To learn how this change affects for-profit entities, click here.
I’ll admit it—every year without fail, my wife and I venture out to the Maine Mall on Black Friday. To me, the most frustrating aspect of the entire day isn’t the long lines, the masses of people shuffling through the mall atriums, or even the flood of impatient shoppers.
The most frustrating aspect of the day, without question, is parking. I find myself hopelessly wandering through the long corridors of packed spaces full with the cars of people who managed to get up earlier than we did. And I’m not alone in my struggle.
Nonprofit organizations throughout the country have been experiencing their own version of parking woes and feelings of hopelessness since the passing of the Tax Cuts and Jobs Act (TCJA) last December. One of the many provisions added by this sweeping tax legislation was Internal Revenue Code Section 512(a)(7). Yesterday, the IRS issued its long-awaited guidance on this code section in the form of Notice 2018-99.
Despite the long waits and frustrations shared by many, perhaps NFPs will find this Notice to be a good deal for them as well.
It’s important to note the guidance issued yesterday was a notice—not a Revenue Procedure or some other substantive legislation. While it can—and should be—relied upon for the time being, the Notice is open to public comment and subject to change.
Section 512(a)(7) states that nonprofit organizations will now be subject to unrelated business income tax (UBIT) for certain disallowed qualified transportation fringe benefits, including items such as a commuter highway vehicle, transit passes, qualified parking, and on-premises athletic facilities. Of course, the largest item in that group of disallowed fringes and the one drawing the most ire from the non-profit community as a whole is qualified parking.
What is qualified parking?
Qualified parking is defined 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. In a nutshell, if you provide parking to your employees, be it through a third-party parking garage, or a parking lot your organization either owns or leases, the organization is subject to UBIT on the cost of providing this benefit.
Notice 2018-99 identifies two separate categories regarding qualified parking:
- Organizations that pay a third party for employee parking spots
- Organizations that own or lease all or a portion of a parking facility
The majority of organizations tend to fall into category #2, so we’ll start there.
Organizations that own or lease all or a portion of a parking facility
There is a four-step approach to determining whether or not you have taxable costs (UBI) related to providing employees with parking if you own or lease a portion of your parking lot. Those steps are as follows:
STEP 1
Calculate the cost of reserved employee spots. All spots reserved by specific signage or segregated by a barrier or limited access for employee parking only are considered reserved employee spots. The percentage of reserved employee spots in relation to total parking spots, multiplied by the total parking costs results in taxable UBI. Skip this step if the organization has no reserved employee spots.
Planning tip: Organizations have until March 31, 2019, to change parking arrangements to decrease or eliminate reserved employee parking spots and treat those spots as non-reserved retroactively to January 1, 2018. This is a significant opportunity for organizations to greatly reduce their UBI tax burden should they so choose to remove “employee only” parking spaces from their respective parking lots.
STEP 2
Determine the primary use of the remaining parking spots. If the primary use of the remaining parking spots is to provide parking to the general public, then the remaining total parking costs are exempted from the UBI tax.
Primary use is defined in the Notice as greater than 50% of actual or estimated usage, tested during normal business hours on a typical business day. The general public includes customers, clients, visitors, individuals delivering goods, patients of a health care facility, students of an educational facility, and congregants of a religious organization. The general public does not include employees, partners, or independent contractors of the organization.
STEP 3
Calculate the allowance for specifically reserved nonemployee spots. All spots reserved by specific signage or segregated by a barrier or limited access for nonemployee parking (i.e., Customer Parking Only) are considered reserved nonemployee spots. The percentage of reserved nonemployee spots in relation to remaining total parking spots, multiplied by the remaining total parking costs is excluded from taxable UBI. Skip this step if the organization has no reserved nonemployee spots.
STEP 4
Determine remaining use and allocable expenses. After completing steps 1-3, any remaining parking expenses are allocated on a reasonably determined basis of use by employees during normal business hours on a typical business day.
