Effective January 1, 2018, the Tax Cut and Jobs Act of 2017 required that all tax-exempt organizations include any amounts paid or incurred for Qualified Transportation Fringe Benefits (QTF) and on-site athletic facilities as Unrelated Business Taxable Income (UBTI). However, the Act does not address how to determine the amount of QTF expense that should be treated as an increase to UBTI. This law change will affect most tax-exempt organizations, including educational institutions and churches. The Act would also potentially affect the fiscal year 2018 filers causing them to bifurcate any expenses incurred after December 31, 2017. The IRS has now issued Notice 2018-99 to provide interim guidance for taxpayers to determine the amount of parking expenses that should be treated as an increase to UBTI.
The IRS recognizes that this guidance has come very late in the year and that taxpayers may have already adopted a reasonable method of calculating the nondeductible expenses. Organizations may continue to use other reasonable methods or rely on this guidance until further guidance is issued. The IRS is also providing relief from any tax penalties associated with not paying estimated tax payments on the UBTI if they were not required to file a 990T in the past.
The method for calculating the amounts to be included vary depending on whether the organization pays a third party for parking or owns or leases their building with an adjacent parking facility. If a taxpayer pays a third party for the use of a facility for employee parking, the includible amount is typically the annual cost paid to the third-party vendor for employee parking. However, if this amount exceeds the monthly limitation on exclusion under §132(f)(2) of $260 per employee per month the excess should be treated as compensation to the employee and would not be taxable to the organization as UBTI. For example, if an organization pays $300 per month for parking, per employee for 10 employees, $31,200 (($260 x 10) x 12 = $31,200) would be taxable to the organization as UBTI and $4,800 (($40 x 10) x 12 = $4,800) should be included as compensation to the employee and would not be considered an increase to UBTI for the organization.
If a taxpayer owns or leases all or portion of their parking facility, the amount treated as an increase to UBTI should be calculated using a reasonable method. The QTF under this scenario relates to the expense or cost of the parking facilities and not the value. Parking expenses include but are not limited to; repairs, maintenance, utilities, insurance, taxes, interest, snow or ice removal, leaf or trash removal, cleaning, landscaping, attendant security, rent or lease expense or any reasonable allocation of these amounts. After the parking expenses are determined, the IRS recommends using the following four step method for determining UBTI below:
Step 1. Calculate the disallowance for reserved employee spots.
o The percentage of reserved employee spots should be applied to the total QTF, and the product is UBTI.
o For example, if an organization has $10,000 of QTF and a parking lot of 500 spots and 100 are reserved for employees and managers, 20% of QTF or $2,000 should be treated as an increase to UBTI.
Step 2. Determine the primary use of the remaining spots.
o If the primary use of the remaining parking spots is determined to be used by the general public, then the expenses from remaining parking spots are not required to be included in UBTI. “Primary use” for this purpose means greater than 50% of actual or estimated usage of the remaining non-reserved spots.
o For example, if the organization has $10,000 of QTF and a parking lot of 500 non-reserved spots and approximately 50 employees use the parking facility, 90% of the non-reserved spots are considered used by the general public, and none of the parking expenses would be required to increase UBTI.
Step 3. Calculate the allowance for reserved nonemployee spots.
o The organization may determine a specific number of spots to be used exclusively for nonemployees. None of the parking expenses related to these spots would be required to increase UBTI.
o For example, if the organization has $10,000 of QTF and a parking lot of 500 spots and approximately 25 spots are reserved for nonemployee use, 5% of the total QTF may be excluded from UBTI.
Step 4. Determine the remaining use and allocable expenses.
o If the organization completes Steps 1-3 above and has any remaining parking expenses not specifically categorized as includible or not includible in UBTI, the organization must use a reasonable method to determine the employee use of the remaining parking spots during normal business hours on a typical business day (or, in the case of an exempt organization, during the normal hours of the exempt organization’s activities on a typical day) and the related expenses allocable to employee parking spots. This can be actual usage or an estimate.
We have included here several examples of situations concerning this new law.
A key part of this guidance is a special rule, enabling many employers to retroactively reduce the amount of their nondeductible parking expenses. Under this rule, employers will have until March 31, 2019 to change their parking arrangements to reduce or eliminate the number of parking spots they reserve for their employees. By making this change, many churches, schools, hospitals and other tax-exempt organizations may be able to reduce their associated UBTI.
In some cases, the organization may avoid having to file a Form 990-T, Exempt Organization Business Income Tax Return, altogether. Such a change made in parking arrangements will apply retroactively to January 1, 2018.
This significant change could potentially affect every tax exempt organization in some way. If you think your organization could be affected, please contact your Warren Averett advisor for more information.