The Tax Cuts and Jobs Act (TCJA) generally disallows a deduction for expenses with respect to qualified transportation fringes (QTF) provided by taxpayers to their employees. In the case of tax-exempt organizations, their unrelated business taxable income (UBTI) is increased by the amount of the QTF expense that is nondeductible. QTFs include:
- Transportation in a commuter highway vehicle between the employee’s residence and place of employment.
- Any transit passes.
- Qualified parking—parking that is provided to an employee on or near the business premises of the employer or on or near a location from which the employee commutes to work.
In recently issued Notice 2018-99, the IRS announced that it intends to publish proposed regulations for guidance on the determination of nondeductible parking expenses and other expenses for QTFs and the calculation of increased UBTI attributable to QTFs. Until that guidance is issued, tax-exempt organizations that own or lease parking facilities where their employees park may rely on this notice for guidance or use any reasonable method for determining nondeductible parking expenses related to employer-provided parking. Notice 2018-99 provides guidance to determine the nondeductible amount of parking expenses, as well as the amount treated as increasing UBTI. The method an organization uses depends on whether the taxpayer pays a third party to provide parking spots or the taxpayer owns or leases a parking facility.
TAXPAYER PAYS A THIRD PARTY FOR EMPLOYEE PARKING SPOTS
In this case, the amount of disallowance generally is the taxpayer’s total annual cost of employee parking paid to the third party. However, if the employee’s parking exceeds the IRS monthly limitation on exclusion ($260 for 2018), the excess must be treated by the taxpayer as compensation and wages to the employee.
Example: Tax-Exempt Organization (A) pays Parking Garage (B), a third party who owns a parking garage across the street from A, $100 per month for each of A’s 10 employees to park in B, or $12,000 per year [($100X 10) X12]. The $12,000 paid for employee parking is additional UBTI.
If, however, A pays $300 per month for each employee, or $36,000 per year [($300 X 10) X 12], then $260 per month is taxable as UBTI to A, or $31,200 [($260 X 10) X 12]. The excess per employee of $40 [$300 - $260] is treated as taxable wages subject to all applicable payroll taxes.
TAXPAYER OWNS OR LEASES ALL OR A PORTION OF A PARKING FACILITY
A parking facility includes indoor and outdoor garages and other structures, as well as parking lots and other areas where employees may park on or near the business premises of the employer or on or near a location from which the employee commutes to work. For this purpose, total parking expenses include but are not limited to:
- Utility costs
- Property taxes
- Snow and ice removal
- Leaf removal
- Trash removal
- Landscape costs
- Parking lot attendant expense
- Rent or lease payments (or a portion of them if not broken out separately)
For the purpose of these calculations, depreciation is not considered part of the total parking expense.
Reasonable methods for determining the additional UBTI inclusion are as follows:
Step 1: Calculate the disallowance for reserved employee spots.
A taxpayer that owns or leases one or more parking facilities must identify the number of spots in the parking facility exclusively reserved for the taxpayer’s employees. This includes spots with specific signage like “employee parking only” or a separate facility or portion of a facility segregated by a barrier to entry or limited by terms of access. The percentage of reserved employee spots in relation to total parking spots is multiplied by the taxpayer’s total parking expenses for the parking facility and is the amount of additional UBTI. Until March 31, 2019, taxpayers that have reserved employee spots may change their parking arrangements to decrease or eliminate their reserved employee spots and treat those parking spots as not reserved employee spots for purposes of this notice retroactively to January 1, 2018.
Step 2: Determine the primary use of remaining spots.
The taxpayer must determine whether the remaining spots are primarily for the general public or for employees. “Primary” means more than 50 percent of actual or estimated usage of the parking spots in the parking facility. This is to be tested during the normal hours of the exempt organization’s activities on a typical day. If the primary use of the remaining parking spots in the parking facility is to provide parking to the general public, then the remaining total parking expenses for the parking facility are not included as an increase to UBTI.
Step 3: Calculate the allowance for reserved nonemployee spots.
Reserved nonemployee spots include spots reserved for visitors and customers and can be designated as such by specific signage (i.e., “Customer Parking Only”). If the primary use of the taxpayer’s remaining parking spots is not to provide parking to the general public, the taxpayer may identify the number of spots in the parking facility exclusively reserved for nonemployees. The percentage of reserved nonemployee spots in relation to the remaining total parking spots is multiplied by the remaining total parking expenses. This amount is not an increase to UBTI.
