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:
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.
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:
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.”
Further, Notice 2018-99 provides a four-step safe harbor to determine the amount of the QTF that is disallowed and results in UBTI:
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.
This publication contains general information only and Sikich is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or any other professional advice or services. This publication is not a substitute for such professional advice or services, nor should you use it as a basis for any decision, action or omission that may affect you or your business. Before making any decision, taking any action or omitting an action that may affect you or your business, you should consult a qualified professional advisor. In addition, this publication may contain certain content generated by an artificial intelligence (AI) language model. You acknowledge that Sikich shall not be responsible for any loss sustained by you or any person who relies on this publication.