By Bob Moreland, Tax Senior Manager – Exempt Organizations
MCM CPA’s & Advisors
The Internal Revenue Service has issued interim guidance to help tax-exempt organizations determine the impact of the change in the treatment of employer provided parking. The interim guidance aims to help taxpayers calculate the amount of parking expenses that is no longer tax deductible due to the Tax Cuts and Jobs Act (TCJA) passed into law December 22, 2017. The guidance also is also meant to help tax-exempt organizations and their accountants figure out how the now nondeductible parking expenses can either create or increase unrelated business taxable income, or UBTI for short.
Parking Fringe Expenses
In guidance issued December 10, the IRS addresses the tax treatment of qualified transportation fringe benefits, as modified under the TCJA. In Notice 2018-99, the IRS provides new rules to help (1) taxpayers determine the amount of parking expenses for qualified transportation fringe benefits paid or incurred after December 31, 2017, and (2) exempt organizations determine how these nondeductible expenses can create or increase unrelated business taxable income.
There are two types of calculations. The first is for cases where the employer pays a third party for the use of its parking lot for the employer’s employees. The second is for cases where the employer owns or leases the parking lot.
Employer contracts with third party. When an employer contracts with a third party for the use of the parking lot, the disallowed expense is generally the amount that the employer pays to the third party. However, if that monthly amount exceeds $260 per employee, the employer must treat the excess as wages to the employee. Therefore, the monthly amount more than $260 may be deducted as compensation expense by the employer.
For example, if Employer A pays $300 per month for each of the employer’s ten employees to park, $31,200 (($260 x 10) x 12) would be the disallowed expense. The remaining $4,800 (($40 x 10) x 12) remains deductible as compensation expense.
Employer owns or leases the parking lot. According to the IRS, until it issues further guidance, employers may use any reasonable method to calculate the disallowed expenses in cases where the employer owns or leases the parking lot. The IRS has provided a four-step reasonable method:
- Calculate the disallowance for reserved employee spots.
- Determine the primary use of the remaining spots (for the general public (over 50 percent) or for employees).
- Calculate the allowance for reserved nonemployee spots.
- Determine the remaining use and allocable expenses.
For example, an Employer E, owns a surface parking lot adjacent to its plant. E incurs $10,000 of total parking expenses. E’s parking lot has 500 spots that are used by its visitors and employees. E has 50 spots reserved for management and has approximately 400 employees parking in the lot in non-reserved spots during normal business hours on a typical business day. Additionally, E has 10 reserved nonemployee spots for visitors.
Step 1. Because E has 50 reserved spots for management, $1,000 ((50/500) x $10,000) is the amount of total parking expenses that is nondeductible for reserved employee spots.
Step 2. The primary use of the remainder of E’s parking lot is not to provide parking to the general public because 89% (400/450 = 89 percent) of the remaining parking spots in the lot are used by its employees. Therefore, expenses allocable to these spots are not excluded from the Code Sec. 274(a)(4)
Step 3. Because 2 percent (10/450) of E’s remaining parking lot spots are reserved nonemployee spots, the $200 allocable to those spots ($10,000 x 2 percent)) is not subject to the Code Sec. 274(a)(4) disallowance. That amount continues to be deductible.
Step 4. E must reasonably determine the employee use of the remaining parking spots during normal business hours on a typical business day and the expenses allocable to employee parking spots.
The IRS has indicated that additional guidance will be issued on these and other issues in the form of proposed regulations at a later date.
The impact to tax exempt organizations is that these changes increase UBTI by the amount of expense incurred related to employer provided parking. It is also important to note that exempt organizations which did not previously have a filing requirement related to UBTI may now be subject to tax liabilities related to the employer provided parking.
Estimated Tax Penalty Relief
Recognizing that this change in the tax code may result in tax-exempt organizations owing unrelated business income tax and having to pay estimated income tax for the first time, Notice 2018-100 waives penalties for a failure to make estimated income tax payments. The waiver applies if the exempt organization meets the following conditions:
- It was not required to file Form 990-T for the tax year preceding its first tax year ending after December 31, 2017 (e.g., 2016 Form 990-T for fiscal year filers and 2017 Form 990-T for calendar year filers);
- The estimated tax was required to be paid on or before December 17, 2018; and
- The underpayment is attributable to section 512(a)(7).
To claim the waiver, the tax-exempt organization must timely file its Form 990-T, timely pay the amount reported for the tax year for which relief is granted, and write “Notice 2018-100” on the top of its Form 990-T.