Learn more about the guidance and examples for calculating the nondeductible portion of parking expenses provided by the IRS for tax-exempt organizations.
The IRS has provided guidance and examples for calculating the nondeductible portion of parking expenses. In addition, the IRS has provided guidance to tax-exempt organizations to help determine how unrelated business taxable income (UBTI) will be increased by the nondeductible amount of such fringe benefit expenses paid or incurred.
Tax-exempt organizations that provide on-site parking for their employees will now need to answer two threshold questions. And they may not be happy with the result.
If tax-exempt employers are not surprised by the unrelated business tax they may owe this year for providing pre-tax or free parking to their employees, they’ll definitely be surprised at the complexity they’ll face in the computation.
Tax legislation passed late in 2017 disallows any expenses for qualified transportation fringe benefits, such as employee parking, as tax deductions for commercial businesses effective for amounts paid or incurred after December 31, 2017. The tax law provides similarly that tax-exempt organizations will need to increase their unrelated business taxable income by the amount that is now nondeductible.
On December 10, 2018 the Internal Revenue Service issued interim guidance regarding a four-step safe harbor method to calculate the amount to be added to a tax-exempt organization’s unrelated business income resulting from providing parking for employees. This guidance, Notice 2018-99, including 10 examples and 24 pages, is meant to help clarify the new provision from the Tax Cuts and Jobs Act that has baffled tax-exempt organizations and their tax advisors since passage in December of 2017.
The tax community had been hoping that, similar to the fringe benefit tax treatment for employees, if there’s no market value for the parking, then the taxable amount for the employer also would be zero. The most disappointing item in the guidance is that it’s not considered a reasonable method to use the fair market value of the parking —rather, it’s based on the expenses.
The total parking expenses for this purpose include, but are not limited to:
There are a few positive items in the guidance. For one thing, depreciation is not included in the expenses for the parking benefit. Another favorable item clarified in the notice is that, if there’s a market value for the parking, the portion reported as taxable income to employees, if any, is not included in the organization’s parking expenses. Taxable income to employees is the amount by which the fair market value of the parking exceeds the maximum monthly exclusion amount for each employee for parking. The maximum monthly exclusion for each employee for parking is $260 per month for 2018 and $265 for 2019. Any excess market value from this calculation is taxable income to employees, and not parking expense for the employer.
The parking is not considered to be a separate trade or business but is an addition to unrelated business taxable income. Net operating losses arising in tax years beginning before January 1, 2018 may be used to offset this taxable income. And, as always, there is a special deduction of $1,000 allowed, so if the total unrelated business taxable income including the amount for the parking is less than $1,000, there will not be any unrelated business income tax due.
The IRS guidance outlines four steps for the calculation of the addition to unrelated business income:
Step 1) Calculate the amount for reserved employee parking spots (defined below).
Step 2) Determine the primary (more than 50%) use of the remaining spots (whether for employees or nonemployees).
If the determination of the primary use test results in more than 50% of the remaining spots for the public, you can stop here. Otherwise, go to step 3.
Step 3) Calculate the amount for reserved nonemployee parking spots.
Step 4) If the organization has any remaining parking spots not categorized in Steps 1-3, it must reasonably determine employee use of those spots during the exempt organization’s normal activities on a typical day.
Reserved employee parking spots means the number of the organization’s spots that are exclusively reserved for its employees by various methods including, but not limited to, specific signage, such as “Employee Parking Only” or a separate facility or portion of a facility segregated by a barrier to entry or limited by terms of access.
The IRS has provided an opportunity in Notice 2018-99 for a retroactive election, which would affect Step 1, above. By March 31, 2019, organizations can elect to change employee reserved parking arrangements to decrease or eliminate reserved employee parking and consider those to be unassigned employee parking spots retroactively back to January 1, 2018.
There remains difficulty in allocating costs for parking facilities as expenses are often combined with building costs. It’s especially difficult if a lease agreement does not contain an allocation of a portion of the lease payment for parking.
The IRS guidance issued is just interim guidance at this point. Taxpayers may use any reasonable method in calculating the addition to unrelated business income and may rely on the notice. The IRS is requesting comments from the public by February 22, 2019, but the guidance can be used as a reasonable interpretation of the Tax Cuts and Jobs Act provision until regulations are issued.
As with all of tax reform, there are “winners” and “losers” — and if legislation is not passed to remove this new tax law on employee parking, this provision certainly is not creating any “winners”!
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