By: Ashley Fogle, HoganTaylor Tax Senior Manager
This week, the IRS issued a notice that provides interim guidance for exempt organizations to determine the increase in the amount of unrelated business income (UBI) under Section 512(a)(7) attributable to the qualified transportation fringes (QTFs) and more specifically parking expenses.
As was stated in the September issue of “UPDATES&INSIGHTS: Nonprofit,” the cost of transportation fringe benefits will be treated as unrelated business income for costs incurred after 12/31/17. Such costs include providing to employees rides in commuter highway vehicles, transit passes, and qualified parking.
However, the new notice provides the first guidance on how to allocate those expenses to employee parking vs. other non-designated parking. In addition, according to the notice, the Department of Treasury and the IRS intend to publish proposed regulations regarding this matter and that they will include the guidance on the calculation of the increase in UBI attributable to QTFs.
Until the proposed regulations are published, exempt organizations may use any reasonable method, as provided below, to determine the taxable amount of QTFs.
Interim Guidance for Parking Expenses for Qualified Transportation Fringes
Organization Pays a Third Party for Employee Parking Spots
In this case, the UBI is calculated as the organization’s total cost of employee parking paid to the third party.
Organization Owns or Leases All or Portion of a Parking Facility
In this scenario, the UBI may be calculated using any reasonable method and the IRS has provided a methodology consisting of four steps that is deemed reasonable. The following are the four steps:
- Calculate the UBI for reserved employee spots – Determine the amount of parking spaces that are specifically reserved for employees. The parking spots could be specifically reserved in many ways including, but not limited to signage or a separate section of a facility segregated by a barrier or limited access. Once the total employee reserved parking is determined, you will need to calculate the percentage of the total parking available. This percentage will be used to allocate the expenses associated with the parking to be reported as UBI on the Form 990-T.
- Determine the primary use of the remaining spots – The organization will need to determine whether the primary use of the remaining spots is for the use of the general public. For this notice, “primary use” refers to more than 50% usage of the parking spots. The primary use should be tested during the normal hours of the exempt organization’s activities on a typical day. The term “general public” includes customers, clients, visitors, individuals delivering goods or services, student, patients, or congregants. The general public does not include employees or independent contractors of the taxpayer. If the primary use is determined to have more than 50% usage by the general public then no UBI is required to be recognized on those spaces.
- Calculate the allowance for reserved nonemployee spots – The organization will need to identify the number of nonemployee reserved spots. This would include parking spaces specifically reserved for visitors or customers. If the organization has reserved nonemployee parking then they will calculate the percentage in relation to total parking spaces. Once the percentage is calculated, the organization can exclude that percentage of the expenses from UBI.
- Determine remaining use and allocable expenses – If the organization has completed steps 1 through 3 and still has remaining expenses that have not been deemed taxable or nontaxable, the organization must reasonably determine the employee use of the remaining spaces during normal hours of the organization’s activities. Actual or estimated usages can be determined based on the number of spots, number of other employees, hours of use, or other measures.
The notice also provides many examples of exempt organizations to use in determining the amount of parking expenses that should be classified as UBI and reported on the Form 990-T. You can review the examples and the full notice online via www.irs.gov.
The IRS also issued an additional notice that provides for relief of underpayment of estimated tax penalties for organizations now required to reported QTFs on their Form 990-T that have not previously filed a Form 990-T.