The Tax Cuts and Jobs Act of 2017 (“TCJA”) disallowed a deduction for a qualified transportation fringe (QTF) expenses, including parking provided by a for-profit employer to its employees. [Internal Revenue Code Sec. 274(a)(1)] As a result, for parity purposes, a tax-exempt employer is now required to increase its unrelated business taxable income (“UBTI”) by the amount of parking expenses that would be nondeductible by a taxable employer. [Code Sec. 512(a)(7)]
The Internal Revenue Service along with the Treasury Department issued highly-anticipated interim guidance, Notice 2018-99, on the determination of (1) the QTF parking expenses that are no longer deductible under Section 274(a)(1); and (2) the increase in UBTI resulting from the nondeductibility of those expenses.
Based on Notice 2018-99, the determination of the nondeductible parking expense (i.e., the amount included as UBTI for a tax-exempt entity) is based on the costs paid or incurred for parking and not on the value of the parking provided to the employee. Specifically, the calculation is dependent upon whether (1) the employer pays a third party for employee parking; or (2) the employer owns or leases the parking facility.
Third-Party Parking Expenses: Amounts paid by a tax-exempt employer to a third party for employee parking constitutes UBTI. However, if the amount paid by an employer exceeds the monthly exclusion limitation ($260 per month per employee for 2018), the excess amount is treated as compensation to the employee and must be included on the employee’s W-2. Any amounts included on the employee’s W-2 are not required to be reported by the employer as UBTI.
Employer-Owned/Leased Parking Facility: If the tax-exempt employer owns or leases a parking facility, it is permitted to use any reasonable method to calculate expenses allocable to employee parking. (See below for a discussion of allocation of expenses.) Total parking expenses include the following: repairs, maintenance, utility costs, insurance, property taxes, interest, snow/ice removal, leaf removal, trash removal, cleaning, landscaping costs, parking lot attendant fees, security, and rent or lease payments. Fortunately, depreciation is excluded from the definition of a parking “expense” (i.e., not UBTI) which significantly reduces the tax liability of nonprofit owners of parking facilities.
Reasonable Method for Allocation of Expenses
Notice 2018-99 provides the following a 4-step methodology as a reasonable method to allocate expenses when a parking facility is owned/leased by a tax-exempt employer:
Step 1: Reserved Parking Spots for Employees
To illustrate this point, suppose that a tax-exempt employer incurs $10,000 of total parking expenses for a facility that has 500 spaces. If the employer reserves 50 spots for employee parking, UBTI would be $1,000 ($10,000 x 50/500).
Step 2: Primary Use of Remaining Spots
If the primary use of the remaining spots is for the general public, the remainder of the parking expenses would not be included as UBTI. In general, the “primary use” test is satisfied if use by the general public exceeds 50% of the actual usage of those spots. Parking spaces available to the general public are typically those used by customers, clients, visitors, and individuals delivering goods or services.
As an example, suppose that a tax-exempt employer owns a parking facility with 500 spaces, with no employee-reserved parking. Employees typically utilize 50 spots, with the remaining spots usually used by visitors. Since use by the general public exceeds 50%, the primary use test is satisfied. Accordingly, the expenses for the parking facility would be excluded from UBTI.
Step 3: Reserved Parking Spots for Non-Employees
If the organization fails to satisfy the primary use test in Step 2, then the parking expenses attributable to spots reserved for non-employees (i.e., visitors, patients, etc.) are excluded from UBTI.
Step 4: Remaining Parking Spots
Any remaining parking expenses are allocated based on the usage of the facility during the normal hours of an exempt organization’s typical day. In essence, the employer determines the number of the remaining parking spaces that are utilized by employees during a typical day and calculates the percentage of employee use. This percentage is then multiplied by the remaining costs of the facility to compute the amount to be included as UBTI.
Waiver of Underpayment Penalty
Along with Notice 2018-99, the IRS issued Notice 2018-100, which waives the underpayment penalty for organizations that have UBTI as a result of Section 512(a)(7), but which have not made estimated tax payments.
Notice 2018-99 provides welcomed guidance regarding employee parking and UBTI. Although depreciation costs are not considered as parking expenses, tax-exempt organizations should analyze expenses associated with any parking facility in order to appropriately calculate UBTI.
Further, if an organization offers reserved spaces for employees, it may wish to decrease or eliminate reserved employee parking in order to minimize UBTI. The Notice includes a transition rule permitting a modification in employee reserve spot designation. Specifically, a change made by March 31, 2019 is applied retroactively to January 1, 2018.
We Can Help
For more information on how Elliott Davis can help, contact, Janice Ratica, Principal, Nonprofit Tax Services Leader or Denise Hill, Senior Manager, Nonprofit Tax Services.
The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.