On December 10, 2018, the Internal Revenue Service (IRS) issued interim guidance on the treatment of qualified transportation fringe benefit expenses under the Tax Cuts and Jobs Act (TCJA). According to the IRS press release:
The new rules assist taxpayers in determining the amount of parking expenses that are no longer tax deductible. They also help tax-exempt organizations determine how these nondeductible parking expenses create or increase unrelated business taxable income (UBTI).
It’s still frustrating to try to understand the rationale behind a law to impose, upon tax-exempt organizations, a tax on an expense rather than on income. However, the TCJA did just that. See our previous posts: The New Tax Law and Its Impact on Nonprofits – Part 2 and Whaaat?! Nonprofits need to pay taxes for providing employee parking!
Notice 2018-99 provides guidance for tax-exempt organizations to determine the corresponding increase in the amount of unrelated business taxable income (UBTI) under Section 512(a)(7) of the Internal Revenue Code (IRC) attributable to nondeductible parking expenses. The Notice provides that until proposed regulations are published, tax-exempt organizations that own or lease parking facilities where their employees park may use any reasonable method to make such determination and rely on the guidance provided by the Notice (the “Safe Harbor”).
The Safe Harbor includes four steps:
- Calculate the disallowance for reserved employee parking spaces. The percentage of reserved employee spots in relation to total parking spots should be multiplied by the taxpayer’s total parking expenses for the parking facility. The exempt organization must then determine the percentage of reserved employee spots in relation to total parking spots and multiply that percentage by the taxpayer’s total parking expenses for the parking facility to calculate its UBTI.
- EXAMPLE: If an exempt organization has 5 parking spots, all reserved for employees, all of the exempt organization’s parking expenses would be included in UBTI.
- Determine the primary use of the remaining spaces (the “primary use test”). If the primary use of the remaining parking spots in the parking facility is to provide parking to the general public (including to customers, clients, visitors, delivery persons, patients, students, and congregants), then the remaining total parking expenses for the parking facility are excepted. “Primary use” means greater than 50 percent of actual or estimated usage of the parking spots in the parking facility tested during the normal hours of the exempt organization’s activities on a typical day.
- EXAMPLE: If an exempt organization has 500 parking spots used by employees and clients, none of which are reserved for employees, and if only 50 employees on average use the parking spots on a typical day, then the primary use of the parking lot (450/500) is to provide parking to the general public, and none of the exempt organization’s parking expenses would be included in UBTI.
- Calculate the allowance for reserved non-employee spaces. For the remaining parking spots whose primary use is not to provide public parking to the general public, the exempt organization should determine the number of reserved non-employee spots (spots reserved for visitors and customers that cannot be used by employees). If the exempt organization has reserved non-employee spots, it may determine the percentage of reserved non-employee spots in relation to the remaining total parking spots and multiply that percentage by the taxpayer’s remaining total parking expenses. The product is the amount that is not included in UBTI.
- EXAMPLE: If an exempt organization has 500 parking spots used by employees and clients, none of which are reserved for employees, and if 400 employees on average use the parking spots on a typical day, then the primary use of the parking lot (450/500) is not to provide parking to the general public. If 50 of those parking spots is reserved for non-employee visitors, 50/500 or 10% of the exempt organization’s parking expenses would not be included in UBTI.
- Determine remaining use and allocable expenses. If, after going through the three steps above, there are any remaining parking expenses not categorized as UBTI or not UBTI, the exempt organization 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: If an exempt organization has 100 parking spots, none of which are either reserved employee parking spots or reserved non-employee spots, and 60 of which are used by employees on a typical day, then the exempt organization must use step 4 to determine the related expenses allocable to employee parking. Here, it would be appropriate for the exempt organization to include 60/100 or 60% of its parking expenses as UBTI.
* Note that the above examples assume that the exempt organization’s parking expenses are not directly connected with an unrelated trade or business that is regularly carried on by the organization.
Notice 2018-99 helpfully provides that depreciation is not included as a parking expense.
A deduction for expenses paid or incurred for on- premises athletic facilities is not disallowed under IRC Section 274 if the athletic facility is primarily for the benefit of the tax-exempt organization’s employees and does not discriminate in favor of highly compensated employees.
Silos and Qualified Transportation Fringe
The provision of qualified transportation fringes (QTFs) that results in an increase in UBTI under Section 512(a)(7) is not an unrelated trade or business. Therefore, any increase in UBTI due to a QTF is not subject to the silo rules codified in Section 512(a)(6), meaning that an exempt organization with only one unrelated trade or business and an increase in UBTI due to a QTF can reduce the UBTI attributable to the QTF by losses of the unrelated trade or business.
Tax-exempt organizations (including churches) are required to file a return on Form 990-T, Exempt Organization Business Income Tax Return, if they have gross income, included in computing UBTI, of $1,000 or more. This threshold amount for filing Form 990-T also applies to UBTI calculated with respect to QTFs. Therefore, organizations for which the sum of (1) gross income from unrelated trades or businesses and (2) the increase of UBTI under Section 512(a)(7) is less than $1,000 need not file a Form 990-T. Organizations for which this amount is $1,000 or more must file a Form 990-T.
Notice 2018-100 provides for waiver of the additions to tax for underpayment of estimated income tax for tax-exempt employers to the extent that they underpay their estimated income tax due to changes to the tax treatment of certain QTFs.
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. These taxpayers would not be eligible to use the safe harbor in section 6655(d)(1)(B)(ii) to calculate the required annual payment of estimated income tax on the basis of the tax shown on the return for the taxpayer’s preceding taxable year and may need additional time to develop the knowledge and processes to comply with estimated income tax payment requirements. Accordingly, in the interest of sound tax administration, 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, is waived for certain tax-exempt organizations that provide qualified transportation fringes (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 enactment of section 13304(c) and section 13703 of the Act. This relief is available only to any tax-exempt organization that was not required to file a Form 990-T for the taxable year immediately preceding the organization’s first taxable year ending after December 31, 2017. This relief is limited to tax-exempt organizations that timely file Form 990-T and timely pay the amount reported for the taxable year for which relief is granted. … To claim the waiver under this notice, the tax-exempt organization must write“Notice 2018–100” on the top of its Form 990-T.