IRS Releases UBIT Guidance for Nonprofit Employee Parking Costs
Of the many provisions in the 2017 Tax Act, the taxation of transportation fringe benefits has the potential to affect the most nonprofit organizations and state colleges and universities. New IRS guidance clarifies when an organization must include the cost of this common employee benefit in taxable income and when it can be excluded.
While all employees can still exclude certain commuter benefits from taxable income, for-profit employers are no longer permitted to deduct the cost of providing those benefits. But nonprofits have a different rule. For those that were not deducting these costs from taxable income, the tax reform law requires that benefits incurred on or after January 1, 2018, must be reported as taxable income on Form 990-T.
Limited waiver of penalties for failure to make quarterly payments
Generally, an organization that owes federal income tax must make quarterly estimated payments. For 2018, a nonprofit’s estimated payments should include the tax on transportation fringe benefits. But on December 10, 2018, the IRS issued Notice 2018-100, which waives the underpayment penalty for failure to make quarterly estimates, but only under limited circumstances:
- The waiver only applies to payments that would have been due on or before December 17, 2018. Therefore, an organization with a June 30 fiscal year end should still consider making estimated payments by March 15, 2019, and June 15, 2019. An organization with a December 31 year end should make quarterly estimated payments on April 15, June 15, September 15, and December 15, 2019.
- The waiver only applies to tax-exempt organizations that were not required to file Form 990-T for the prior year. For this purpose, you must identify the first tax year that ends after December 31, 2017. If the organization filed Form 990-T in the prior year, it is not eligible for the waiver, and can be penalized for a failure to make quarterly estimated payments that were due prior to December 17, 2018.
- The entire tax owed must be paid by the initial due date of the return, which is the 15th day of the fifth month after the end of the year. To be eligible for the penalty waiver an organization that files for an extension must pay the tax by the initial due date, not the extended due date.
- Form 990-T must be filed by either the initial due date or the extended due date. Late Form 990-Ts are not eligible for the waiver.
- The organization must write “Notice 2018-100” on the top of Form 990-T.
Calculating taxable transportation fringe benefits for parking
For exempt organizations, tax is imposed on various benefits provided to employees in connection with commuting to work, including transit passes, reimbursements, flexible spending arrangements for commuter expenses, and parking.
On December 10, 2018, the IRS issued Notice 2018-99, which clarifies the amount of parking expenses subject to tax. This includes parking provided to an employee on or near the business premises of the employer, or on or near a location from which the employee commutes to work:
- Taxable benefits include parking facilities owned or leased by the employer, as well as situations where the employer pays a third party for the employee parking spaces. For example, individuals receiving the benefits may be employees of a management company that provides parking benefits. If the nonprofit pays a management fee for those benefits, the parking benefits must be reported as taxable income on Form 990-T.
- The calculation is based on the cost of the parking or parking facility, not its value. Costs that may be included: repairs, maintenance, utilities, insurance, property taxes, interest, snow and ice removal, trash removal, cleaning, landscape costs, parking lot attendant expenses, security, and rent. The cost of depreciation cannot be included because depreciation is not a parking expense, it is an allowance for exhaustion, obsolescence, and wear and tear on the parking facility. Until Treasury regulations are released, a nonprofit may use any reasonable method to calculate its parking costs, excluding the fair market value of the parking.
- The cost of reserved employee parking spaces are included as taxable transportation fringe benefits. Employers that decrease or eliminate the reserved parking spaces by March 31, 2019, can exclude the value of these benefits retroactively to January 1, 2018.
- If, after removing any reserved parking spaces that are provided to the employees, more than 50 percent of the actual or estimated use of the remaining spaces is to provide parking to the (non-employee) general public, then all of the costs of the remaining spaces are excluded from taxable transportation fringe benefits. Consideration must be given to normal business hours, empty spaces, space labeling, and other factors.
- The limit on an employee’s monthly exclusion for qualified parking expenses in 2018 is $260. Parking benefits in excess of that amount must be reported as taxable compensation to the employee. The employer’s cost for providing parking benefits in excess of $260 per month in 2018 is not included as taxable transportation fringe benefits.
Two examples of how to calculate taxable parking costs
- A nonprofit owns a parking lot adjacent to its office. Parking expenses for the year are $10,000, and the lot has 500 spaces. Approximately 400 employees park in the lot during normal business hours on a typical business day, but none of the spaces are reserved for specific employees. There are 25 parking spaces reserved for non-employee visitors. Since 75 spaces are used by the general public, a nonprofit employer could reason that it is only providing a benefit to its employees based on a ratio of 400 employees to 500 spaces. In that case, only 80 percent of the cost, or $8,000, would be included as taxable transportation fringe benefits. However, the organization may conclude that only the 25 visitor spaces are for non-employees. In this case, 95 percent of the cost, or $9,500, would be included as taxable transportation fringe benefits.
Both of these computations use reasonable methods for determining the cost of employee parking. However, the first method would likely be chosen since it results in a lower benefit taxed to the organization.
- An organization owns a parking lot with 500 spaces used by congregants, volunteers, students, visitors, and employees. Ten spaces are reserved for specific employees. On weekdays, the organization has approximately 50 additional employees parking in non-reserved spots, and approximately 440 non-reserved parking spaces that are left empty. On weekends, the organization has approximately 400 non-employees parking in the lot in non-reserved spots, and 20 employees parking in the lot in non-reserved spots. Parking expenses for the year are $10,000.
The 10 reserved spaces represent 2 percent of the available 500 spaces, generating $200 of taxable transportation fringe benefits.
During the week, 440 of the available 490 spaces (90 percent) are available to the general public, and on the weekend, 470 of the available 490 spaces (96 percent) are available to the general public. Since more than half of the actual or estimated use of the remaining spaces is to provide parking to the (non-employee) general public, then all of the costs of those spaces are excluded from taxable transportation fringe benefits.
How we can help
The guidance provided in these two IRS notices should be used by nonprofits making a reasonable effort to comply with the provisions of the 2017 Tax Act prior to the issuance of Treasury regulations. Contact our nonprofit tax professionals to discuss how these new rules and other provisions of tax reform impact your organization.