that they offered in the past, nonprofits were effectively liable for a new tax. This provision was effective for amounts paid or incurred after 2017.
But the not-for-profit community strongly objected to the TCJA’s imposition of UBIT on disallowed transportation benefits — and Congress listened. As part of the Consolidated Appropriations Act of 2020, the special UBIT provision was repealed retroactively. Thus, organizations that had paid the tax in the previous two years became eligible for a refund.
Bicycle Commuting Benefits: Stop and Go
Before 2018, bicycle commuting expense reimbursements provided to employees were excluded from tax and were deductible by nonprofit employers, up to an annual limit of $2,400. The exclusion applied to reasonable expenses incurred for the purchase, improvement, repair or storage of a bicycle regularly used for travel to and from work.
However, the Tax Cuts and Jobs Act suspended the exclusion for 2018 though 2025. Nevertheless, your organization can continue to deduct bicycle commuting benefits that would have been excludable from tax but for the suspension. This is an exception to the current ban on deductions. Also, any tax roadblocks for bicycle community benefits may be removed in the future because of growing environmental concerns. We’ll continue to monitor the issue.
So, what does all this mean for your organization? Although your nonprofit can no longer deduct transportation benefits, they remain tax-free to workers within the indexed limits.
Contact us for help deciding whether you should continue (or start) to offer these benefits, and how you can limit UBIT liability.