On December 10, 2018, the IRS issued long-awaited guidance on the application of one of the new tax provisions added by the Tax Cuts and Jobs Act. This provision under the Act is effective January 1, 2018. Notice 2018-99 provides guidance for tax-exempt entities on how to compute the additional Unrelated Business Taxable Income (UBTI) generated related to parking provided to employees under IRC Section 512(a)(7).
This section of the Internal Revenue Code apply to the costs incurred by tax-exempt employers in providing Qualified Transportation Fringes (QTFs). This applies even if the tax-exempt entity does not charge employees for parking, that charge is below the market value employees would have to pay to park elsewhere in the area or employees pay for parking on a pre-tax basis.
The method of determining the amount to be included in UBTI for a tax-exempt entity depends on whether the employer pays a third party to provide parking or if the tax-exempt entity owns or leases a parking facility (or a portion thereof).
If the tax-exempt entity pays a third party to provide parking to employees, either through a separate arrangement or through a lease agreement, the amount to be included in UBTI is the amount paid to the third party for employee parking up to the parking benefit exclusion amount ($260 per month in 2018). Amounts in excess of $260 per month are to be included in the employee’s taxable income; therefore, these amounts are not included in UBTI of tax-exempt entities. It is important to review the terms of your facility lease agreement to determine if the cost of parking is specifically stated or if it is included within your overall lease payment. If the latter, the tax-exempt entity will need to determine a reasonable allocation of the overall lease payment to parking, which should be included in UBTI for the tax-exempt entity up to the threshold noted above.
If the tax-exempt entity owns all or a portion of a parking facility, any reasonable method may be used to calculate the amount to be included as UBTI. However, the Notice does state that using the market value of parking to determine the cost is not a reasonable method. Rather, according to the Notice, parking expenses include repairs, maintenance, utilities, insurance, property taxes, interest, snow and ice removal, leaf removal, cleaning, landscape costs, parking lot attendant expenses, and security. Depreciation is not considered an expense of providing parking.
The Notice provides a four-step method that is deemed to be a reasonable allocation of costs. The cost of spaces reserved for employees is 100% UBTI. Parking reserved for employees can be denoted by signs, barriers limiting access or other methods. The Notice states that if signage, barriers, etc. indicating employee-reserved spots are removed by March 31, 2019, they then can be treated as “not reserved” retroactive to January 1, 2018, which could reduce the UBTI includible amount for tax-exempt entities depending on the degree of usage by nonemployees.
In addition, if more than 50% of the total parking spots (other than spaces reserved for employees) are normally used by the general public (e.g. clients, customers, visitors, students, congregants, etc.), none of the entity’s parking expense for non-reserved parking spots should be included in UBTI.
In essence, if less than 50% of the parking spots are normally used by non-employees, the amount required to be included in UBTI would be reasonable expenses allocated to parking spots specifically designated for employees and the employee allocable portion of remaining parking spots.
For tax-exempt entities, the guidance clarifies that the amount included in UBTI related to parking provided for employees is not considered an unrelated trade or business. Based on this determination, until final regulations are issued, a tax-exempt entity with only one unrelated trade or business can potentially use a loss from that unrelated trade or business to reduce the UBTI related to providing parking to employees. A net operating loss (NOL) generated in a year beginning before January 1, 2018 can also be used to reduce the UBTI resulting from providing parking to employees.
A companion notice, Notice 2018-100, waives underpayment of estimated tax penalties for tax-exempt entities that did not file Form 990-T for its year beginning in 2017 for payments due before December 18, 2018. Fiscal year tax-exempt entities should consider whether estimates will be required in 2019 for their tax years that began in 2018. Note that for the quarter beginning January 1, 2019, the interest rate on underpayments is generally 6% (increasing from 5%).
There are still many unanswered questions related to these provisions of the new tax law. Please contact one of RubinBrown’s Not-For-Profit Services Group or tax professionals to further discuss how these rules may impact your organization.
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