IRS Provides Update on Nonprofit Parking Expenses
The 2017 Tax Cuts and Jobs Act imposed unrelated business income tax (UBIT) for parking expenses for qualified transportation fringe benefits provided by nonprofits. With the new law impacting the current 2018 tax year, many nonprofits were concerned about the changes and requested more guidance to fully understand the new requirement. The Treasury Department and IRS just issued Notice 2018-99 to help minimize the impact of the tax on nonprofits’ parking-benefit expenses. The IRS is acknowledging that this clarification is falling late in the year so nonprofits can either rely on the new guidance issued or any reasonable method they have already adopted to determine their nondeductible parking expenses.
The IRS implemented a special rule that will enable many employers to retroactively reduce the amount of their nondeductible parking expenses. Employers now have until March 31, 2019 to change their parking arrangements to reduce or eliminate the number of parking spots they reserve for their employees. These changes will apply retroactively to January 1, 2018. Additionally, the IRS announced they will provide estimated tax penalty relief in 2018. For tax-exempt organizations that were not required to file a Form 990-T in the last filing season and did not make estimated tax payments during 2018 (if their tax liability will exceed $1,000), the underpayment of tax penalty will be waived.
The IRS’ notice provided more details to determine the amount of parking expenses that are no longer tax deductible and how the nondeductible parking expenses create or increase unrelated business taxable income.
- If an employer pays a third party an amount for employees to park at the third party’s parking lot or garage, the disallowance (nondeductible amount) is calculated as the employer’s total annual cost of employee parking paid to the third party. If the amount exceeds the monthly limitation on exclusion (for 2018 - $260 per employee), the excess must be treated as wages to the employee. The excess amount is excluded from the disallowance amount. The disallowance is reported as unrelated business taxable income.
- If an employer owns or leases all or a portion of one or more parking facilities where its employees park, the disallowance may be calculated using any reasonable method as the IRS describes in four steps:
- Calculate the disallowance for reserved employee spots – Determine the percentage of reserved employee spots in relation to total parking spots and multiply it by the total parking expenses for the parking facility. This amount is nondeductible.
- Determine the primary use of remaining spots – Identify remaining parking spots in the facility and determine whether primary use is to provide parking to the general public, in which case the remaining total parking expenses are excluded from the disallowance. “General public” includes customers, clients, visitors, individuals delivering goods/services, patients, and students. It does not include employees.
- Calculate the allowance for reserved nonemployee spots – If primary use of remaining parking spots is not to provide parking to general public, employers may identify the number of spots in the parking facility exclusively reserved for nonemployees (visitors and customers). The percentage of reserved nonemployee spots in relation to remaining total parking spots multiplied by the remaining total parking expenses is the amount of the deduction that is allowed.
- Determine remaining use and allocable expenses – After steps 1-3, if any remaining parking expenses are not categorized as deductible or nondeductible, the employer must reasonably determine the employee use of the remaining parking spots during normal business hours and the related expenses allocable to employee parking spots.
The Tax Act requires tax-exempt organizations that have employees to increase their unrelated business taxable income by any amount for which a deduction is not allowable for qualified transportation fringes, any parking facility used in connection with qualified parking or any on-premises athletic facility. Tax-exempt organizations are required to file a Form 990-T if they have gross income of unrelated business taxable income of $1,000 or more.
You can read the IRS notice here, which provides examples related to this new guidance: https://www.irs.gov/pub/irs-drop/n-18-99.pdf
You can read our previous blog article on this topic: https://www.herbein.com/blog/tax-cut-and-jobs-act-nonprofit-fringe-benefits
Please feel free to contact us if you have any questions about these changes or options for complying with the new requirements for your organization at firstname.lastname@example.org.
Article written by Justine Bauer.