Example: A hospital owns a parking lot adjacent to its building and incurs $10,000 of total parking expenses. The parking lot has 500 total spots used by patients, visitors, and employees. 50 spots are reserved for management and approximately 100 employees park in the lot in non-reserved spots during the normal operating hours of the hospital.
STEP 1
As 50 spots are reserved for management employees, $1,000 ((50/500) x $10,000 = $1,000) is taxable as UBI.
STEP 2
The primary use of the remainder of the parking lot is to provide parking to the general public because 78% (350/450 = 78%) of the remaining spots in the lot are open to the public. Therefore, all of the remaining expenses allocable to the 450 spots are exempted from taxation, and only $1,000 will be considered UBI.
In the example above, if none of the parking spots were reserved, the primary use of the parking lot would be to provide parking to the general public because 70% (350/500 = 70%) of the spots are open to the public (primary use is > 50%). In this situation, none of the parking costs would be subject to UBI tax.
What is a parking facility?
The term “parking facility” includes indoor and outdoor garages and other structures, as well as parking lots and other areas, where employees may park on or near the business premises or near a location from which an employee commutes to work.
What expenses are included?
Parking expenses include (but are not limited to) repairs, maintenance, utility costs, insurance, property taxes, interest, snow and ice removal, leaf 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 very important distinguishment in the Notice states that depreciation is NOT to be included as a parking expense. This is certainly welcome news and a departure from what most practitioners and clients expected. Expenses paid for items not located on or in the parking facility are also not included (i.e., landscaping or lighting next to the parking facility).
In lieu of further guidance, organizations that either own or lease their own lot may use any reasonable method to determine the amount of expenses related to providing parking. The four-step method described above is deemed to be a reasonable method. Using the value of employee parking to determine expenses allocable to employee parking in a parking facility owned or leased by the taxpayer is not considered a reasonable method.
Organizations that pay a third party for employee parking spots
The costs paid to a third party for employee parking, up to the IRC Section 132(f)(2) limitation (which is currently $260 per month), are taxable as unrelated business income (UBI). Any excess over the limitation is taxable compensation to the employee.
For example, an organization pays $300 per person per month for its five employees to park in a garage across the street for the entire year. At the end of the year, the organization will pay UBI tax on $14,600 ($260 x 5 employees x 12 months), less the $1,000 specific UBI exclusion. The remaining $40/month ($480 per employee) is to be reported as taxable compensation to the employee.
A few other notes:
- Notice 2018-99 reiterated that UBI generated from disallowed qualified transportation fringe benefits does not constitute a separate line of business for purposes of UBI siloing. This topic was originally covered in Notice 2018-67 (my write-up on that Notice can be found here).
- The $1,000 specific exclusion from UBI still applies. Said another way, if the amount you compute as taxable UBI related to parking is $1,000 or less and the organization has no other UBI activities, then the organization has no UBI and therefore no Form 990-T filing requirement.
- Section 512(a)(7) mentions on-premises athletic facilities as one of the disallowed fringe benefits triggering UBI to nonprofit organizations. However, the Tax Cuts and Jobs Act did not include a corresponding change disallowing deductions generally for on-premises athletic facilities.
Accordingly, a deduction for expenses paid or incurred for on-premises athletic facilities is not considered a disallowed fringe if the athletic facility is primarily for the benefit of the tax-exempt organization's employees and does not discriminate in favor of highly compensated employees. In short, if you have an on-premises athletic facility and do not discriminate who has access to the facility, the organization would not be subject to UBI regarding this particular benefit.
- Notice 2018-100, also issued yesterday, provides relief from estimated tax penalties for organizations that were required to make estimated tax payments on or before December 17, 2018. The Notice does not address penalty relief from other penalties such as failure to timely file Form 990-T or any taxes owed with Form 990-T, only penalties stemming from estimated tax payments due on or before December 17, 2018.
Notice 2018-99 overall is a welcome sight and provides a good baseline as to how to go about determining an organization’s exposure to UBI regarding qualified transportation fringe benefits. During this holiday season, nonprofit organizations should take a few moments to reflect on the past year and count their blessings—and their parking spaces!
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