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NONPROFIT ALERT: Qualified Transportation Benefit Relief… Sort Of

By: Corey Pless, HoganTaylor Tax Senior

2018 brought sweeping changes to the IRS Tax Code, and tax-exempt organizations were no exception. One massive change that will impact many tax-exempt organizations is §512(a)(7) of the Internal Revenue Code, which now allows for the taxation of parking expenses for qualified transportation fringe benefits.

In this article, you will learn more about the Parking Tax and a recent IRS Notice that may offer a bit of relief to the nonprofit community.

What’s the Parking Tax?

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.

In December of 2018, the IRS issued Notice 2018-99, which provided 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.

What’s the Impact?

Unfortunately, if you pay for individual spots in a parking lot, there is no percentage exclusion.  The full amount of parking expenses will be considered UBI.  When calculating parking expenses based on the ownership/lease of a lot, the parking tax uses a ‘public use percentage.’  The percentage of the lot designated for public use is based on the number of reserved employee parking spots, reserved visitor parking spots, and total full-time equivalent employees using the lot. If the public use is above 50%, then at least a portion of the expenses will be subject to UBI.

How Can I Minimize UBI Associated with Parking Expenses?

Included in the guidance from IRS Notice 2018-99 was a short, but important, paragraph that provides some relief for taxpayers with reserved employee parking.

Since this tax law change applies retroactively to January 1, 2018 and the guidance did not come out until December of 2018, the IRS has added a special rule to allow employers to change their parking arrangements by March 31, 2019, to reduce or eliminate the number of reserved parking spots for their employees, thus reducing the UBI associated with those spots. This could also eliminate any UBI, as reducing these spots could raise the public use percentage above 50%, making none of the parking expenses taxable.

Examples of these changes might be removing signage (i.e. Reserved for Employees) or removing barriers/gates to a section of a parking lot.

Example 1: Nonprofit A has 100 total parking spaces, including 10 reserved employee spots (reserved by signage) and 10 reserved visitor spots with 40 full-time equivalent employees. The primary public use percentage is 50%, which means there will be UBI on the organization’s parking expenses.
Example 2: Let’s say the same facts are true for Nonprofit B as in Example 1, except Nonprofit B removed a gate fencing off 10 parking spots only accessible to employees with key cards.  In removing the gate and allowing the public access to the 10 parking spots, the public use percentage went up to 44%. As a result, there will be no UBI on the organization’s parking expenses.

What Happens Now?

These tax law changes are very new to everyone involved; tax-exempt organizations, tax preparers, and even the IRS.  The Treasury Department and IRS are seeking additional guidance and clarification on how to treat the qualified transportation fringe expenses.

There will be more to come on this topic and the HoganTaylor Nonprofit practice will keep you updated on any additional developments or issuance of related regulations. In the meantime, organizations should seek ways to minimize the impact of this provision, so they can keep as many dollars as possible going toward their mission.