Many not-for-profits organizations have been concerned about the taxability of parking and transportation benefits as a result of the Tax Cuts and Jobs Act. Fortunately, the IRS recently issued interim guidance around the treatment of these benefits incurred after December 31, 2017. The new rules will help you determine the amount of parking expenses that are subject to unrelated business income tax (UBIT).
Reducing or Eliminating UBIT for Parking
Under a special rule, employers will have until March 31, 2019 to change their parking arrangements, potentially enabling them to reduce or eliminate potential UBIT with respect to parking fringes. And it may be possible to avoid having to file a Form 990-T, Exempt Organization Business Income Tax Return, altogether.
The IRS also announced that it will provide estimated tax penalty relief in 2018 to some tax-exempt organizations that offer these benefits and were not required to file a Form 990-T in their prior filing season.
Determining What Will be Taxed
Here are a few scenarios that will help you understand the amounts subject to the tax:
Not-for-Profit Pays a Third Party for Employee Parking Spots
If the Organization pays a third party an amount so that its employees may park at the third party’s parking lot or garage, this amount is now considered UBIT.
Not-for-Profit Owns or Leases All or a Portion of a Parking Facility
Until further guidance is issued, if the Organization owns or leases all or a portion of one or more parking facilities where its employees park, the Organization must use a reasonable method to determine what amount, if any, may be considered UBIT. If you don’t know what reasonable method to use, the IRS has developed a 4 Step Method:
- Step 1. Calculate the percentage of reserved employee spots – these are parking spaces exclusively reserved for your employees. So, if the total parking facility the Organizations owns or leases has 100 spaces, and 20 are reserved for your employees – this is 20/100 or 20%. Then, multiply this percentage by the Organization’s total parking expense for the parking facility. IMPORTANT NOTE: Until March 31, 2019, NPFs that have reserved employee spots may change their parking arrangements, including changing signage, access, etc., to decrease or eliminate their reserved employee spots and treat those parking spots as not reserved employee spots retroactively to January 1, 2018.
- Step 2. Determine the primary use of remaining spots via the “primary use test”. The Organization may identify the remaining parking spots in the parking facility and determine whether their primary use is to provide parking to the general public. “Primary use” means greater than 50% of actual or estimated usage of the parking spots in the parking facility during the normal hours of the organization’s activities on a typical day. If the primary use of the remaining parking spots in the parking facility is to provide parking to the general public, then the remaining total parking expenses for the parking facility are not considered UBIT.
- Step 3. Calculate the allowance for reserved nonemployee spots – these spots are exclusively reserved for visitors, customers, etc. This applies if the primary use of an Organization’s remaining parking spots is not to provide parking to the general public.
- Step 4. Determine remaining use and allocable expenses. If the not-for-profit completes Steps 1-3 above and has any remaining parking expenses not specifically addressed, the organization must reasonably determine the employee use of the remaining parking spots during the normal hours of the organization’s activities on a typical day, and the related expenses allocable to employee parking spots. Methods to determine employee use of the remaining parking spots may include specifically identifying the number of employee spots based on actual or estimated usage.