Minimize Unrelated Business Income for Employer Provided Parking
TAKE ACTION NOW TO ADDRESS AND MINIMIZE YOUR ORGANIZATIONS TAX LIABILITY ATTRIBUTABLE TO EMPLOYEE PROVIDED PARKING BENEFITS BEFORE MARCH 31, 2019.
While publicized as “tax simplification” the Tax Cuts and Jobs Act of 2017 (The Act), created provisions that are anything but simple. The Act added two provisions that impact tax exempt organizations as follows:
- New Section 274(a)(4) of the Code which states in pertinent part that no deduction shall be allowed for the expenses related to any qualified transportation fringe benefit (which includes Employee Parking) provided to an employee (further defined below) of the taxpayer; and
- New Section 512(a)(7) states that for applicable organizations unrelated business income is increased by any amount for which a deduction is not allowable by reason of Code Section 274. Under the Act, unrelated business income is taxed at the maximum corporate rate of 21%.
If your organization is a tax-exempt organization and provides parking benefits for employees or contracted workers, this tax provision pertains to your organization.
The law changes are effective for any expenses incurred after December 31, 2017. This means that 2018 calendar year organizations will be required to gather and analyze the 12-month cost of expenses attributable to qualified transportation fringe benefits provided and if your organization has a fiscal year end, for instance June 30, 2018, you will be responsible for analyzing only 6-months of data. Due to the rush to pass the Act, it does not address how to determine the amount of the qualified transportation fringe expense that is nondeductible or treated as an increase in unrelated business income. While the Department of Treasury and the IRS intend to publish proposed regulations under Sections 274 and 512, the only guidance available comes in the form of IRS Notice 2018-99 and leaves many unanswered questions.
The IRS Notice 2018-99 lays out a four-step process for analyzing and quantifying an organizations increase in unrelated business income as a result of these provisions. Step #1 is to calculate the disallowance of expenses attributable to reserved employee spots. Until March 31, 2019, organizations that have reserved employee spots as defined in the notice may change their parking arrangements (changing signage, access, etc.) to decrease or eliminate their reserved spots and treat those spots as not reserved employee spots for purposes of the Notice retroactively to January 1, 2018.
Theoretically, there is only one scenario that will allow an organization to completely avoid nondeductible qualified transportation fringe expenses and therefore eliminate additional unrelated business income. The theoretical organization would need to completely abolish “reserved or designated parking” and have greater than 50% of all available spaces actually used by the general public. That said, the great majority of organizations will ultimately have an additional tax burden as a result of these law changes.
If your organization has not addressed this tax law change, there is still time and we can help. As part of a service offering, we have developed an interactive workbook to help our clients gather the required data and expenses to analyze and determine the amount of additional unrelated business income that will be required to be reported on your organizations Form 990-T.
As part of our service offering we will share our workbook with you and provide you with consultations relative to the application of the guidance in the IRS Notice. We can tailor the cost of the project depending on the size and complexity of your organization.