By Colin Hannifin, Business Assurance & Advisory Services Manager | Not-for-Profit Team
One of the most significant challenges arising from the 2017 Tax Cuts and Jobs Act for tax-exempt organizations is the attempt to increase unrelated business taxable income through nondeductible parking expenses.
The Tax Cuts and Jobs Act (the “Act”) amended the Internal Revenue Code to disallow deductions for certain employee parking expenditures; this in turn requires tax-exempt organizations to report these expenses as an increase in unrelated business taxable income (“UBTI”). Since the passage of the Act, there have been a number of questions and concerns about this new requirement.
On December 10, the IRS issued Notice 2018-99 (the “Notice”), which provides interim guidance to determine the deductibility of parking expenses (and thus, the reporting requirement for tax-exempt organizations). The methodology used depends on whether the taxpayer pays a third party to provide parking for its employees or the taxpayer owns or leases a parking facility which employees use for parking.
If the taxpayer pays a third party, any amount in excess of the monthly limitation on exclusion (260 dollars per employee per month for 2018) should be treated as compensation and wages to the employee.
If the taxpayer owns or leases a parking facility where employees park, the amount of disallowed deduction can be calculated using any reasonable method, including the methodology included in the Notice. The Notice specifies that using the value of employee parking to determine the expenses allocable to employee parking is not a reasonable method. The Notice further clarifies that parking facility includes both garages and parking lots and that “parking expenses” includes (but is not limited to) repairs, maintenance, utility costs, insurance, property taxes, interest, snow and ice removal, leaf removal, trash removal, cleaning, landscape costs, parking lot attendant expenses, security, and rent or lease payments (or a portion thereof if not broken out), but excludes depreciation.
The Notice provides a 4-step methodology to determine the allocation of parking expenses to employee and non-employee spots and the amount of deduction to be disallowed (and thus, the amount to be included as an increase to UBTI):
Calculate the disallowance for reserved employee spots;
Any costs associated with spots reserved for employees will be disallowed under the guidance. These costs are calculated by multiplying the ratio of reserved employee spots to total parking spots by the total parking expenses.
Determine the primary use of remaining spots;
The taxpayer, using a reasonable method, should determine the primary use of the remaining spots. If the primary use (defined as >50 percent of actual or estimated usage) is to provide parking for the general public, the parking costs are deductible (and will not increase UBTI for tax-exempt individuals). The primary use of the spots applies during normal business hours or during the normal hours of an exempt organization’s activities.
Calculate the allowance for reserved nonemployee spots; and
Any costs associated with spots reserved for the general public, including customers, clients, and visitors, are deductible. These costs are calculated by multiplying the ratio of reserved nonemployee spots to total parking spots by the total parking expenses.
Determine remaining use and allocable expenses.
Any remaining costs that have not been categorized should be allocated based on real or estimated employee use, which may be based on the number of spots used, the number of employees, the hours of use, or other measures.
The Notice provides taxpayers with reserved employee spots an opportunity to alter their parking arrangements (such as changing signage or access) until March 31, 2019. Any changes made by this deadline can be considered to have been effective January 1, 2018, for the purposes of the calculations above.
The Notice also provides 10 detailed examples walking through the application of the 4-step methodology described above.
The same day, the IRS also issued Notice 2018-100, which may provide tax relief for some tax-exempt organizations who may have to file a Form 990-T for the first time. For organizations who will have to recognize UBTI based on the parking considerations above and were not required to file a Form 990-T in the immediately preceding year, the addition to tax for failure to make estimated income tax payments on or before December 17, 2018, is waived. However, in order to receive this waiver, the effected tax-exempt organizations must timely file Form 990-T and pay the amount reported for the taxable year. In addition, the tax-exempt organization must write “Notice 2018-100” on the top of its Form 990-T.
The IRS remarks in Notice 2018-99 that the guidance is interim in nature, with final guidance to be provided in the future. In addition, there are items pending before Congress which may alter or suspend the implementation of the requirement to recognize UBTI related to employee parking expenses for tax-exempt organizations. There are still a lot of questions and concerns regarding the implementation of the 2017 Tax Cuts and Jobs Act – be sure to stay up-to-date with Keiter as more information is released!
Additional Not-for-Profit Tax and Accounting Resources:
- Not-for-Profit Proposal to Allow Goodwill Amortization
- Not-for-Profit Lobbying Activities: Know Where to Draw the Line
- Learn about Changes to Financial Statements for Not-for-Profits:
The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.