The adage goes “there is no such thing as a free lunch.” Perhaps this could be expanded now to be “there’s no such thing as free parking.” Last year’s “Tax Cuts and Jobs Act” (TCJA) heralded sizable tax cuts and expanded CapEx deductions for businesses and a number of changes for Exempt Organizations (EOs). There were several seemingly insignificant provisions that created confusion for EOs after they were enacted, and these changes are coming into focus now as IRS guidance is released. One such provision relates to parking benefits provided by employers to their employees. This parking issue had drawn much attention over the past year, as there was much uncertainty on how the IRS would apply and enforce these changes. The IRS issued advice on December 10, 2018 with Notice 2018-99 (please click here for a copy of this Notice) which offered some guidance.
The TCJA made changes related to “Qualified Transportation Fringes” (“QTFs”) by increasing UBTI (unrelated business taxable income) for the disallowed QTFs that a company provides to its employees. This change applies beginning in 2018 and covers the following:
- It provides that a tax-exempt organization’s UBTI is increased by the amount of the QTF expense that is non-deductible.
- The TCJA did not address, however, how to determine the amount of the QTF expense that is treated as an increase in UBTI.
- It should be noted that there generally is no impact to the employee. Employees are not subject to additional income tax for the parking fringe benefit they receive from an exempt organization. [There is an exception, however, if the amount the company pays to a third party for an employee’s parking exceeds a monthly limitation (which is set at $260 per month for 2018 by the IRS). The excess amount then must be treated by the taxpayer as wages to the employee.]
Again, this was a minor provision in TCJA that has received major fanfare. Various tax-exempt organizations tried to determine how they would calculate this parking adjustment applicable to their employees. There was also some speculation whether there would be any exceptions or other IRS relief, or even if the effective date might be delayed. But, many of these questions were dealt with in the issuance of Notice 2018-99 by the IRS.
IRS Guidance Issued
On December 10, 2018 the IRS issued Notice 2018-99 dealing with QTFs. The notice indicated that the IRS will issue proposed regulations addressing the UBTI amount for exempt organizations (as well as disallowed deductions for businesses). The IRS further stated in Notice 2018-99 that until these regulations are issued, that tax-exempt organizations that own or lease parking facilities where their employees park may use any “reasonable method” (as spelled out in Notice 2018-99) to determine the amount of UBTI.
Notice 2018-99 provides a general discussion outlining the amount of QTF expenses that are disallowed and treated as UBTI for an exempt organization. The following guidelines were offered in this IRS guidance:
- Exempt Organization Pays a Third Party to Provide Employee Parking. Notice 2018-99 states that if the exempt organization pays a third party to exclusively provide parking for its employees, the amount of UBTI is generally calculated as the EO’s total annual cost of employee parking paid to that third party. The EO should know this cost and thus, it should be readily able to determine this disallowed expense.
- Exempt Organization Owns or Leases All or a Portion of a Parking Facility – How does the EO determine “Total Parking Expenses”? Notice 2018-99 further states that total parking expenses under this notice 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).
Good News – A deduction for an allowance for depreciation on a parking structure owned by a taxpayer (the EO) and used for parking by the taxpayer’s employees is an allowance for the exhaustion, wear and tear, and obsolescence of property, and is not a parking expense for purposes of this notice.”
- Exempt Organization Owns or Leases All or a Portion of a Parking Facility – EO can Use the IRS’ Four-Step Safe Harbor Calculation (see below) or any Reasonable Method to Determine its UBTI. It specifies that until further guidance is issued, if an EO owns or leases all or a portion of one or more parking facilities where its employees park, the UBTI amount “may be calculated using any reasonable method.” The four-step safe harbor method is considered reasonable and the Notice provides some useful examples.
- Unreasonable Methods. While the IRS permits a reasonable method to be used to determine the QTF amounts, it also indicates some methods are not reasonable. For instance, the notice states that using the value of employee parking to determine expenses allocable to employee parking is not considered a reasonable method.
- Transition Relief for Changing Designated Reserved Employee Parking Spots. Notice 2018-99 provides a special transition rule that if an EO changes their employee reserved spot designations by March 31, 2019 to make these spots available to everyone, this would be treated as applying retroactively for all of 2018 for purposes of this guidance. EOs are therefore, encouraged to analyze all reserved employee parking spots by March 31, 2019.
