The Internal Revenue Service (IRS) has issued Notice 2018-99, Parking Expenses for Qualified Transportation Fringes Under Section 274(a)(4) and 512(a)(7) of the Internal Revenue Code, which provides some clarity to nonprofits for determining the amount of increase to unrelated business taxable income (UBTI) for parking benefits provided to employees. This new UBTI is a result of an addition to the tax code by the Tax Cuts and Jobs Act (TCJA) by inserting code section 512(a)(7), and it is effective for benefits provided beginning January 1, 2018. Both for-profit companies and nonprofit organizations are affected, with the distinction being that parking expenses are a disallowed deduction if not included in employee wages for for-profit entities, while the benefit amount increases UBTI for nonprofits. The term “qualified transportation fringes” is broader than just parking benefits, but the notice is focused on parking benefits specifically. In this article, we will break down the four-step process described in the notice for determining the parking benefit amount, and explain some other details that may help to decrease or avoid taxation in this area.
When a nonprofit pays a third party for an employee parking facility, the increase in UBTI would simply be the amount paid to the third party. The discussion of how to determine the increase in UBTI if the nonprofit owns or leases a parking facility is where it gets very detailed. The notice lays out a four-step process, deemed a “reasonable method” by the IRS, to determine the amount. The implication seems to be that only the four steps are deemed a reasonable method. These four steps provide consideration of who uses the parking areas, what to do with reserved parking areas or spaces, and how to handle different uses at various times during the year. It provides clarity on what is considered a “parking facility” and what type of expenses are considered to be “parking expenses,” along with 10 examples.
Parking benefits can be provided as additional compensation through a reimbursement or in-kind or through a compensation reduction agreement.
What expenses are counted as parking expenses? According to Notice 2018-99, “parking expenses include, but are not limited to, repairs, maintenance, utility costs, insurance, property taxes, interest, snow and ice removal, leaf removal, trash removal, cleaning, landscape costs, parking lot attendant expenses, security, and rent or lease payments or a portion of a rent or lease payment (if not broken out separately).” Depreciation is NOT included.
The notice provides that “…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.” It does not include parking on property used by an employee for residential purposes (i.e. when a school provides housing on campus that includes parking).
If there are no reserved parking areas for employees and “primary use,” described later, is determined to be more than 50% general public use, then your entity is not going to have any taxable amount. Also, if your taxable amount totals $1,000 or less, and your nonprofit has no other UBTI, the specific deduction of $1,000 can be used to wipe away any tax due, and you also do not have to file a Form 990-T. Further, the notice clarifies that if a nonprofit has one source of UBTI from a trade or business that results in a loss, the loss can be used against the increase in UBTI due to this parking benefit (or from qualified transportation fringe benefits in general).
Here is a brief summary of the four-step process the IRS is using as the “reasonable method” for determining parking benefits:
Step 1: Calculate the disallowance for reserved employee spots: Reserved spots result in a taxable amount. Parking expenses are allocated to the percentage of reserved employee parking provided and counted as taxable.
Step 2: Primary use test: Next, figure out the primary (more than 50%) use of the remaining spots. Evaluate the usage during normal hours of the exempt organization’s activities on a typical day. Non-reserved areas or spaces primarily used by employees do not count as public use. “General public” usage does count when used by customers, clients, members, students, visitors, patients, congregants of a religious organization, and delivery services. Including students, patients, and congregants included in the general public definition is good for health care facilities, schools, and religious organizations in determining the 50% use test as it helps push the calculation over that threshold. “General public” does NOT include employees or independent contractors. If the result of your calculation is over 50% use by the general public, then none of the remaining parking area is subject to the tax and you do not move on to Steps 3 or 4.
Step 3: If your Step 2 results show that remaining parking spots are not more than 50% provided to the general public, then calculate the reserved nonemployee areas and allocate parking expense to that section. The result is not included with the remaining parking expenses considered taxable.
Step 4 – If you completed Steps 1-3 and have remaining parking areas to consider, evaluate the employee usage, and allocate the remaining parking expense.
The first step makes clear that reserved employee spots are going to result in a taxable amount, as the parking expenses are allocated to the reserved spots as a percentage of the whole. However, the IRS is giving a reprieve until March 31, 2019 to change the signage of reserved employee spaces to avoid a taxable amount, which will be retroactive to January 1, 2018. This could be utilized by some nonprofits to avoid increasing UBTI. For many others, however, this will not be a practical solution.
For more information, contact Kathy Cuddapah or one or our tax advisors at 301.231.6200.