One of the changes made to the tax laws by the Tax Cuts and Jobs Act was to disallow a tax deduction for qualified transportation fringe benefits businesses provide to their employees. Qualified transportation fringe benefits (QTFs) include:
Tax exempt organizations did not escape this law change. They are required to increase their unrelated business taxable income (UBTI) by the amount of QTFs that would otherwise be nondeductible if they were a taxable entity.
While the loss of the QTF deductions will affect the tax paid by employers, taxable or not, the QTF-defined benefits are still excluded from an employee’s income up to the limits provided.
There was a problem in applying the new deduction disallowance/UBTI rule. Due to the lack of specific language in the Act, many employers, including tax-exempt organizations, did not have the guidance necessary to determine how the amount of 2018 parking expense that is nondeductible, or treated as an increase in UBTI, was to be calculated.
In response to these guidance questions, the IRS released Notice 2018-99 on December 10. Notice 2018-99 provides interim guidance for employers to use to determine the amount of nondeductible parking expenses or the corresponding increase in UBTI. The notice also specifically states that said guidance can be relied upon until further guidance, most likely in the form of proposed regulations, is issued. Due to the late release of this guidance, taxpayers who have already adopted reasonable methods in 2018 to determine these amounts may continue to use those methods instead of the methods proposed in the guidance.
Special Rule for 2018
The Notice provides an important special rule permitting employers who utilize reserved employee parking spots to retroactively reduce, all the way back to January 1, 2018, the amount of their nondeductible parking expenses or UBTI adjustment. This can be accomplished by changing their parking arrangements to eliminate or reduce the number of reserved employee parking spots if done by March 31, 2019. According to the IRS, this special rule should enable “churches, schools, hospitals and other tax-exempt organizations” to reduce or eliminate their potential increase to UBTI for 2018.
Method for Calculating Nondeductible Parking / UBTI Adjustment
The method for determining the nondeductible amount of parking expenses (and the increase to UBTI) depends on whether the employer pays a third party to provide parking for its employees, or the employer owns or leases a parking facility where its employees park.
If an employer pays a third party for employee parking: the nondeductible parking expense is the employer’s total annual cost for employee parking paid to the third party. Special calculations are necessary if the amount paid to a third party for any employee exceeds the monthly limitation on the amount that can be excluded from employee wages (currently $260/month).
If the employer owns or leases all or a portion of a parking facility: the nondeductible parking expense “may be calculated using any reasonable method.” Using the value of employee parking to determine expenses allocable to employee parking in a parking facility is not a reasonable method of allocation. The Notice provides an alternative “safe-harbor” method that involves the following four-step calculation:
The Notice provides additional details on each of these steps as well as examples illustrating the calculations for both businesses and tax-exempt organizations. Total parking expenses, based on the Notice, should include 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 separately stated). However, parking expenses do not include depreciation.
According to the Notice, IRS officials believe the retroactive elimination of the reserved employee spots and the “primary use” test should minimize or eliminate the amount of UBTI related to parking expenses for many tax-exempt organizations. In addition, exempt organizations are only required to pay tax on unrelated business income in excess of $1,000. It is likely many tax-exempt organizations will not have more than $1,000 of additional UBTI after applying the above calculations and therefore will not be required to file Form 990-T.
To learn more about the calculations required to determine the nondeductible portion, or UBTI increase amount, related to QTF parking expenses, contact your Eide Bailly professional or a member of the Exempt Organization Group for assistance.