The 2017 Tax Cut & Jobs Act (TCJA) includes many tax law changes. Some of the changes are beneficial to taxpayers as they reduce tax revenues. Tax reductions include changes to individual and corporate tax rates, doubling of the standard deduction amounts, increases to estate tax exemption amounts, the new Qualified Business Income Deduction for individual taxpayers and many others. Congress could not get all of their tax cuts passed without having a few tax increases to balance out the cost of the entire tax cut. Deductions for expenditures viewed to be inherently personal in nature were targeted. Moving expenses are no longer deductible for individuals. Deductions for meals and entertainment have been changed as business entertainment will no longer be deductible. Business deductions for certain qualified transportation fringe benefits, which include the cost of transportation in a commuter highway vehicle, any transit pass, and qualified parking, are no longer deductible. Since these items are no longer deductible for a for-profit business, they are now subject to unrelated business taxable income (UBTI) for the nonprofit community.
Qualified parking is parking provided to an employee by an employer, either on or near the employer’s business premises, or at a location from which the employee commutes to work.
Parking can be Provided by the Employer if:
- The parking is on property the employer owns or leases, or
- The employer pays for the parking, or
- The employer reimburses the employee for parking expenses.
The IRS released Notice 2018-99 to provide guidance for taxpayers to determine the amount of nondeductible parking expenses and for tax-exempt organizations to determine the corresponding increase in the amount of unrelated business taxable income. The method of determining the nondeductible amount depends on whether the taxpayer pays a third party to provide parking for its employees or the taxpayer owns or leases a parking facility where its employees park.
If the taxpayer pays a third party an amount so the employees may park, the amount paid will be disallowed and will need to be added to UBTI. If the taxpayer owns or leases all or a portion of a parking facility, there is a multi-step process for determining the amount that will be disallowed. The IRS notice specifies total parking expenses include, but are not limited to 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 lease payment. A deduction for an allowance for depreciation on a parking structure owned by a taxpayer and used for parking by the taxpayer’s employees is an allowance for the exhaustion, wear and tear, and obsolescence of property, and not a parking expense per the IRS notice.
The Multi-step Allocation Process Outlined by the IRS
Step 1. Calculate the disallowance for reserved employee spots.
A taxpayer must identify the number of spots in the parking facility exclusively reserved for employees. Then determine the percentage of reserved employee spots in relation to the total parking spots and multiply that percentage by the total parking expenses for the parking facility.
Step 2. Determine the primary use of remaining spots, the “primary use test”.
The taxpayer may identify the remaining parking spots in the parking facility and determine whether their primary use is to provide parking to the general public. If the primary use of the remaining parking spots in the parking facility is to provide parking to the general public, then the remaining total parking expenses for the parking facility are allowable and not subject to UBTI.
Step 3: Calculate the allowance for reserved non-employee spots.
If the primary use of the remaining parking spots is not to provide parking to the general public, exclusively reserved for non-employees; for example, spots reserved for visitors and customers. Parking expenses allocable to non-employee spots are allowable and not subject to UBTI.
Step 4: Determine remaining use and allocable expenses.
If there are any remaining parking spots that were not specifically reserved for employees or non-employees, the nonprofit must reasonably determine the employee use of the remaining parking spots and allocate related expenses. Methods to determine employee use of the remaining spots may include specifically identifying the number of employee spots based on actual or estimated usage.
Examples for Applying the Allocation Process
The IRS notice provides several examples but only two are specifically related to nonprofits. The following are examples similar to the ones that the IRS provides.
Example #1
A religious organization (R) operates a church and a school and owns a surface parking lot adjacent to its buildings. R incurs $10,000 of total parking expenses for the year. R’s parking lot has 400 spots that are used by its congregants, students, visitors, and employees, and 10 spots that are reserved for certain employees. During the normal hours of R’s activities on weekdays, R usually has approximately 40 employees parking in the lot in non-reserved spots and approximately 300 non-reserved parking spots that are empty. During the normal hours of R’s activities on weekends, R usually has approximately 300 congregants parking in the lot in non-reserved spots and 15 employees parking in the lot in non-reserved spots.
