The Internal Revenue Service (IRS) recently released Notice 2018-99, which provides guidance on non-deductible transportation benefits. While the Notice touches on other aspects of IRC section 274(a)(4), which generally disallows a deduction for expenses associated with qualified transportation fringes (QTF), this tax alert will focus on qualified parking, which has the most far-reaching consequences for tax-exempt organizations.
The Tax Cuts and Jobs Act (TCJA) stipulated under the new IRC section 512(a)(7) that an organization’s unrelated business taxable income (UBTI) would be increased by the amount of QTF expenses that are now nondeductible under section 274. For most organizations, that means parking. Any organization which provides parking to its employees, whether by paying a third party on its employees’ behalf or by providing employees with parking on its own, may be impacted by this new rule.
When calculating the amount to report as UBTI, there are different methods used by organizations that pay a third party and organizations that incur costs associated with their own lots and garages. For organizations that pay a third party for parking for their employees, generally the whole amount is non-deductible under section 274. However, the monthly limitation on exclusion from income for employees’ QTF under section 132(f)(2), $260 for 2018, limits the amount of UBTI that the organization has to report. Any amount per employee per month that exceeds $260 must be treated as compensation to the employee and reported on the employee’s W-2.
Organization A pays a third-party garage $100 per month for each of A's 10 employees, or $12,000 per year (($100 x 10) x 12 = $12,000). The entire $12,000 will need to be reported as UBTI.
Organization A pays a third-party garage $300 per month for each of A’s 10 employees, or $36,000 per year (($300 x 10) x 12 = $36,000). Of the $300 per month paid for each employee, $260 is considered excludible from an employee’s compensation. Thus, $31,200 (($260 x 10) x 12 = $31,200) will need to be reported as UBTI. The extra $40 per employee per month will need to be treated as compensation to the employees. Therefore, $4,800 ($40 x 10 x 12) is treated as compensation expense.
Calculation of Amount Subject to Tax:
For organizations that own or lease all or a portion of one or more parking facilities where its employees park, the § 274(a)(4) disallowance may be calculated using any reasonable method. Using the value of employee parking to determine expenses allocable to employee parking in a parking facility owned or leased by the taxpayer is not a reasonable method.
A “parking facility” is any indoor or outdoor garage or other structure, as well as parking lots and other areas where employees may park, that is on or near the business premises or near a location where the employee can commute to work. This includes parking lots or garages either owned or leased by organizations. This does not include residential parking. The organization may aggregate the number of spots from multiple lots in the same location but may not aggregate parking spots from different locations.
Expenses that may be included are, but are not exclusive 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. Depreciation is not considered a parking expense for purposes of this notice. Expenses paid for items not located on or in the parking facility, including items related to property next to the parking facility, such as landscaping or lighting, are not included. Note that if an organization has a lease for which the parking is not separately stated, an allocation must be done to calculate the portion of the lease dedicated to the parking spots.
The Notice provided a four-step process that can be relied upon as a safe harbor method to determine the number of parking spot expenses that must be included in UBTI.
Organization B, a church which also runs a school, owns a surface parking lot. B incurs $10,000 of total parking expenses. B'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 B's activities on weekdays, B 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 B's activities on weekends, B usually has approximately 400 congregants parking in the lot in non-reserved spots and 20 employees parking in the lot in non-reserved spots.
Organization C is a hospital that owns a surface parking lot. C incurs $10,000 of total parking expenses. C's parking lot has 500 spots that are used by its patients, visitors, and employees. C has 50 spots reserved for management and has approximately 100 employees parking in the lot in non-reserved spots during the normal operating hours of the hospital.
Organization D owns its own surface parking lot. D incurs $10,000 of total yearly parking expenses. D's parking lot has 500 spots that are used by its customers and employees. D usually has approximately 50 employees parking in the lot in non-reserved spots during normal business hours on a typical business day. D usually has approximately 300 non-reserved parking spots that are empty during normal business hours on a typical business day.
Organization E owns a surface parking lot. E incurs $10,000 of total parking expenses. E's parking lot has 500 spots that are used by its visitors and employees. E usually has approximately 400 employees parking in the lot in non-reserved spots during normal business hours on a typical business day. Additionally, E has 25 spots reserved for nonemployee visitors.
Note that Notice 2018-100 provides tax-exempt organizations a waiver of underpayment of estimated income tax payments required to be made on or before Dec. 17, 2018, to the extent the underpayment of estimated income tax results from the changes to the tax treatment of qualified transportation fringes. This relief is available only to organizations that were not required to file a Form 990-T for the tax year immediately prior to the organization’s first tax year ending after Dec. 31, 2017. 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 the waiver under Notice 2018-100, the tax-exempt organization must write “Notice 2018-100” on the top of its Form 990-T.
All tax-exempt organizations should address their parking situations immediately to determine their exposure under these rules. Documentation is key to supporting an organization’s conclusions as to the amount of parking expenses to be reported.
Finally, there is the possibility of legislative relief. A bill has been proposed in the House of Representatives that calls for a repeal of the Section 512(a)(7) parking rules that relate to non-profits. However, the time to effect passage is limited in this lame duck session of Congress. Whether the new Congress will pass legislation in 2019 providing either prospective or retroactive relief remains uncertain. We will continue to monitor and provide further guidance as needed.
For more information on this topic, or to learn how Baker Tilly tax specialists can help, contact our team.