Tax Brief: Parking Fringe and Unrelated Business Taxable Income
It is important that tax-exempt organizations be familiar with the key provisions of the Tax Cuts and Jobs Act (the Act) with respect to qualified transportation fringes (QTFs), as well as how the Act and IRS Notice 2018-99 affect these organizations.
As amended by the Act, effective for amounts paid or incurred after December 31, 2017, §274(a)(4) of the Internal Revenue Code (the Code) generally disallows a deduction for expenses with respect to QTFs provided by taxpayers to their employees, and § 512(a)(7) generally provides that a tax-exempt organization’s unrelated business taxable income (UBTI) is increased by the amount of the QTF expense that is nondeductible under § 274.
QTFs are defined by the Code to include: (1) transportation in a commuter highway vehicle between the employee’s residence and place of employment, (2) any transit pass, and (3) qualified parking. Qualified parking is defined in the Code as “parking provided to an employee on or near the business premises of the employer or on or near a location from which the employee commutes to work.”
The IRS released Notice 2018-99 (the Notice) to provide interim guidance for taxpayers to determine the amount of parking expenses for QTFs that is nondeductible under § 274(a)(4) of the Code and for tax-exempt organizations to determine the corresponding increase in the amount of UBTI under § 512(a)(7) attributable to the nondeductible parking expenses.
Whether the tax-exempt organization pays a third party specifically for employee parking spots, or owns or leases parking spots, there is the potential for QTF expense to be considered UBTI. Determination of the amount of the QTF expense is relatively straight forward when the tax-exempt organization is paying a third party specifically for employee parking spots; however, it is more complicated to determine the QTF expense when the parking is built into a lease of a building or when the parking lot is owned by the organization.
Let’s look at two common scenarios and their effect on UBTI for tax-exempt organizations.
Tax-exempt organization pays a third party for employee parking spots:
If a taxpayer pays a third party an amount in order to grant its employees the ability to park at the party’s parking lot or garage, the disallowance (or UBTI) is generally calculated as the taxpayer’s total annual cost of employee parking paid to the third party. If the amount paid exceeds the monthly limitation as defined by the Code ($260 per employee per month for 2018), then the excess is not UBTI, but instead should be treated as compensation and wages to the employee. In this
Scenario 2: Tax-exempt organization owns or leases all or a portion of a parking facility/lot:
In the case of a tax-exempt organization that owns or leases parking, the amount of the QTF expense is much more difficult to determine. Before the tax-exempt organization goes through the process of determining the QTF expense, the organization should first determine if there is indeed any disallowance (potential UBTI) of QTF expenses. The Notice explains that until further guidance is issued, if a taxpayer owns or leases all or a portion of one or more parking facilities where its employees park, the amount of the disallowance may be calculated using any reasonable method. The Notice goes on to describe the following methodology that is deemed to be a reasonable method.
STEP 1: Calculate the disallowance for reserved employee spots
The taxpayer must identify the number of parking spots, if any, that are exclusively reserved for employees. Parking spots with signage such as “employee parking only” or a separate parking, segregated by an entrance barrier or for which entry is limited to employees, is considered reserved employee parking. If there are no reserved employee spots, move on to Step 2.
If there are reserved employee parking spots, the taxpayer must then determine the percentage of reserved employee spots in relation to total parking spots. That percentage is then multiplied by the QTF expense (see Step 5) resulting in the amount that is considered UBTI for reserved employee spots. Then move to Step 2.
NOTE: Until March 31, 2019, taxpayers that have reserved employee spots as defined in this notice may change their parking arrangements (changing signage, access, etc.) to decrease or eliminate their reserved employee spots and treat those parking spots as not reserved employee spots for purposes of this notice retroactively to January 1, 2018.
STEP 2: Determine the primary use of remaining spots (the “primary use test”)
The taxpayer may then identify the remaining parking spots and determine whether the primary use is to provide parking to the general public. If the primary use (greater than 50% of actual or estimated usage) of the remaining parking spots is to provide parking to the general public, as defined below, then the remaining total parking expenses are not considered UBTI.
Primary use of the parking spots is tested during the normal hours of the tax-exempt organization’s activities on a typical day. Non-reserved parking spots that are available to the general public but empty during normal hours of the tax-exempt organization’s activities on a typical day, are treated as provided to the general public. In addition, 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. “General public” includes, but is not limited to, customers, clients, visitors, individuals delivering goods or services to the taxpayer, patients of a health care facility, students of an educational institution, and congregants of a religious organization. The general public does not include employees, partners or independent contractors of the taxpayer.
If the primary use of the remaining parking spots is determined to be for the general public, then there is no UBTI for the expenses related to those parking spots. If the primary use, as determined in this step, is not to provide parking to the general public, move to Step 3.
STEP 3: Calculate the allowance for reserved nonemployee spots
If the primary use of a taxpayer’s remaining parking spots is not to provide parking to the general public, the taxpayer may identify the number of spots in the parking facility, or the taxpayer’s portion thereof, exclusively reserved for nonemployees. These reserved spots need to be designated in some way such as “Customer parking only” signage. A taxpayer that has no reserved nonemployee spots may go to Step 4.
If the taxpayer has reserved nonemployee spots, these spots will be removed from the calculation performed in Step 4 for the employee use of parking spots. Move to step 4.
STEP 4: Determine remaining use and allocable expenses
If the taxpayer completes Steps 1-3 in the methodology above and has any remaining parking expenses not specifically categorized as deductible or nondeductible, the taxpayer must reasonably determine the employee use of the remaining parking spots during normal hours of the exempt organization’s activities on a typical day, and the related expenses allocable to employee parking spots. Methods of determining employee use of the remaining parking spots may include specifically identifying the number of employee spots based on actual or estimated usage. Actual or estimated usage may be based on the number of spots, the number of employees, the hours of use, or other measures. The percentage of the spots deemed to be for employee use is then multiplied by the QTF expense (see Step 5) resulting in the amount that is considered UBTI. This amount is added to any amount from Step 1 resulting in total UBTI. Move to step 5.
STEP 5: Determine the QTF expenses
Determining the QTF expenses may be difficult for some organizations. The Notice provides some guidance. For purposes of the Notice, “total parking expenses” include, but are not limited to, repairs, maintenance, utility costs, insurance, property taxes, interest, snow and ice removal, leaf removal, trash removal, cleaning, landscape costs, parking lot attendant expenses, security, and rent or lease payments or a portion of a rent or lease payment (if not broken out separately). A deduction for an allowance for depreciation on a parking structure owned by a taxpayer and used for parking by the taxpayer’s employees is an allowance for the exhaustion, wear and tear, and obsolescence of property, and not a parking expense for purposes of the Notice. The determination of the QTF should take these costs into consideration and rely on a reasonable methodology that is documented at the time the costs are calculated.
See IRS Notice 2018-99 for additional details and helpful examples.
This article is meant to be a resource and provide tools to assist your organization. Please consult your tax advisor regarding your specific tax situation.