Due to the Tax Cuts and Jobs Act (“TCJA”) passed by Congress in December 2017, starting in 2018 many 501(c)(3) Exempt Organizations (“EOs”) are required to treat the cost of employer-paid qualified transportation and parking benefits as unrelated business taxable income (“UBTI”) to the EO. Though EOs have until May 15, 2019 to file their 2018 returns and remit any taxes owed to the federal government, there is a time-limited opportunity for some EOs to change their parking policy prior to March 31, 2019 and minimize the amount of parking tax owed.
New Tax on Employee Parking
EOs pay federal income taxes on their UBTI at a 21% rate. Generally, UBTI is the income generated by an EO’s activity which is unrelated to the organization’s exempt purpose. The TCJA changed this definition so that certain amounts spent by an EO on qualified transportation fringe benefits (e.g. employee parking) are treated as UBTI. The IRS detailed their reasoning as to the types of taxable parking in IRS Notice 2018-99, which may be relied upon by EOs until the IRS issues regulations.
Amount of Tax
EO Purchases Parking for Employees
The amount of employee parking expenses which are taxable varies by how the organization provides employee parking. An EO may pay a third-party to provide parking spaces at a third-party parking facility to the organization’s employees. If so, the EO’s costs up to $260 per month per employee will be subject to the new tax. Any amounts paid over $260 per month will not be subject to the new tax, though the excess will likely be included in the employee’s taxable income.
EO Owned/Leased Parking Facilities
Alternatively, an organization may own or lease a parking lot or garage. If so, the EO will incur a variety of expenses related to providing employee parking facilities: “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.” Many of these parking facilities are open to members of the public, customers, or nonprofit service recipients, and only the portion of the expenses attributed to employee parking are taxable. The organization will need to apportion its parking facility expenses between those for employee parking (taxable) and those for non-employee parking (non-taxable).
Apportionment Guidance from the IRS
EOs have some flexibility in this apportionment process, but not with respect to parking spaces which are formally reserved for employees. The IRS has stated that it will consider employee parking spaces to be reserved based on a variety of indicia, including whether there is “specific signage (for example, “Employee Parking Only”) or a separate facility or portion of a facility segregated by a barrier to entry or limited by terms of access.” The IRS will impose a formulaic standard in determining the taxable parking expenses attributed to these spots: the EO will have to divide the number of reserved employee spaces by the total number of parking spaces in the facility (e.g. 50 reserved spaces over 300 total spaces) and multiply that fraction (e.g. 1/6) by the total amount of expenses attributed to that facility.
In Notice 2018-99, the IRS makes several additional points. First, in determining the remaining parking facility expenses attributable to unreserved employee spaces as opposed to public spaces, the IRS allows EOs to use any “reasonable method.” The Notice contains an IRS proposal of a reasonable method based on whether the primary purpose of the unreserved places is for employees or the public, but the details of this method are beyond the scope of this post. In addition, the Notice also contains a second, time-sensitive declaration.
Opportunity Available Until March 31st
The Notice provides that EOs may reduce the number of their reserved employee parking spaces before March 31, 2019 and treat these spots as if they had been unreserved employee parking spaces for the entirety of 2018. Such a change may reduce your organization’s tax liability with respect to employee parking as it allows the expenses for the unreserved parking spaces to be apportioned under the more flexible method set out in the Notice. There is no guarantee that making such a change will reduce your organization’s tax liability, but for additional information on how the new tax on EO employee parking could affect your organization or whether your organization should change its employee parking policy, contact Michael Williams or Jeff Birdsong.
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