Step 4: Determine remaining use and allocable expenses.
After Steps 1 through 3 above, if there are any remaining parking expenses not specifically categorized as UBTI or not UBTI, the taxpayer must reasonably determine the employee use of the remaining parking spots during the normal hours of the exempt organization’s activities on a typical day and the related expenses allocable to employee parking spots.
Example 1: Tax-Exempt Organization J, a religious organization that operates a church and a school, owns a surface parking lot adjacent to its buildings. J incurs $10,000 of total parking expenses. J’s parking lot has 500 spots that are used by its congregants, students, visitors, and employees and 10 spots that are reserved for certain employees. During the normal hours of J’s activities on weekdays, J usually has approximately 50 employees parking in the lot in non-reserved spots and approximately 440 non-reserved parking spots that are empty. During the normal hours of J’s activities on weekends, J usually has approximately 400 congregants parking in the lot in non-reserved spots and 20 employees parking in the lot in non-reserved spots.
Step 1: Because J has 10 reserved spots for certain employees, $200 [(10/500) X $10,000] is the amount of total parking expenses that is an increase to UBTI for reserved employee spots.
Step 2: Because usage of the parking spots vary significantly between days of the week, J uses a reasonable method to determine that the primary use of the remainder of J’s parking lot is to provide parking to the general public because 90% [440/490] of the spots are used by the public during the weekdays and 96% [470/490] of the spots are used by the public on the weekends. The empty, non-reserved parking spots are treated as provided to the general public.
Therefore, J has $200 of the total $10,000 parking expenses that will be an increase to UBTI.
Example 2: Tax-Exempt Organization K is a hospital and owns a surface parking lot adjacent to its building. K incurs $10,000 of total parking expenses. K’s parking lot has 500 spots that are used by its patients, visitors, and employees. K has 50 spots reserved for management and has approximately 100 employees parking in the lot in non-reserved spots.
Step 1: Because K has 50 reserved spots for employees, $1,000 [(50/500) X $10,000] is the amount of total parking expenses that is subject to an increase to UBTI.
Step 2: The primary use of the remainder of K’s parking lot is to provide parking to the general public because 78% (350/450] of the remaining spots in the lot are open to the public.
Therefore, K has an increase to UBTI of $1,000 for employee parking.
RELIEF FOR ADDITIONS TO TAX FOR UNDERPAYMENT OF ESTIMATED INCOME TAX FOR TAX-EXEMPT ORGANIZATIONS THAT PROVIDE CERTAIN QUALIFIED TRANSPORTATION FRINGES
The IRS also released Notice 2018-100, which provides a waiver of the addition to tax for underpayment of estimated tax payments required to be made on or before December 17, 2018, for the underpayment of estimated income tax resulting from the changes to the tax treatment of qualified transportation fringes. This will apply only if the tax-exempt organization was not required to file a Form 990-T, Exempt Organization Business Income Tax Return, for the taxable year prior to 2018. In addition, the organization must timely pay the amount reported for 2018.
The IRS also released a draft of the 2018 Form 990-T. The draft form allows any pre-2017 net operating losses (NOL) to offset the increase of UBTI as a result of qualified transportation fringes. In addition, the IRS announced in Notice 2018-99 (until further guidance is issued) that if the tax-exempt organization has only one unrelated trade or business in addition to the increase because of qualified transportation fringes, to the extent that the deductions directly connected with carrying on the unrelated trade or business exceed the gross income derived from that unrelated trade or business, the taxpayer can reduce the increase in UBTI created by qualified transportation fringes.
There are also efforts to have this portion of the TCJA repealed. On December 10, House Ways and Means Chairman Kevin Brady unveiled a revised tax package that includes the retroactive repeal of the increase in unrelated business taxable income resulting from qualified transportation benefits.
Each tax-exempt organization needs to analyze its parking facility’s use. In addition, each tax-exempt organization that offers reserved employee parking needs to determine whether it will cease with that practice to save potential increases to UBTI. As part of the IRS guidance, a special rule enables employers to retroactively reduce the amount of their increase to UBTI. Under this rule, employers have until March 31, 2019, to change their parking arrangements to reduce or eliminate the number of parking spots they reserve for their employees.
There undoubtedly will be an increase in complex allocations that may be needed to comply with this tax law. If there are amounts that need to be added to UBTI, planning is needed to make sure that the payment is timely paid. Wipfli can assist in your analysis.