IRS Releases Guidance on Taxable Parking Expenses and Provides Relief for Some Organizations
The Tax Cuts and Jobs Act passed by Congress in 2017 (the Act) contains a provision making qualified transportation fringes (QTFs) nondeductible to taxpayers (IRC Section 274(a)(4)). In an attempt to level the playing field, the Act also provides that the amount of these payments made by exempt organizations will be added to the unrelated business taxable income (UBTI) of such organizations beginning on January 1, 2018 (IRC Section 512(a)(7)). Organizations incurring these expenses will now have to report them on Form 990-T and pay applicable taxes. Parking provided for employees is included as a QTF.
The Act does not address how to determine the amount of the amount of QTFs, including parking expense, which is treated as an increase in UBTI. In addition, the Act does not provide relief for organizations not paying estimated tax on such expense in the first year.
On December 10, 2018, the IRS released two notices addressing these issues. Notice 2018-99 addresses determination of the amount of parking expenses for QTFs that is nondeductible for taxpayers or an increase in UBTI for exempt organizations. Notice 2018-100 provides transitional relief for payment of estimated tax for certain organizations.
This notice provides interim guidance for compliance with the new provision and may be relied upon until the IRS issues regulations (which it intends to do). The notice makes it clear that the taxable parking amount relates to the expense of providing the benefit and not to its value.
It is relatively simple to calculate the taxable amount for employer-paid parking in third party facilities and for commuter passes. The amount paid for such benefits is the amount that will be included in UBTI, but only up to the monthly dollar amount limitation under IRC Section 132(a)(5). This amount is $260 for 2018, and $265 for 2019. Amounts over this limitation are taxable compensation to the employee and are not UBTI to the employer. For example, if an employer pays a third party or reimburses the employee $300 per month for an employee parking space or transit passes, only $260 would be taxable to the employer, and the additional $40 would be added to the employee’s taxable compensation reported on Form W-2. Such benefits are also often provided through pre-tax compensation reduction arrangements. The amount of the pre-tax salary reduction is also taxable UBTI to the employer.
It gets more complicated when an employer owns or leases all or a portion of one or more parking facilities where its employees park. Notice 2018-99 makes it clear, until further guidance is issued, that “any reasonable method” may be used for calculating the expense in such a facility. However, using the fair market value of employee parking to determine allocable expenses for employee parking is not considered a reasonable method. For years beginning on or after January 1, 2019, a method that fails to allocate expenses to reserved employee parking spaces cannot be considered a reasonable method. If an employer has more than one parking facility in a geographical location, it may aggregate them; however, if facilities are in more than one location, it cannot aggregate them.
It is important to note that Notice 2018-99 specifically excludes depreciation expense from expenses to be included as UBTI, as it is considered to be a capital expense. Such items as repairs, maintenance, utility costs, snow, ice and leaf removal, cleaning, landscaping, parking lot attendant expenses, security, rent, and lease payments (or a portion thereof) could be considered parking expenses, but this is not an all-inclusive list.
Although any reasonable allocation method may be used, Notice 2018-99 does contain a methodology which the IRS considers to be reasonable, as follows:
First, the percentage of spaces that are specifically reserved for employee parking (via sign or other method) should be calculated and multiplied by the total parking facility expense. The resulting amount will be included in taxable parking expense. However, organizations have until March 31, 2019, to eliminate some or all of their reserved employee parking spaces (e.g., change of signage, etc.), and they will be retroactively considered to be nonemployee reserved spaces as of January 2018. This change may be very favorable to many organizations.
The next step is to determine the primary use of the remaining spaces. Primary use means greater than 50% of actual or estimated usage of the parking facility. Non-reserved employee parking spaces that are available to the general public, but empty during normal business hours on a typical business day, are treated as available to the general public. If this varies significantly on different days, the organization may use any reasonable method to determine average actual or estimated usage. “General public” includes, but is not limited to, customers, clients, visitors, individuals making deliveries or services, patients of a health-care facility, students of an educational institution, and congregants of a religious organization.
Of the spaces not reserved for employees, if any of them are reserved non-employee spots, such as reserved for customers and visitors, then the costs associated with such spots are not includable as UBTI. By definition, such spots cannot be used by employees so cannot be taxable.
After the above calculations are made, a determination must be made of the usage of the remaining spaces (not reserved for employees or reserved for customers/visitors, etc.) by employees. This can be done using any reasonable method. If 50% or less of the remaining usage is by employees, then the primary use of the parking facility is not for employees, and the only taxable usage will be for reserved employee parking spaces. If the employee usage of the remaining spaces is greater than 50%, then it will be considered as being primarily used for employee parking. In this case, the percentage of usage of this portion of the lot will be multiplied by total taxable parking expenses, and this product is considered UBTI and added to any expenses related to reserved employee spaces. This makes the option of getting rid of reserved employee parking spaces before March 31, 2019, very attractive to many organizations: if there are not reserved employee spaces and the overall usage is 50% or more for the general public, then there will be no UBTI from parking expense.
Notice 2018-99 contains several examples of parking arrangements and the resulting tax calculation under this methodology. Keep in mind that the above is only one method that the IRS defines as reasonable — any other reasonable method may also be utilized. Further definitions are also provided for a variety of terms including “employee.” The notice also makes it clear that if total UBTI is under $1,000, then there is no need to file a Form 990-T since there is a statutory exclusion for income below that threshold.
This much shorter notice provides transitional relief for some first time Form 990-T filers. If an organization is filing Form 990-T for the first time only because of transportation fringe benefits, then it will be excused from penalties for not making estimated tax payments for that first year. The organization must still pay the tax by the original due date for filing the return. To claim the waiver, the organization must write “Notice 2018-100” on top of its Form 990-T for the tax year in which it is claiming relief.
Most states follow the Federal taxation rules with regards to UBTI, so most of the states will also be taxing under this provision. However, a few states have “decoupled” from this provision (e.g., New York, North Carolina, and California), and others may follow. Certain other states do not tax UBTI (e.g., Pennsylvania) so will also not be taxing this new source of UBTI.
The rules that these notices address are complex, and many questions still remain unanswered. Please Contact us if you are in need of assistance or have any questions regarding this matter.