Implications for Businesses and Tax-Exempt Organizations
The Tax Cuts and Jobs Act changed the rules for certain employer provided Qualified Transportation Fringe Benefits. A specific category of fringe benefits that is going to impact both, taxable entities and tax exempt organizations, is employer provided parking expenses.
Effective for amounts paid or incurred after 12/31/17 (i.e. not tax year beginning after 12/31/17), employers (taxable entities) are no longer able to deduct the expenses associated with any parking expenses provided to employees on or near the work place. In addition, tax-exempt organizations are now required to include any amount paid or incurred for employee parking as Unrelated Business Taxable Income (UBTI).
This means that taxable UBI now includes any amount that is paid or incurred by the organization for any parking facility (leased or owned) used in connection with qualified parking.
Starting January 1, 2018, if an employer pays this benefit on behalf of an employee the payments are not deductible and for an exempt organization, these are considered UBI. The Congressional intent was that certain nontaxable fringe benefits should not be deductible by employers if not includible in income of employees.
The new taxable UBI provision specifically includes the cost not the value of parking facilities.
Under a third party reimbursement arrangement, if an employer pays a third party for the parking, the total annual cost of employee parking paid, less any parking-related amounts included as wages to the organization’s employees, is a nondeductible expense or UBTI.
The value of the employer-provided parking is still excludable from gross income of the employee up to the annual limit of $260 per month for 2018 and $265 per month for 2019.
For example, if a tax exempt employer pays $290 a month to a parking garage for 10 of its employees, it will have $2,600 of UBTI per month or $31,200 per year. The employer would include $30 a month as additional compensation to each employee and the $260 a month times the 10 employees would be considered UBTI. If the tax exempt employer has a fiscal year end of 6/30/18, a 990-T would have to be filed reporting UBTI of $15,600 for the first six months of 2018.
This is pretty clear cut if the parking benefit is paid to a third party facility. However, it becomes more complicated for employer-owned or leased facilities.
Although lobbying in this area has been extensive, the Treasury did not delay implementation as originally anticipated. However, the IRS issued Notice 2018-99 in December, offering interim guidance relating to parking expenses which can be relied upon until Regulations are issued. This notice lays out a four step methodology for computing the disallowed parking related expenses. It also establishes safe harbors and de Minimis rules. A summary of the calculation is attached for your reference.
Related guidance was issued in Notice 2018-100 which provides very limited relief in waiving estimated tax penalties under certain circumstances.
The following points should also be noted:
- The current guidance does not address the issue where lease payments for rental of an office include parking or parking fees. It states that a “reasonable method” may be used until further guidance is issued.
- A tax-exempt organization with multiple business locations and parking lots in several states may now need to source the UBI to various states and file 990-Ts in each state.
- Due to these extensive changes, Form 990-T has undergone a complete revamp for 2018.
- The specific deduction of $1,000 can be used to reduce the taxable UBI from disallowed fringe benefits.
- The new UBI is not considered a separate trade or business for the siloing rules and can be offset by losses from other trades or businesses.
- The tax rates that apply to UBI changed as a result of the new law also. Tax-exempt trusts including associations are taxed at graduated rates up to 37% and tax-exempt corporations are taxed at a flat rate of 21%.
- Quarterly estimated tax payments are due by the 15th day of the 4th, 6th, 9th and 12th month of the tax year if tax exceeds $500 for the tax year.