Trade and membership associations may find themselves facing new questions about something unexpected—taxes. The Tax Cuts and Jobs Act of 2017 is a new tax law that significantly modifies the deductibility of certain fringe benefits for associations, including employee parking and transportation benefits.

Under the law, associations that were once allowed to provide tax-free transportation benefits for employee parking and transit passes can no longer do so. The cost is 21 percent of the value of the benefit. This is a UBIT tax based on the new federal corporate tax rate and will be accounted for on a 990-T, a form that many associations have not been required to file until now.

As a result of the potential bottom-line impact, some eligible associations may choose to evaluate whether they wish to continue providing transportation benefits to their staff. This applies even if the association offers this benefit to employees tax-free through a compensation reduction agreement.

This new UBIT tax applies to the value of all transportation benefits paid on behalf of employees associated with commuting to work and is effective January 1, 2018. However, this does not apply to business travel. The 21 percent tax should be multiplied by the cost (value) of all transportation benefits provided and remitted to the federal government (and presumably state governments, when applicable) on a quarterly basis.

As a result of the potential bottom-line impact, some eligible associations may choose to evaluate whether they wish to continue providing transportation benefits to their staff.

For organizations currently filing a 990-T, it would mean increasing the estimated taxes paid quarterly to include the new taxes due.

When an association does not provide the transportation benefits directly but allows the employee to participate in a pre-tax plan, it’s known as a compensation reduction agreement. In this case, the amount that the employee reduces taxable compensation by, under the pre-tax plan, is still taxable to the organization. Therefore, the use of a pre-tax plan for transportation benefits does not avoid the tax for the organization. This is according to the IRS’s Publication 15-B, Employer’s Tax Guide to Fringe Benefits [PDF].

A possible solution is to raise the salaries of employees to cover the cost of parking and transit expenses so the organization can avoid the additional 21 percent tax on this benefit and account for the expense as salary/compensation, subject to FICA. Employees would then be responsible for paying their own parking and transit expenses, which they would not be able to deduct.

However, several metropolitan regions across the country, including the District of Columbia, New York City, and several cities within the Northern California region— including San Francisco, Berkeley, and Richmond—are legally required to offer commuter benefit programs. While the requirements vary by jurisdiction, associations in those areas should be sure they abide by the local law.

For example, in the District of Columbia, employers with 20 or more employees must offer commuter transit benefits to their employees under the DC Omnibus Amendment Act of 2014. Three options are available, including a pretax option, an employer-paid benefit, and an employer-provided transit service, such as a bus operated by the employer.

This requirement, and potentially requirements in other regions where associations are subject to mandatory commuter benefit laws, conflict with the new federal law.

Associations should continue to monitor areas where the IRS has not yet provided clarity, including the lack of a policy on penalties charged against organizations that don’t pay the estimated taxes in 2018. Until the IRS clearly states its policy, it’s recommended that associations pay those estimated taxes.