Parking Tax: What Are The Implications on Nonprofit Organizations?

By October 16, 2019 March 3rd, 2020 Not-for-Profit, Tax
Parking Tax | Empty Parking Garage

The Tax Cuts and Jobs Act (TCJA) of 2017 brought about significant tax reform. However, one of the more perplexing provisions is that employer-provided parking is now considered unrelated business taxable income (UBTI). Therefore, employer-provided parking is now taxable.

What is the “parking tax”?

Under the TCJA, new Section 274 of the tax code denies employers a deduction for expenses paid or incurred to provide employee parking after December 17, 2017. To establish parity between taxable and tax-exempt organizations and prevent unfair competitive advantages for nonprofits, the TCJA created the new Section 512(a)(7). The new section requires tax-exempt organizations to increase their UBTI by the amount of employee parking expenses that would not be deductible if they were subject to the same deduction disallowance rules as taxable entities. As such, tax-exempt entities must now pay up to 21% on the amount of any disallowed parking expenses.

Additionally, nonprofits are set to pay UBTI benefits only up to the per-employee per-month amount that is tax-free to employers. This was $260 in 2018 and increased to $265 in 2019.

In December 2018, the Internal Revenue Service (IRS) issued Notice 2018-99 to provide guidance on the new “parking tax.” Specifically, the IRS clarified how employers can calculate the tax on qualified parking benefits.

What qualifies as employee parking?

Per Section 512(a)(7), employee parking includes parking provided to an employee on or near the business premises or on or near a location from which the employee commutes to work. For example, employers may allow employees to park for free or at a reduced rate in an employer-owned or leased parking facility such as a parking lot or garage. Another option is paying a third party so employees can park at the third party’s garage or lot. Additional alternatives include reimbursing employees for parking costs or allowing employees to pay for parking on a tax-free basis through a salary reduction arrangement.

How is this different from before?

Prior to the 2017 tax reform laws, qualified transportation fringe benefits (QTF) were deductible as ordinary and necessary business expenses. QTF benefits included commuter highway vehicle rides, free transit passes, parking on business premises and biking expenses. These benefits remain excludible from employee income, except for the bicycle commuting reimbursement.

Under TCJA, though, the amended section 274(a) expressly disallows deductions for the “expense of any qualified transportation fringe provided to the employee of the taxpayer.” Qualified parking is considered a QTF.

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What is unrelated business taxable income?

Unrelated business taxable income (UBTI) is income regularly generated by a tax-exempt organization by means of taxable activities. UBTI is unrelated to the main purpose of the entity, but is necessary for the generation of a small portion of income.

Note that an organization’s purpose is different than its activities. Its purpose is its reason for existence and the basis for qualifications as a tax-exempt organization under Section 501(a) of the Internal Revenue Code (IRC). The activities are the organization’s undertakings and actions.

An exempt organization that has over $1,000 or more of gross income from unrelated business operations must file Form 990-T, Exempt Organization Business Income Tax Return.

Unrelated business income will result in unrelated business income taxes (UBIT) unless an exception or exclusion is available.

Organizations Subject to UBTI Taxes

Nearly all tax-exempt organizations are subject to UBTI requirements. Among these organizations are:

  • Charitable entities such as religious and educational organizations
  • Scientific and research institutions
  • Social welfare organizations
  • Advocacy groups
  • Veterans’ organizations
  • Trade and professional associations
  • Labor organizations
  • Employee benefit funds
  • Fraternal organizations

Organizations not generally subject to unrelated business income taxes include:

  • Corporations organized under Acts of Congress and instrumental to the United States
  • Designated charitable trusts not subject to the tax on private foundations

Potential UBTI Consequences for Nonprofits

Nonprofits can lose their tax-exempt status if the IRS determines that the percentage of their income derived from unrelated business activities is excessive. As of October 2019, there is no designated percentage threshold defined by the IRS. However, they would consider and assess the facts and considerations of each individual case.

This is critical, as many nonprofits rely on their tax-exempt status for funding purposes.

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What are qualified transportation fringe benefits?

The IRC allows employers to offer nontaxable qualified transportation fringe (QTF) benefits. Examples of these benefits include mass transit benefits, van pools, qualified parking and some other commuter benefits.

