Does my Nonprofit Have to Pay Tax on Employee Parking?
posted Apr 2, 2019 by Sandy Ross, CPA, CFE in the Mission Matters Blog
Do you provide free parking for your employees? Thanks to a change made by the Tax Cuts and Jobs Act (TCJA), this may no longer be tax free.
What exactly changed?
Check out our blog, Is My Parking Free? QTF Parking Benefits Under the TCJA. Essentially, the TCJA amended Sec. 274(a)(4) to provide that expenses paid or incurred by employers after December 31, 2017 to provide employee parking are (generally) no longer deductible.
How are nonprofit organizations affected?
If your organization provides parking to its employees, it may now need to pay unrelated business income tax (UBIT) on the value of that parking benefit and report it on Form 990-T, Exempt Organization Business Income Tax Return.
How much tax do organizations have to pay?
Notice 2018-99 provides guidance for determining the nondeductible amount of parking expense as well as the amount that would increase Unrelated Business Taxable Income (UBTI). The appropriate method depends on whether the organization pays a third party for employee parking or if the organization owns or leases a parking facility where its employees park.
Do you pay a third party for employee parking?
If an organization pays a third party for employee parking in the third party's parking lot or garage, the section 274(a)(4) disallowance generally is calculated as the organization's total annual cost of the employee parking paid to the third party. If parking expenses amount to more than $265 per month per employee ($260 for 2018), the excess needs to be included in the employee’s income and would be deductible as wages.
Do you own or lease a parking facility for employees?
If an organization owns or leases all or a portion of a parking facility for its employees, Notice 2018-99 proposed a four-step method to determine the amount of UBTI. *This may be used as a safe harbor until final guidance is issued.
Step 1.Determine the percentage of reserved employee spots in relation to total parking spaces and multiply that percentage by that total parking expenses. The result of this amount is the amount disallowed under Section 274(a)(4).
Step 2.Determine whether the “primary use” of remaining spots is for public use. Under section 274(a)(4), “primary use” means greater than 50% of actual or estimated usage of the parking spots in the parking facility. If the primary use of the remaining parking spots is for the general public, the remaining parking expenses are still deductible.
Step 3.Is the primary use of remaining spots not for the general public? Specify any spots reserved for non-employee use. Calculate the allowance for reserved nonemployee spots. An organization that does not have reserved parking for visitors, customers or other non-employee spots, can go to the next step.
Step 4.Remaining spots not addressed in steps 1-3? The organization must determine the employee use of any remaining parking expenses not specifically categorized as deductible or non-deductible based on a typical business day for the organization.
The IRS issued a “special rule” in Notice 2018-247 under which employers will have until March 31, 2019 to change their parking arrangements to reduce or eliminate the number of parking spots they reserve for their employees.
This change in parking arrangements will apply retroactively to Jan. 1, 2018. By making this change, many churches, schools, hospitals and other tax-exempt organizations may be able to reduce their associated UBTI. In some cases, an organization may avoid having to file a Form 990-T, Exempt Organization Business Income Tax Return, altogether.
We are following the IRS updates very closely and will keep you posted with more information as it becomes available. Questions? Please reach out to us.