How ‘Employee-Only’ Parking Spots Could Impact Your Nonprofit’s 2018 Taxes
By Steve Anseth, CPA
One of the changes ushered in by the Tax Cuts and Jobs Act (TCJA) was a provision that required exempt organizations to pay unrelated business income tax (UBIT) on the value of qualified transportation fringe benefits.
Generally speaking, the IRS defines qualified transportation fringe benefits as those offered on a pre-tax basis to mitigate the cost of transportation to and from the employer’s location and employee’s residence. Since the new law went into effect on January 1, 2018, employers have scrambled to comply—and nonprofit organizations are no exception.
For nonprofits, one of the biggest challenges has been how to handle reimbursing employees for parking or paying a third party to provide employee parking. This is especially true for nonprofits that own or lease a parking lot or parking spaces. If your nonprofit falls into this category, it’s important to determine your UBIT obligations—and act quickly (i.e., by March 31) to make changes to your parking situation if necessary.
Generally speaking, any parking spots designated for your nonprofit’s employees—whether in your parking lot or leased in a third-party lot—count as a qualified transportation fringe benefit and are subject to the rule mentioned in the previous paragraph. An example of this would be a parking spot designated as “Pastor Parking Only” in a church parking lot.
How do you calculate the amount of parking expenses subject to UBIT?
The IRS recently issued Notice 2018-99, which addresses frequently asked questions and provides additional guidance on the matter. Until further guidance is issued, the notice states that tax-exempt organizations may use any reasonable method to calculate the amount of employee parking expenses incurred via owned or leased parking lots or spots. The notice also includes a method that tax-exempt organizations should follow to make a “reasonable calculation.”
To help you quickly determine if this applies to your nonprofit, I’ve summarized the method below.
1. Calculate the disallowance for reserved employee spots.
Count the number of spots in your parking lot that are reserved for employees. Then, divide this number by the total number of spots. This will give you the percentage of employee-only spots in relation to the total available spots. Then, multiple this percentage by your total parking expenses for the parking lot.
2. Determine the primary use of the remaining spots in the parking lot.
Primary use is defined as greater than 50 percent of the actual or estimated usage of the spot. This should be based on a typical day for your organization. Public spots include those designated as “customer only,” “visitor parking,” and other similarly designated spots not used by employees. However, empty parking spots that are available to the public are generally considered public parking.
3. If fewer than 50 percent of the non-reserved spots are considered available to the public, calculate the percentage of public spots to employee-only spots.
If fewer than 50 percent of the remaining (i.e., non-reserved) spots are considered public parking, add the percentage of employee-only spots in Step 1 to the public spots in Step 2.
4. Determine the remaining use and allocable expenses.
If greater than 50 percent of the spots are considered employee parking, multiply this percentage (total employee spots/total parking spots) by your total parking expenses. This will equal the amount of unrelated business income that you must report on your nonprofit’s IRS Form 990-T.
Total parking expenses include items such as repairs, maintenance, utility costs, insurance, property taxes, interest, snow and ice removal, leaf removal, trash removal, cleaning, landscape costs, attendant expenses, and security. Parking expenses also include lease costs for parking spots, whether specifically noted in the lease or not, and specifically exclude depreciation.
Wishing you could go back in time to change your nonprofit’s number of employee-only spots for the 2018 tax year?
The special rule for 2018 allows nonprofit employers who own or lease parking facilities to change the number of reserved employee spots with an effective date January 1, 2018. But it’s important to act quickly. You have only until March 31, 2019, to make this change and apply it retroactively as far back as January 1, 2018. This could include decreasing or even eliminating employee-only spots in your parking facility.
Is your nonprofit required to report unrelated business income?
In summary, if any or all of the following are true your organization could be required to report unrelated business income:
1. Your parking facility has spots reserved for employees
2. You reimburse or cover the cost of off-site parking for employees
3. Fewer than 50 percent of your parking spots are considered public parking
If this wasn’t complicated enough, there are more rules around completing Form 990-T, which is the IRS form used to report unrelated business income. If you have questions about this topic or need help with calculating the amount you need to report, please give us a call.
For more on how the TCJA changed the rules associated with transportation fringe benefits, read our previously published article on the topic.