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Employer’s deduction for fringe benefit expenses limited (July 5, 2018)

Under current law, a taxpayer may deduct up to 50% of expenses relating to meals and entertainment. Housing and meals provided for the convenience of the employer on the business premises of the employer are excluded from the employee's gross income. Various other fringe benefits provided by employers are not included in an employee's gross income, such as qualified transportation fringe benefits new law. For amounts incurred or paid after Dec. 31, 2017, deductions for entertainment expenses are disallowed, eliminating the subjective determination of whether such expenses are sufficiently business related; the current 50% limit on the deductibility of business meals is expanded to meals provided through an in-house cafeteria or otherwise on the premises of the employer; and deductions for employee transportation fringe benefits (e.g., parking and mass transit) are denied, but the exclusion from income for such benefits received by an employee is retained. In addition, no deduction is allowed for transportation expenses that are the equivalent of commuting for employees (e.g., between the employee's home and the workplace), except as provided for the safety of the employee.

For tax years beginning after Dec. 31, 2025, the Act will disallow an employer's deduction for expenses associated with meals provided for the convenience of the employer on the employer's business premises, or provided on or near the employer's business premises through an employer-operated facility that meets certain requirements. (Code Sec. 274 , as amended by Act Sec. 13304)

While the impact of businesses appears to be rather straight forward (no deductions allowed), the impact on nonprofits may be significant. 

It’s possible that due to the new law a nonprofit may be required to file Form 990-T and claim the tax free reimbursement to the employee as unrelated business income (UBIT) based on their individual circumstances.

Here’s an example:  In 2017, if an employer provided an employee with $150 per month to offset regular parking costs, the employee would have treated the $150 as tax-free reimbursement income and the employer would have been allowed to claim a $150 deduction.  As  a result  of the  Act,  for  tax  years  beginning  in  2018, the employee can still  treat  the  $150  as tax-free  reimbursement income,  but  the  Exempt Organizations (“EO”s) employer  must  report  $150  of  unrelated business  income  and cannot  claim a  $150 tax  deduction. This unrelated business income would be included on the EO's 2018 Form 990-T. If the EO did not previously file Form 990-T, the organization may now have this filing requirement if all unrelated business income for the year – including qualified transportation benefit expenses – exceeds $1,000.  Additionally,  if  the  EO expects its annual federal tax liability to exceed $500, it  should  consider  the need to  make  estimated  tax  payments  with  the  first  payment  due date of April 17, 2018. Finally, because many states base their own unrelated business income tax calculations on federal taxable income, this change may also create state level filing requirements.

Due to the passage of the Tax Cuts and Jobs Act on December 21, 2017, and the immediately following holidays, the IRS-has yet to release any guidance regarding implementation procedures for these changes. Until then, EOs have the option of continuing to provide these transportation benefits and simply pay the unrelated business income tax; they may discontinue the employer-paid transportation benefit but increase an employee's salary to compensate; they may institute an employer-sponsored salary reduction program, or they may eliminate transportation support for employees  altogether.

Provided by Steven M. Brettholtz, CPA, CFF, CGMA Managing Partner at Myers, Brettholtz & Company, PA.  Steve can be reached at steve.brettholtz@mbcopa.com or 239.690.4256.

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