Not all provisions in early versions of the Tax Cuts and Jobs Act that worried independent schools made it into law, but a few did. One change that could pose difficulties for some schools involves the taxation of transportation benefits, according to RSM’s James P. Sweeney and Bill Turco in the recent NBOA webinar “Tax Reform Provisions Impacting Independent Schools.”
Before the tax bill was passed into law in December 2017, nonprofit employers could offer tax-free transportation fringe benefits, unlike for-profit employers. Now all such benefits are taxable, including mass transportation and parking benefits to the extent the school incurs an expense to offer them. “What the government has done is try to put tax-exempt organizations, including independent schools, on a level playing field with for-profit businesses,” said Sweeney.
Sweeney offered an example:
A school spends $50,000 a year providing parking for employees. The school should treat that benefit as taxable income and pay 21 percent tax on it for tax years that begin in 2018. For fiscal years starting in 2017, the tax rate is blended, between 21 and 34 percent, and most likely 28 percent for many independent schools that have year-ends of June 30.
Schools can avoid paying this tax by including the benefits in employees’ wage income, which is subject to income tax withholding, advised Sweeney.
The change is trickier in major cities that require organizations offer mass transit benefits on a pre-tax basis, which are Washington, D.C., New York City, and Berkeley, Richmond and San Francisco, California. This can be “a budget buster” Sweeney said. “We have some clients that are generating $500,000 of these kinds of benefits on an annual basis, [which results in a] $110,000 tax liability.”
In the webinar, Sweeney Turco also addressed changes to the taxation of unrelated business income, charitable contributions, athletic facilities, corporate income tax rates, excise taxes and more. And they shared what they learned from a meeting with the IRS based on public comments from tax-exempt/government entities. Members can find a recording, slides transcript on NBOA.org.