Further, Notice 2018-99 provides a four-step safe harbor to determine the amount of the QTF that is disallowed and results in UBTI:
- Step One – Calculate the disallowance for reserved employee spots. Determine the number of reserved employee spots as a percentage of total parking spaces. That percentage of the cost is disallowed and it’s considered UBTI.
- Step Two – Determine the primary use of remaining spots (“primary use test”). Employers need to look at the remaining spots. If more than 50 percent of the spots can be used by the public, none of the expenses attributable to the rest of the parking facility are considered UBTI to exempt organizations.
- Step Three – Calculate the allowance for reserved non-employee spots. If the “primary use” under Step 2 is considered to be for employees (not for the public), the EO then looks at spots reserved for customers and other non-employees. These expenses for public/non-employee parking are always deductible, and thus not UBTI.
- Step Four – Determine remaining use and allocable expenses (if there are spots left over after the first three steps). This step requires the employer to use a reasonable method to determine employee use during normal business hours.
In addition to these steps, the IRS offered some examples in Notice 2018-99 to illustrate how the four-step safe harbor works. Here are a few of the examples taken from Notice 2018-99:
Example 1. Exempt Organization A pays 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’s garage, or $12,000 per year. The $100 per month paid for each employee for parking is excludible as a tax-free fringe benefit, and none of the other exceptions apply. Thus, the entire $12,000 is subject to disallowance and results in UBTI to A.
Example 2. 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 = $200) is the amount of total parking expenses that is nondeductible for reserved employee spots under § 274(a)(4). Thus, under § 512(a)(7), J must increase its UBTI by $200, the amount of the deduction disallowed under § 274(a)(4).
Step 2. Because usage of the parking spots varies 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 = 90%) of the spots are used by the public during the weekdays and 95% (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. Thus, expenses allocable to these spots are excepted from the §274(a) disallowance by §274(e)(7) under the primary use test, and only $200 of the $10,000 is subject to the § 274(a)(4) disallowance. Therefore, only $200 of the expenses for the provision of the QTF will result in an increase to UBTI under § 512(a)(7).
If J does not have gross income from any unrelated trades or businesses of $800 or more included in computing its UBTI (to reach the $1,000 filing threshold), J is not required to file a Form 990-T for that year.
Example 3. 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 during the normal operating hours of the hospital.
Step 1. Because K has 50 reserved spots for employees, $1,000 [(50/500) x
$10,000 = $1,000] is the amount of total parking expenses that is nondeductible for reserved employee spots. Thus, under §512(a)(7), K must increase its UBTI by $1,000, the amount of the deduction disallowed.
Step 2. The primary use of the remainder of K’s parking lot is to provide parking to the public because 78% (350/450 = 78%) of the remaining spots in the lot are open to the public. Thus, expenses allocable to these spots are excepted from disallowance under the primary use test, and only $1,000 is subject to the disallowance. Therefore, only $1,000 of the expenses for the provision of the QTF will result in an increase in UBTI under § 512(a)(7).
K will need to add the $1,000 increase of UBTI under § 512(a)(7) to its gross income from unrelated trades or businesses. K is required to file a Form 990-T because the $1,000 increase to UBTI under §512(a)(7) meets the filing threshold.
Exempt Organizations that offer QTFs for their employees for parking should analyze these new rules spelled out in Notice 2018-99. There may be a disallowed amount treated as UBTI which they need to include with their 2018 tax return. In addition, if they have any reserved spots for certain employees, they might consider the special election needed by March 31, 2019 to remove the special parking privileges. Please contact your Sikich tax advisor with any questions you may have.
Update: Possible Law Change with Parking Fringe Benefits for Exempt Organizations. House Ways and Means Committee Chairman Kevin Brady introduced a year-end tax bill (H.R. 88) on December 17, 2018. Part of the bill would make some technical corrections and other changes related to the TCJA. Once such change would repeal the UBTI tax on QTFs for exempt organizations under Section 512(a)(7). This repeal is not final yet, but is a proposal that may be voted on later this week along with other tax items and year-end budget measures. There is much uncertainty this week as Congress winds up its legislative activities for the year. Stay tuned to Sikich for the latest developments.