When the Tax Cuts and Jobs Act (TCJA) was signed into law in December 2017, it amended Section 274 and Section 512 of the Internal Revenue Code (Code) and opened the door for the potential of nonprofit organizations generating unrelated business taxable income (UBTI) due to the parking they provide to their employees. It also resulted in requests for guidance from the industry to help interpret the changes.
On Monday, almost a year after TCJA was signed into law, the IRS issued Notice 2018-99 as interim guidance to assist entities in determining the amount of parking expenses for Qualified Transportation Fringes (QTF) that would be UBTI for nonprofit organizations.
Reviewing the Notice in its entirety with your tax advisor is recommended.
The Notice provides a summary of the provisions of TCJA as well as updated guidance.
A summary of the provisions from TCJA relevant to nonprofit organizations include:
• TCJA generally disallows a deduction for expenses with respect to QTFs provided to employees.
• UBTI for tax-exempt organizations is increased by any amount of QTF expense that would be nondeductible.
• The deduction disallowed under Code Sect. 274 relates to the expense of providing the QTF, not its value.
• QTFs include qualified parking, which is defined as parking provided to employees on or near the business premise of the employer or on or near the location from which the employer commutes to work.
• 2 Exceptions that specifically apply to parking expenses include:
o QTF’s that exceed the limitation on exclusion from an employee’s gross income ($260/mo. In 2018) are included in employee compensation and therefore do not increase UBTI.
o Expenses for parking provided to the general public (including customers) are exempt from UBTI inclusion.
The Notice indicates that the method for determining the UBTI (or nondeductible expense) amounts depends on whether the entity (1) pays a third party directly to provide parking for employees or (2) owns or leases a parking facility where employees park. A parking facility per the notice includes indoor or outdoor facilities, lots, structures and other areas. The Notice provides a 4-step process as a reasonable method to determine the disallowed expenses treated as UBTI. The 4 steps are as follows:
1. Calculate the disallowance for reserved employee spots
2. Determine the primary use for remaining spots
3. Calculate the allowance for reserved nonemployee spots
4. Determine remaining use and allocable expenses
The notice includes 10 examples (including examples for nonprofit organizations) of applying the 4-step model to determine nondeductible parking expenses or parking expenses that would increase UBTI.
Under a special rule, employers will have until March 31, 2019, to change their parking arrangements thereby potentially enabling them to reduce or eliminate potential UBTI with respect to parking fringes. It may be possible to avoid having to file a Form 990-T, Exempt Organization Business Income Tax Return, altogether.
The Department of Treasury and IRS intend to publish proposed regulations under Sect. 274 and Sect. 512 to include additional guidance on the determination of nondeductible (or UBTI) parking expenses. Until that guidance is issued, nonprofit organizations may rely on Notice 2018-99 to determine the amount of employee parking related expenses that increase UBTI.
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