One of the surprising changes under the Tax Cuts and Jobs Act (TCJA) is the treatment of transportation fringe benefits paid or incurred after December 31, 2017. These benefits are no longer deductible by for-profit businesses and may result in unrelated business taxable income (UBTI) for nonprofit organizations.
Tax bite for offering employee parking
Employer-provided parking is included in this and, for purposes of these rules, parking includes situations where an organization pays a third party to provide parking for its employees as well as when the organization owns or leases the parking facility where its employees park. In the first case, the taxable amount is based on the amount paid to the third party, whereas in situations where the nonprofit owns or leases the parking facility, the taxable amount must be calculated based on an allocation of total parking expenses.
The IRS recently issued Notice 2018-99 which indicated that any reasonable method may be used to calculate the taxable amount. It also defined “total parking expenses” for purposes of this calculation and provided a four step methodology (and examples) that is deemed to be a reasonable method for calculating the taxable amount:
- Calculate the disallowance for reserved employee spots, if any.
- Determine the primary use of the remaining spots. If primarily (>50%) for the general public, then the remaining parking expenses are allowed. If not, then
- Calculate the allowance for spots reserved for non-employees, and then
- Determine remaining use and allocable expenses.
Regardless of the method used, a portion of the parking expenses incurred by nonprofits may result in the payment of income taxes and will require nonprofits to file Form 990-T if imputed gross income from this and other unrelated business activities is $1,000 or more.
Relief offered by IRS Notice 2018-99
Notice 2018-99 also allows employers to retroactively reduce the amount of their disallowed parking expenses by reducing or eliminating the number of parking spots reserved for employees. Employers will have until March 31, 2019 to make this change and these changes will apply retroactively to January 1, 2018, which is the effective date for the new rules. By making this change, many nonprofits may avoid owing tax or having to file Form 990-T to report the taxable parking amount. In addition, the IRS provided estimated tax penalty relief to nonprofits that owe tax in 2018 as a result of disallowed parking expenses and were not previously required to file a Form 990-T.
While additional guidance is expected in the form of proposed regulations, taxpayers may rely upon these provisions until further guidance is issued. Please contact your tax advisor to discuss your organization’s particular situation and how you may be impacted by these rules.