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In Notice 2018-100, the IRS has announced that it will provide estimated tax penalty relief in 2018 to tax-exempt organizations that offer qualified transportation fringe (QTF) benefits and were not required to file a Form 990-T, Exempt Organization Business Income Tax Return, for the tax year preceding the organization's first tax year ending after December 31, 2017.

Notice 2018-100 was issued concurrently with Notice 2018-99, which includes interim guidance for taxpayers to determine the amount of QTF parking expenses that is nondeductible under Section 274(a)(4) and for tax-exempt organizations to determine the corresponding increase in the amount of unrelated business taxable income (UBTI) under Section 512(a)(7) attributable to the nondeductible parking expenses. For a discussion of Notice 2018-99, see Tax Alert 2018-2497.

Background

QTF changes

Prior to changes enacted by the Tax Cuts and Jobs Act (TCJA), taxpayers could generally exclude from income a QTF benefit used to defray an employee's commuting expenses. Tax-exempt organizations, like taxable entities, could provide their employees with QTF benefits free from income tax at both the employer and employee level.

The TCJA amended Section 274 effective for amounts paid or incurred after December 31, 2017. As amended, Section 274(a)(4) generally disallows a deduction for expenses for QTFs provided by taxpayers to their employees. For exempt organizations, a companion provision in new Section 512(a)(7) generally increases a tax-exempt organization's UBTI by the amount of the QTF expense that is nondeductible under Section 274.

Estimated income tax payments

Section 6655 generally requires corporations, private foundations and tax-exempt organizations to pay estimated income tax in four quarterly installments, with each installment equal to 25% of the required annual payment. Specifically, Section 6655(d) requires tax-exempt organizations with unrelated business taxable income in a given tax year to pay quarterly estimated tax payments based on the lesser of: (1) the actual tax due for the current tax year, or (2) the entire tax due from the preceding tax year (the safe harbor) (an exception exists for "large corporations" with $1 million or more of taxable income in any of the three preceding tax years). Otherwise, Section 6655(a) imposes an addition to tax for failure to make a sufficient and timely payment of estimated income tax. Organizations that did not file a return for the preceding tax year that showed a liability for tax may not use the safe harbor.

Transitional relief for underpayment of estimated income tax

The IRS notes that the enactment of Section 512(a)(7) may result in tax-exempt organizations owing unrelated business income tax and having to pay estimated income tax for the first time. The IRS believes that these organizations may need additional time to comply with the estimated income tax payment requirements. Accordingly, the IRS is waiving the addition to tax under Section 6655 for failure to make estimated income tax payments otherwise required to be made on or before December 17, 2018, for certain tax-exempt organizations that provide QTFs (as defined in Section 132(f)) and any parking facility used in connection with qualified parking (as defined in Section 132(f)(5)(C)) to an employee to the extent that the underpayment of estimated income tax results from the corresponding TCJA changes.

This transitional relief is only available for tax-exempt organizations that were not required to file Form 990-T for the tax year immediately preceding the organization's first tax year ending after December 31, 2017. In addition, the relief is limited to tax-exempt organizations that timely file Form 990-T and timely pay the amount reported for the tax year for which relief is granted. To claim this relief, organizations must write "Notice 2018-100" on the top of the Form 990-T filed for the applicable tax year.

Implications

In Notice 2018-100, the IRS has provided some welcome relief to certain tax-exempt organizations that were waiting for the guidance provided in Notice 2018-99 in order to estimate the impact of changes regarding the treatment of QTFs. For many tax-exempt organizations, the UBTI created by Section 512(a)(7) will cause them to file Form 990-T and pay unrelated business income tax for the first time. Furthermore, because the guidance provided in Notice 2018-99 was not available until the end of the calendar year, those organizations may have underestimated the amount of UBTI created by Section 512(a)(7) in 2018 and therefore were unable to properly calculate any estimated tax due under Section 6655. Thus, the relief provided in Notice 2018-100 aims to provide a fair and reasonable result for tax-exempt organizations that had not previously been subject to taxation.

Please contact your Ernst & Young LLP tax professional with any questions.

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RELATED RESOURCES

— For more information about EY's Exempt Organization Tax Services group, visit us at www.ey.com/ExemptOrg.

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