Changes to UBTI, Transportation Fringe Benefits and On-Premise Athletic Facilities Under Tax Reform
The 2017 Tax Cuts and Jobs Act (the “Act”) has amended the Internal Revenue Code by adding a special rule for organizations with more than one unrelated trade or business. Unrelated business taxable income (UBTI) will now be computed separately with respect to each such trade or business, so that deductions or losses no longer shelter income across businesses. Any net operating loss deduction will also be computed separately with respect to each such trade or business. An organization’s UBTI will be the sum of the separately computed UBTI of each trade or business. However, UBTI of any such trade or business cannot be less than zero. New operating losses are only allowed for the specific trade or business from which the losses derived. The new legislation does not define a separate trades or businesses. This new rule applies to taxable years beginning after December 31, 2017. A flat tax rate of 21% will be applied to any UBTI over the $1,000 standard deduction.
The Act also includes major changes to the carryover and carryback rules for net operating losses (“NOLs”) and a limitation on NOL utilization. Previously, NOLs could generally be carried back two years, carried forward 20 years and fully offset taxable income. Now, NOLs arising in a taxable year ending after December 31, 2017, cannot be carried back, but they can be carried forward indefinitely. The amount of NOL that can be utilized in a single year is equal to the lesser of available NOL carryover or 80% of taxable income (without regard to the NOL). The new utilization rule applies to NOLs arising in years beginning after December 31, 2017. NOLs incurred in prior years are utilized in accordance with the rules in effect for the years in which they were incurred.
Transportation Fringe Benefits
Another aspect of the Act concerns limitation or elimination of deductions for qualified transportation fringe benefits and on-premises athletic facilities. The Act treats any amounts paid for these benefits that are not deductible under the new law as UBTI. Qualified transportation fringe is considered any of the following provided by an employer or employee:
- Commuter transportation between the employee’s home and place of employment in a commuter highway vehicle. It must seat at least six adults, excluding driver, and at least 80% of the mileage use can reasonably be expected for transporting employees between their residences and places of employment—as well as on trips where the number of employees transported is at least half of the adult seating capacity, including van pools.
- Transit passes—any pass, token, fare card, voucher or similar item—that entitle someone to transportation on mass transit facilities or provided by any person in the business of transporting persons for compensation or hire, if the transportation is in a commuter highway vehicle.
- Qualified parking provided to an employee on or near the business premises of the employer, or on or near from where the employee commutes to work by transportation using transit passes in a commuter highway vehicle or by carpool. It does not include parking on or near property used by the employee for residential purposes.
- Qualified bicycle commuting reimbursement.
On-Premise Athletic Facilities
An on-premises athletic facility is a gym or other athletic facility that is (1) located on the employer’s premises; (2) employer-operated; and (3) substantially used by employees, their spouses and their dependent children.
The organization can avoid the addition of these items to UBTI if it provides the benefits as taxable items to the employees and includes the cost of the benefits on their Form W-2. If the organization treats the benefits as taxable wages, it is not required to include the benefits in UBTI and pay tax on them, but they will incur additional payroll taxes.
This new rule is effective for amounts incurred after December 31, 2017. Fiscal-year organizations must maintain separate treatments of pre-2018 and 2018 payments for qualified fringes.