On December 20, 2019, a collective sigh of relief replaced the deafening groan emitted from the nonprofit community whenever someone deigned to utter the dreaded phrase “disallowed fringe benefits.”
It seems that Congress finally heard the uproar created by the provision in the Tax Cuts and Jobs Act of 2017 (“Jobs Act”) which required nonprofit organizations to pay Unrelated Business Income Tax (“UBIT”) on parking spaces (and other qualified transportation benefits) provided to their employees. Effective immediately—and retroactively—with the passage of the Taxpayer Certainty and Disaster Tax Relief Act of 2019, the reviled “parking tax” is no longer.
How Did We Get Here?
The Tax Cuts and Jobs Act was the largest and most extensive piece of tax reform legislation to pass since the legendary Tax Reform Act of 1986.
And, few other sections of it garnered as much resistance and backlash as Section 13702, which made certain expenses, which were previously deductible as ordinary business expenses, taxable to the nonprofit employer.
The Jobs Act established Internal Revenue Code Section 512(a)(7), which states:
Unrelated business taxable income of an organization shall be increased by any amount for which a deduction is not allowable under this chapter by reason of section 274 and which is paid or incurred by such organization for any qualified transportation fringe (as defined in section 132(f)), any parking facility used in connection with qualified parking (as defined in section 132(f)(5)(C)), or any on-premises athletic facility (as defined in section 132(j)(4)(B)).
While the Code section does go on to specify that the provision does not apply to expenses that are directly connected to an unrelated trade or business, it provides little else in the form of guidance on implementation of the new legislation or even on the calculation of the increase to the taxpayer’s Unrelated Business Taxable Income (“UBTI”).
In fact, nonprofits were left to their own devices (or to those of their tax advisors) to determine if the law even applied to the organization and, if so, how much of their parking expenses should be allocated to employee use and included on Form 990-T as taxable income.
Although §512(a)(7) promised “such regulations or other guidance as may be necessary or appropriate to carry out the purposes of this paragraph, including regulations or other guidance providing for the appropriate allocation of depreciation and other costs with respect to facilities used for parking or for on-premises athletic facilities,” that guidance would not be issued until nearly a year later with the December 11, 2018 publication of Notice 2018-99.
The Notice provided some, albeit muddled, explanation of what would constitute nondeductible parking expenses for purposes of Form 990-T and set forth a complex and convoluted formula for determining whether parking is truly for “public use” and for allocating expenses—including such disparate and unquantifiable items as the taxable portion of trash removal, benefits for parking lot attendants or energy powering a lamppost—accordingly.
Nonprofits were forced to incur the significant costs of performing these tedious calculations and expense allocations and to get so far into the weeds that they found themselves physically counting and monitoring individual parking spaces and removing or editing existing signage.
(It’s ironic that a piece of legislation drafted to ease the burden on taxpayers and promote administrative efficiency would actually impose such a significant administrative and financial burden on the same taxpayers it was intended to protect.)
The parking tax provision applied to any disallowed fringe benefit expense incurred after December 31, 2017. As such, calendar-year filers were required to report parking-related UBTI on their 2018 Forms 990-T, while fiscal-year filers had to report disallowed fringe benefit expense on the 2017 Form 990-T, if it included activity from any part of 2018.
The nonprofits were also required to pay estimated taxes for 2019 based on the liability incurred in 2018. As with any other type of UBIT, parking tax liability could not be offset with losses from a different unrelated business activity, and penalties and interest would be assessed on late payments or underpayment of estimated tax.
As many affected nonprofits had never bifurcated parking expenses by user of the individual spaces (i.e., employee, visitor or general public), filing an accurate Form 990-T (often for the first time in the history of the organization) proved difficult and frustrating, and the resulting tax liability onerous and burdensome.
Tax professionals and nonprofit executives alike were baffled by the legislation and shocked when it was not repealed at the end of 2018. On the contrary, with the issuance of Notice 2018-99, it appeared it was (very unfortunately) here to stay.
So What Changed?
Notice 2018-99 requested comments on the Notice and on any future guidance pertaining to the legislation, particularly with respect to “determining the use of the parking spots and the related expenses allocable to employee parking.” The general public had until February 22, 2019 to provide feedback. And provide it they did.
The AICPA, Tax Executives Institute, state and local interest groups, professional services firms and even the Association for Commuter Transportation submitted lengthy and detailed objections to the legislation, imploring the Department of the Treasury to repeal the provision or at least delay its implementation until final regulations could be issued.
Perhaps the most compelling of these responses was that of the National Council of Nonprofits, which represents and advocates on behalf of more than 25,000 organizational members across the country. With the goal of “promoting both fairness and tax compliance within the charitable nonprofit community,” the Council explained the unique concerns of its nonprofit constituents, why Notice 2018-99 was insufficient and how the legislation was overly burdensome and inherently unfair.
Finally, two years after the passing of the Jobs Act, Congress listened. As President Trump signed a $1.4 trillion spending package into law on December 20, 2019, the parking tax was repealed.
The repeal of the parking tax legislation is effective immediately and retroactively, meaning nonprofits that paid tax with their fiscal or calendar-year 2018 Forms 990-T may file amended returns for those periods and request a full refund of taxes paid.
In addition, if the nonprofit organization has not already filed its 2019 return, it should now report $0 of UBTI related to disallowed fringe benefits and request a refund of any estimated taxes paid towards the parking tax liability. Because the nonprofit no longer has reportable UBTI from disallowed fringe benefits for these periods, it can also file amended or adjusted state returns and seek refunds of any state taxes paid on federal UBTI.
Warren Averett’s experienced Nonprofit Tax Team is here to celebrate this victory for nonprofits with you and to help your organization recover every dollar of parking tax expense it incurred. So, breathe that sigh of relief and get back to doing what you do best: improving lives and fostering thriving communities.