Step 1: Determine the reserved employee spots.
Because R has 10 reserved spots for certain employees, $250 ((10/400) x $10,000 = $250) is the amount of total parking expenses that is nondeductible for reserved employee spots. R must increase its UBTI by $250, the amount of the deduction disallowed.
Step 2: Determine the primary use of the remaining spots.
Because usage of the parking spots varies significantly between days of the week, R uses a reasonable method to determine that the primary use of the remainder of R’s parking lot is to provide parking to the general public because 77% (300/390 = 77%) of the spots are used by the public during the weekdays and 96% (375/390 = 96%) of the spots are used by the public on the weekends. Because the primary use (more than 50%) of the parking lot of the non-reserved spaces are used by the general public they are deemed to be general use and are not disallowed. Therefore only the $250 calculated in Step 1 will result in an increase to UBTI.
Example #2
If R does not have gross income from any unrelated trades or businesses of $750 or more (to reach the $1,000 filing threshold), R will not be required to file a Form 990-T for that year. A Hospital (H) owns a surface parking lot adjacent to its building. H incurs $10,000 of total parking expenses. H parking lot has 400 spots that are used by its patients, visitors, and employees. H has 40 spots reserved for management and approximately 100 employees parking in the lot in non-reserved spots during the normal operating hours of the hospital.
Step 1: Determine the reserved employee spots.
Because H has 40 reserved spots for employees, $1,000 ((40/400) x $10,000 = $1,000) is the amount of total parking expenses that is nondeductible for reserved employee spots. H must increase its UBTI by $1,000.
Step 2: Determine the primary use of the remaining spots.
The primary use of the remainder of H’s parking lot is to provide parking to the general public because 72% (240/340 = 72%) of the remaining spots in the lot are open to the public. Thus expenses allocable to these spots are allowable. Therefore, only $1,000 from Step 1 is subject to UBTI.
Example #3
A Social Enterprise (SE) owns a surface parking lot adjacent to its store. SE incurs $10,000 of total parking expenses. SE’s parking lot as 600 spots that are used by its customers and employees. SE usually has approximately 450 employees parking in the lot in non-reserved spots during normal business hours on a typical business day. Additionally, SE has 30 spots reserved for non-employee visitors.
Step 1: Since none of SE’s parking spots are exclusively reserved for employees, there is no amount to be specifically allocated to reserved employee spots.
Step 2: The primary use of SE’s parking lot is not to provide parking to the general public because 75% (450/600 = 75%) of the lot is used by its employees. Thus, expense allocable to those spots are subject to UBTI under the primary use test. $7,500 ($10,000 x 75% = $7,500) would be subject to tax.
Step 3: Because 5% (30/600 = 5%) of SE’s parking lot spots are reserved non-employee spots, up to $500 ($10,000 x 5% = $500) of SE’s total parking expenses are exempt from UBTI.
Step 4: SE must reasonably determine the employee use of the remaining parking spots during normal business hours on a typical business day and the expenses allocable to employee parking spots. The IRS doesn’t give very much guidance on how that is to be done. Each organization will be left to make a reasonable determination of the use of those spots. If the remaining 120 spots are not used by employees and are available for use by the general public it is reasonable to assume that those remaining 120 space would also be exempt from UBTI.
The TCJA has put a different spin on tax compliance. Due to the disallowance of business deductions for qualified transportation fringe benefits, nonprofits will now be required to allocate parking expenses provided to employees and report unrelated business taxable income on the transportation fringe benefit. Based on IRS Notice 2018-99, the employee parking expense allocation is a multi-step process. Nonprofits will need to work through the four-step process to determine the amount of employee related parking expenses subject to UBTI.
