Tax Reform Provision Targets Churches and Nonprofits

Louis P. Barbarin, CPA, Chief Executive Officer, MMBB Financial Services

Welcome to the third installment in our series of articles outlining tax reform and how the new tax law may affect your finances, both personally and organizationally. This article focuses on a little-known provision of the Tax Cuts and Jobs Act (H.R.1) of 2017 that may have a large impact on your church or faith-based organization. The provision requires that churches, hospitals, colleges and other tax-exempt organizations begin paying a 21 percent tax on some types of fringe benefits they give their employees such as parking, transportation and other benefits.

To put this provision in the proper context, it’s helpful to understand fringe benefits. Generally, compensation and benefits provided by employers to employees are taxable. There are a few exceptions to this general rule, including fringe benefits outlined in section 132 of the Internal Revenue Code. One of the taxable fringe benefits is the “qualified transportation fringe” which includes any of the following:

1. Transportation in a commuter highway vehicle if such transportation is in connection with travel between the employee’s residence and place of employment.
2. Any transit pass
3. Qualified parking¹
4. Any qualified bicycle commuting reimbursement

Many churches and nonprofit organizations are not aware of the tax, which could cost them tens of thousands of dollars annually. It will be a financial burden, as well as an administrative one, since it will cause them to file Form 990-T, the Exempt Organization Business Tax Return. For those churches and nonprofits that are aware of the new requirement there is confusion as to how the tax should be calculated. For example, churches are asking how they are supposed to calculate the value of parking spaces for employees. And some are questioning if the garages provided as part of clergy residences are now taxable.

The Treasury is working on regulations spelling out the details of how the tax will work, even though the affected groups should already have been paying the quarterly tax which took effect January 1, 2018. In addition, legislation was introduced in June to rescind this particular tax provision. The Church Alliance (a coalition of the chief executive officers of 38 church benefits organizations), in which MMBB is a member, is advocating to have churches exempted from the tax and the filing requirement. We will keep you updated on any developments with respect to this situation.

¹The term ‘qualified parking’ means parking provided to an employee on or near the business premises of the employer or on or near a location from which the employee commutes to work by transportation in a commuter highway vehicle, or by carpool.