One of the biggest questions arising from the passing of the Tax Cuts and Jobs Act (TCJA) involves the add-back of disallowed fringe benefit deductions to an exempt organization’s unrelated business income (UBI) – in particular, parking expenses paid or incurred by the exempt organization for its employees. The IRS has recently released Notice 2018-99 to help clarify how to calculate these parking expenses. Until further guidance is issued, exempt organizations may rely on the guidance in this notice (and provided below) to determine the amount of parking expenses to treat as an increase to UBI.
Parking Expense Addition Determination
Exempt organizations that answer “yes” to the below questions will be required to include parking expenses in unrelated business income:
- Did the exempt organization pay or incur qualified parking expenses on behalf of their employees after December 31, 2017?
- If the organization leases or maintains a parking facility, does the exempt organization have reserved employee parking spots?
- Is the parking facility primarily for employee use (i.e. greater than 50% of actual or estimated usage for unreserved parking spots)?
- Does the exempt organization allow employees to use a flexible spending account to pay for parking costs?
To help you correctly answer each question above, see below for our detailed explanations:
1. Determination of Providing Parking and Parking Expenses Definition
Provided parking may seem only to include any direct payments made by an exempt organization to a third party on employees’ behalf. However, parking can be determined as provided by an employer if the parking expenses are a supplement to an employee’s compensation, either in-kind or through a bona fide cash reimbursement arrangement, or as a compensation reduction agreement (flexible spending accounts). In addition, parking is considered as provided even if the employer owns the parking facility, regardless of the amount of debt outstanding or the fair market value of the property.
To help taxpayers determine the total amount of parking expenses incurred by employers, the IRS has provided the following non-exhaustive list of costs: repairs, maintenance, utility costs, insurance, property taxes, interest, snow/ice removal, leaf removal, trash removal, cleaning, landscape costs, parking lot attendant expenses, and security. Depreciation was specifically noted as not being included within this list. If the exempt organization does not own the parking facility, parking expenses would be calculated as the amount of rent or lease payments or a portion of rent or lease payments (if not broken out separately in the contract) paid to the third party.
2. Reserved Employee Parking Allocation
A taxpayer must determine what amount of provided parking expenses are allocated to reserved employee spots. These are spots that have specific signage for certain employee parking only or even a separate facility (or portion of facility) segregated by a barrier or limited access. The percentage of reserved employee parking spots to the total number of parking spots would be used to determine the allocation of parking expenses for reserved parking spots. This allocation amount would be a direct addition to UBI.
Planning opportunity: Notice 2018-99 allows employers to change their parking arrangements before March 31, 2019, to decrease or eliminate reserved spots (i.e. by removing signage and barriers). This applies retroactively as if in effect at January 1, 2018. This may potentially eliminate any taxable parking for an organization.
3. Primary Use Test of Remaining Parking Spots
For the remaining unreserved parking spots, an exception is allowed if the parking is provided for general public use. Primary use is defined as greater than 50% of actual or estimated usage of the parking spots in the parking facility. The primary use determination needs to be conducted during the normal hours of the exempt organization’s activities on a typical day. Non-reserved parking spots that are available to the general public but empty during the normal hours of the exempt organization’s activities on a typical day are treated as provided to the general public. If the actual or estimated usage of the parking spots varies significantly between days of the week or times of the year, the taxpayer may use any reasonable method to determine the average actual or estimated usage.
If it is determined that greater than 50% of the parking spots are primarily for public use, no further allocations are needed for additional UBI. If less than 50% of the spots are for public use, then the taxpayer must determine the percentage of employee use of the remaining parking spots (if there are reserved employee parking spots). This percentage will be used to determine the direct addition amount for unreserved employee parking spots to UBI.
Form 990-T $1,000 Filing Threshold
The IRS has clarified that the increases to UBI from reserved and unreserved parking spot expenses would still be applied to the $1,000 threshold for filing Form 990-T. Therefore, if the parking expenses additions along with other UBI activity is less than $1,000, no Form 990-T needs to be filed by the exempt organization.
Notice 2018-100 and Additional Help
If you believe your organization would now be liable for a Form 990-T filing after the parking expenses consideration, the IRS has issued Notice 2018-100, which provides some relief from underpayment penalties of taxes due to these parking expenses additions.
Further, we would be remiss if we did not mention The Retirement, Savings, and Other Tax Relief Act of 2018. This tax package would strike the language regarding taxing transportation benefits. At the time of this article, the package has not passed the House or the Senate and should not be relied upon when determining unrelated taxable income for 2018.
If you have further questions surrounding the parking expenses for your organization, please contact your local Blue & Co. advisor for additional help.