Prior to tax reform, employers were generally able to deduct the costs for offering employees QTF benefits. As of January 1, 2018, the TCJA eliminated or limited tax deductions for expenses related to QTF benefits.

Qualified parking is defined as parking provided to an employee by an employer:

  • On or near the business premises; or
  • At a location from which the employee commutes to work (including carpool, commuter highway vehicles, mass transit facilities, or transportation provided by any person in the business of transporting persons for compensation or hire).

Parking is provided by the employer if:

  • The parking is located on property owned or leased by the employer
  • The employer pays for the parking
  • The employer reimburses the employee for parking expenses

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What is Notice 2018-99?

In December 2018, the U.S. Department of the Treasury and the IRS announced relaxed rules for nonprofits related to the employee parking tax. The move was intended to ease the new tax burden for churches and other religious organizations, as well as charities that offer employee parking or transportation options.

Notice 2018-99 provides guidance about computing the amount of nondeductible parking expenses, as well as how nonprofits can calculate the amount of expenses subject to UBTI. More specifically, the Notice explains that the employer’s expense of providing the QTF benefit, rather than the value, determines the amount of disallowance under the new tax code laws.

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How do I calculate the new parking tax?

Notice 2018-99 outlined the process to calculate the additional tax based on the “total parking expenses” paid to provide employee parking. Under Sec. 274(a)(4), expenses incurred for providing employee parking that are nondeductible and treated as an increase in unrelated business taxable income. These expenses include but are not limited to: repairs and maintenance, rent or lease payments, interest, insurance, property taxes, landscape costs, utilities, parking attendant and security expenses, cleaning and maintenance such as snow, leaf and trash removal.

If your organization pays a third party for employee parking spaces, the deduction and increase to UBTI is the total annual cost for parking paid to the third party.

However, if your organization owns or leases a parking facility, the IRS provides a four-step “reasonable” methodology for computing the expense:

1. Calculate the disallowance for reserved employee parking.

The taxpayer (employer) must identify the number of parking spots available in the parking facility and the amount exclusively reserved for the taxpayer’s employees. From there, the taxpayer must determine the percentage of reserved employee spots in relation to the total number of parking spaces in the facility. Multiply the percentage by the taxpayer’s total parking expenses to get the amount of nondeductible parking expenses or additional UBIT for a tax-exempt entity.

2. Determine the primary use of the remaining spaces during normal working hours.

The employer must determine whether the primary use (meaning 50% or more) of the remaining parking spaces is for employees or the general public. The general public entails customers, clients, visitors, individuals delivering goods to the taxpayer, patients of a health care facility, students of an educational institution or congregants of a religious organization. The general public does not include employees, partners or independent contractors of the employer.

If the primary use of the remaining spots is for the general public, the remaining expenses are deductible and the employer may skip the next two steps.

3. Calculate the allowance for reserved nonemployee spots.

If the primary use of the remaining spots is not for the general public, then the taxpayer may identify the number of spots in the facility reserved exclusively for nonemployees. Nonemployees include visitors and customers, as well as partners, sole proprietors, and 2% shareholders of S corporations.

From there, the taxpayer determines the percentage of reserved nonemployee spots in relation to the remaining total parking spots and multiplies the percentage by the remaining parking expenses. The total from this calculation is the amount not subject to the section 274(a)(4) disallowance.

4. Determine the remaining use and allocable expenses.

If there are remaining expenses not accounted for in steps 1-3, the employer can allocate them and add them to the amount in step 1 to determine the total taxable expense.

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How has the parking tax affected nonprofits?

There is no getting around the fact that the lost tax deduction yields some tax complexity for employers – and particularly nonprofits. Moving forward, employers should rely on Notice 2018-99 until the IRS or Treasury Department issues further guidance.

Furthermore, nonprofits and other affected organizations should consider changing their parking arrangements and devising other methods to reduce the total parking expenses. Our tax professionals and nonprofit industry group are here to help you determine the most optimal strategy for you and your organization.

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Disclaimer: This material has been prepared for informational purposes only, and is not intended to substitute for obtaining accounting, tax, or financial advice from a professional tax planner or financial planner. All information is provided “as is,” with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information.