One of the more confusing provisions of the 2017 Tax Cuts and Jobs Act is that employer-provided parking is now considered unrelated business taxable income (UBTI)—and is therefore taxable. In other words, if you provide a parking benefit for your employees, you may need to pay unrelated business income tax (UBIT) on that expense.
As a reminder, UBTI is income that a nonprofit organization generates from a trade or business that is regularly carried on and is not substantially related to the organization’s mission or “exempt” purposes. If your organization owns or leases a parking lot or pays employee parking expenses, you are affected.
Parking = QTF
Why the confusion? The tax law now includes parking as a qualified transportation fringe benefit (QTF) and mandates that all expenses related to QTF be considered UBTI. Previously, these expenses could be deducted.
To clarify, the new IRC Section 274 denies all employers—for-profit entities as well as nonprofits—a deduction for expenses paid or incurred for employee parking after December 17, 2017.
To create parity between for-profit and nonprofit entities, a new Section 512(a)(7)) requires nonprofits to increase their UBTI by the amount of employee parking expenses that would not be deductible if they were subject to the same deduction disallowances as for-profit companies. Now, nonprofit entities must pay tax of up to 21 percent on the amount of any disallowed parking expenses.
Calculating the Taxable Benefit
In December 2018, the IRS released Notice 2018-99 outlining the process to calculate this additional tax based on the “total parking expenses” paid to provide employee parking. These expenses include repairs and maintenance, rent or lease payments, interest, insurance, property taxes, landscape costs, utilities, parking attendant and security expenses, cleaning, and maintenance such as snow, leaf, and trash removal.
If your organization pays a third party for employee parking spots, the deduction and increase to UBTI are calculated as the total annual cost for parking paid to the third party.
If your organization owns or leases a parking facility, the IRS provides a four-step methodology for calculating the expense:
1. Calculate the disallowance for reserved employee parking. Any spots specifically reserved for employees are automatically disallowed and therefore taxable.
2. Determine the primary use of the remaining spots during normal working hours. If the “primary use” of 50 percent or more of the remaining spots is public usage, then the remaining total parking expense is excluded from the calculation. If your facility has greater than 50 percent public usage, your organization can skip the next two steps.
3. Calculate the allowance for reserved nonemployee spots, such as customers, patients, visitors, or congregants. These expenses continue to be an allowable expense.
4. Determine the remaining use and allocable expenses. Allocate the remaining expenses not accounted for in steps 1–3 and add them to the amount in step 1 to determine the total taxable expense.
Until the IRS provides further guidance, nonprofits might want to consider changing their employee parking arrangements and determining how to reduce total parking expenses.