The notice also provides guidance to tax-exempt organizations regarding how to determine what portion of these nondeductible parking expenses should be treated as unrelated business taxable income (UBTI). This is one of the items we identified in our Not-For-Profit Group’s Summer 2018 Newsletter that could have an impact to many tax-exempt organizations.
Deductions Not Allowed
Internal Revenue Code (Code) section 274(a)(4) was added to provide that no deduction would be allowed for any qualified transportation fringes provided to an employee of the taxpayer. Code section 512(a)(7) was also added in an attempt to align the tax treatment of QTFs between taxable and tax-exempt organizations. It states that tax-exempt organizations are required to increase their UBTI by the amount that is paid or incurred by the organization and in which a deduction is not allowed under Code section 274(a)(4) for any QTF, including parking facility expense.
This means various qualified transportation benefits provided to employees, such as van pools, transit passes and qualified parking, are no longer allowable deductions for employers, and the related expenses must be picked up as UBTI. Regardless of whether the benefits are employer provided, reimbursed by the employer or through a compensation reduction plan, previously allowable deductions are not allowed beginning January 1, 2018. This Code change does not affect employees, as payments for these QTFs are still excluded from wages.
Notice 2018-99 specifically focuses on which expenses to consider when looking at qualified parking and how to determine what portion of those expenses should be treated as UBTI under the new rules. The notice identifies “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 of a rent or lease payment (if not broken out separately),” as included in calculating total parking expenses. One notable item that did not make the list is depreciation expense—it remains fully deductible.
Owning or leasing a parking facility
Organizations should first determine whether a third-party is providing parking for its employees or if the organization owns or leases a parking facility. If a third-party provides parking, then the increase in UBTI is generally calculated as the total annual cost of employee parking paid to the third-party. If the organization owns or leases a parking facility for its employees, more detailed analysis is required. In fact, the IRS lays out a four-step methodology that they deem a reasonable method until any regulations are issued. These steps are laid out as follows:
Step 1: Calculate the Disallowance for Reserved Employee Spots
Step 2: Determine the Primary Use of Remaining Spots
Step 3: Calculate the Allowance for Reserved Nonemployee Spots
Step 4: Determine Remaining Use and Allocate Expense
Details of each step and example scenarios can be found in Notice 2018-99.
The current notice does not touch on the increase in UBTI for highway commuter vehicles, such as van pools, transit passes or pre-tax transit and parking plans as the IRS appears to deem these changes as more straight-forward. For example, the UBTI amount would be the expense to the employer for hiring a company to run the van pool, the cost to purchase the transit passes distributed to employees or the portion of payroll expense relating to pre-tax transit or parking deductions.
Dates to Remember
One item to note from the recently issued guidance is that organizations will have until March 31, 2019 to retroactively change their parking arrangements, such as signage and access, in order to reduce or eliminate the amount of reserved employee and nonemployee parking spots. This, in turn, would reduce the amount of UBTI. Any changes made by the March 31, 2019 deadline will be retroactively applied as if occurring on January 1, 2018 when the new law took effect.
As you can see, the rules and calculations surrounding the determination of increases in UBTI from QTF parking expenses can be complex. While Treasury and the IRS intend to issue temporary regulations in the future, this interim guidance should help provide a process for determining a reasonable method for these calculations.