By Samantha Ramirez, CPA, Tax Manager
Hidden surprises in the new Tax Cuts and Jobs Act (TCJA)? One worthy of discussion is the “parking tax”. While this provision applies to all businesses, for tax-exempt organizations (TEOs) it creates an extra filing requirement. For the first time in 2019, TEOs may be required to file a Form 990-T and pay unrelated business income tax.
The TCJA added IRC Section 274 to deny employers a deduction for certain qualified transportation benefits paid after December 31, 2017. These benefits include the expense for employer-provided parking. In an attempt to mitigate disparity between for-profit and not-for-profit entities, the TCJA added IRC Section 512(a)(7), which requires tax-exempt organizations to increase unrelated business income (UBI) by the transportation benefits disallowed as a deduction for taxable entities. For those organizations that pay these benefits, the organization will be subject to a flat 21% income tax on any disallowed parking expense.
The increase to UBI is equal to the cost of the benefits that would otherwise be disallowed as a deduction if the organization operated as a for-profit entity. For example, organizations that pay a third party for employee parking (such as a parking structure operator), the amount paid to the third party would be the increase to UBI.
For organizations that own or lease a portion of the parking facility, the IRS has provided interim guidance in Notice 2018-99 to determine the amount to include in UBI. This requires looking at total parking costs – repairs, maintenance, insurance, property taxes, etc. and applying a ratio to the portion of the parking facility that is exclusively used for employees. Since final regulations have not been issued, the IRS has determined that any reasonable method could be used to allocate the parking expense to increase UBI. The Notice outlines a reasonable method, utilizing a four-step calculation with examples. For additional information, visit: https://www.irs.gov/pub/irs-drop/n-18-99.pdf.
TEOs can avoid this “parking tax” if parking is made available to the general public in a parking facility. If there are no designated spaces for employees displaying signage, organizations will not be subject to the increase to UBI. Also, in order to avoid the UBI increase, the parking facility for the public cannot be a separate facility, a segregated part of the lot, or have a barrier to entry for the public.
The “parking tax” also applies to benefits provided under a compensation reduction agreement, where the employer gives the employee a cash reimbursement for these benefits. This payment will result in an increase to UBI. The organization can avoid including these benefits in UBI, if these benefits are paid with after-tax dollars.
If your organization has any additional questions about whether these new parking regulations apply to you, please reach out to our Nonprofit Group.