Even state colleges and universities that have never generated unrelated business income in the past should know their liability for tax on transportation fringe benefits and parking expenses.
Since the enactment of the tax reform law commonly known as the Tax Cuts and Jobs Act, the new provision related to employer-provided transportation fringe benefits and parking is having a significant impact on many state colleges and universities. IRS Notice 2018-99 clarified the amount of parking expenses subject to tax, but lacking official Treasury regulations, colleges and universities have been left to make reasonable efforts to comply with the law.
Getting to know unrelated business income
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 and other tax-exempt organizations 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. What many may not realize is that state colleges and universities are also subject to the unrelated business income tax (UBIT). This code section has been in place for several years, but the majority of state colleges and universities have not engaged in activities that generated unrelated business income (UBI) and have not been subject to the tax. For many, that has now changed.
What qualifies as taxable parking expenses?
For state colleges and universities, 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.
The majority of state colleges and universities have not engaged in activities that generated unrelated business income (UBI) and have not been subject to the tax. For many, that has now changed.
Notice 2018-99 clarifies the amount of parking expenses subject to tax, and that the law 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. If the college pays a third party for an employee’s right to park, the parking benefits must be reported as taxable income on Form 990-T.
Calculating taxable transportation fringe benefits for parking
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. Until Treasury regulations are released, a state college or university may use any reasonable method to calculate its parking costs, excluding the fair market value of the parking.
If the college or university has parking facilities in more than one geographical location, the total parking spots may not be aggregated. Parking facilities in different cities cannot be aggregated, while parking facilities in different locations within the same compound can be aggregated. In this way, campuses with multiple parking structures and lots will be able to aggregate the total spots, while multi-campus college districts with locations in different cities will need to complete the calculation separately for each location. This would include administrative offices and satellite/extended university locations.
The cost of reserved employee parking spaces
Reserved parking includes the number of spots in the parking facility identified as reserved for employees only. This can be accomplished in a variety of ways including signage, painted spots, segregated parking lots, or barriers to entry: gates, arms, parking booths, codes, or any other means that would limit access to employees only. Since most state colleges and universities have parking reserved for faculty and staff, this will automatically generate an increase in UBI and taxable income. To determine the amount, the percentage of reserved spaces to total parking spaces (by geographic location) is calculated and multiplied by the parking expense.
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. The general public includes customers, clients, visitors, individuals delivering goods or services, and students of an educational institution. Consideration must be given to normal business hours, empty spaces, space labeling, and other factors.
In situations where the amount of reserved faculty and staff parking is sufficient for the college, the remaining spots will likely be almost entirely available for student use and the college will meet the public parking exception. In this situation, no additional UBI will be generated.
The important point is that the UBI generated by the reserved employee parking spots cannot be negated with the amount of parking provided to students. For example, a college with 1,000 total parking spots that include 100 reserved faculty and staff spots, would generate an increase in UBI for the 100 reserved spots (or 10 percent), even though the reserved spots comprise less than 50 percent of the total parking. The evaluation of the remaining 900 spots must be performed to determine if the public parking exception applies.
Limits on qualified parking expenses
The limit on an employee’s monthly exclusion for qualified parking expenses in 2019 is $265. 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 $265 per month in 2019 is not included as taxable transportation fringe benefits.
Two examples of how to calculate taxable parking costs
Example one: a state community college
A state community college owns a parking lot with 500 spaces used by students, visitors, and employees. Parking expense for the year is $10,000, and there are 100 spaces reserved for faculty and staff. The remaining spaces are to provide parking for students and others. The 100 reserved spaces represent 20 percent of the available 500 spaces, generating $2,000 of taxable transportation fringe benefits.
On weekdays, the college has approximately 40 additional employees parking in non-reserved spots, and approximately 360 non-reserved parking spaces that are typically used for student parking. On weekends, the college has approximately 380 spaces available for student parking in the lot in non-reserved spots, and 20 employees parking in the lot in non-reserved spots.
During the week, 360 of the available 400 spaces (90 percent) are available to the general public, and on the weekend, 380 of the available 400 spaces (95 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.
Example two: a state university with two locations
A state university owns the parking facilities on its campus and rents an administrative building located in a different city. The campus in City A has a parking lot with 500 spaces and a parking structure with 1,500 spaces. There are 200 spaces reserved for faculty and staff. On weekdays, the college has approximately 50 additional employees parking in non-reserved spots, and approximately 1,750 non-reserved parking spaces that are used by students, visitors, and contractors. On weekends, the entire non-reserved portion of the parking lot is available for student and general parking. Total parking expense for the year is $10,000 for the campus location.
The administration building in City B has 75 spaces. Monthly rent for the administration building is $100,000, and the college has determined that $5,000 of the monthly cost is allocated to parking.
Because the campus and the administration building are located in different cities, two calculations must be completed to determine the total amount to be included as taxable transportation fringe benefits.
Parking spots in the parking structure and lot on the college campus may be aggregated. The 200 reserved spaces represent 10 percent of the available 2,000 spaces, generating $1,000 of taxable transportation fringe benefits. During the week, 1,750 of the remaining 1,800 spaces (97 percent) are available to the students and general public, and on the weekend, all of the remaining 1,800 spaces (100 percent) are available to students and 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.
For the administration building, approximately 60 employees use the lot during normal business hours on a typical business day, but none of the spaces is reserved for specific employees. There are five parking spaces reserved for non-employee visitors. Since 10 spaces are used by the general public, the college employer could reason that it is only providing a benefit to its employees based on a ratio of 60 employees to 75 spaces. In that case, only 80 percent of the cost, or $4,000, would be included as taxable transportation fringe benefits. However, the college may conclude that only the five visitor spaces are for non-employees. In this case, 95 percent of the cost, or $4,750, 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 university.
How we can help
As state colleges and universities continue to await Treasury regulations on this important issues, CLA’s nonprofit and higher education professionals can help you make reasonable efforts to comply with the tax reform law. Contact us to discuss how these new rules and other provisions of tax reform impact your organization.