IRS Revs Up New Parking Guidance
After being put in an awkward position twelve months ago with the late passage of the Tax Cuts and Jobs Act of 2017 the Internal Revenue Service has been working to provide guidance to taxpayers to assist them in determining their tax liability. On December 10, 2018, the IRS released much sought after guidance to determine the amount of parking expenses incurred after December 31, 2017, to be included in unrelated business taxable income.
With the passage of the Act, qualified transportation fringe benefits, including parking, were considered a nondeductible or, in the case of nonprofit taxpayers, taxable expenditure for 2018. Several questions arose from this new promulgation. For instance, organizations were unsure how qualified transportation fringe benefits would be taxed, if losses from an unrelated trade or business could offset any qualified transportation fringe benefit liability, and how these rules would apply to an organization that owns or leases a parking facility.
With the release of Notice 2018-99, the Service confirms the long-held supposition that cash payments to third party parking and transportation providers would be considered taxable amounts going forward. The Service goes on to explain that a taxpayer that owns or leases a parking facility for the benefit of its employees may determine the taxable portion of the expense by, “any reasonable method,” and also provides a suggested calculation. Under the suggested method, an owned or leased parking facility with no reserved spots where more than 50% of the space is available for the general public’s use would generate no tax liability. Further, the Service has indicated that these facilities may change any reserved spot designations through March 31, 2019, to retroactively apply to this test. If the taxpayer elects to maintain the designation of reserved spots or if less than 50% of the non-reserved spots were available for the general public, the allocation would be based on the following four-step method:
- Step 1: Calculate the disallowance for reserved employee spots – the percentage of reserved employee spots relative to total parking spots applied to the total expense for the parking facility.
- Step 2: Determine the primary use of remaining spots – if greater than 50% of the non-reserved parking spots are for the general public, the remaining expense is not considered taxable for the taxpayer.
- Step 3: Calculate the allowance for reserved nonemployee spots – if the primary use of the remaining spots is not for the general public (less than 50%), the taxpayer should identify the spots reserved for nonemployees (such as spots reserved for visitors or customers). The percentage of these spots, relative to the remaining total parking spots, applied to the remaining total parking expenses. This amount is not considered taxable.
- Step 4: Determine the remaining use and allocable expenses – Use a reasonable method to determine the day-to-day use of the remaining parking spots not classified in Steps 1 through 3.
The Notice provides several examples to illustrate their suggested four-step calculation; however, we have paraphrased a particularly comprehensive example below for your convenience:
Taxpayer E, a nonprofit, owns a surface parking lot adjacent to its headquarters. E incurs $10,000 of total parking expenses related to this parking lot. E’s parking lot has 500 spots that are used by its visitors and employees. E has 50 spots reserved for management and has approximately 400 employees parking in the lot in non-reserved spots during normal business hours on a typical business day. Additionally, E has 10 reserved nonemployee spots for visitors.
- Step 1. Because E has 50 reserved spots for management, the allocable amount of total parking expenses related to these spaces increases unrelated business taxable income.
- Step 2. The primary use of the remainder of E’s parking lot is not to provide parking to the general public because 89% (400/450) of the remaining parking spots in the lot are used by its employees. Thus, expenses allocable to these spots increase unrelated business taxable income.
- Step 3. 10 of the 450 remaining parking spots (approximately 2%) are reserved nonemployee spots, the expenses allocable to those spots would not be considered qualified transportation fringe benefits and would not increase unrelated business taxable income.
- Step 4. E must reasonably determine the employee use of the remaining parking spots during normal business hours on a typical business day and the expenses allocable to employee parking spots.
While this method is merely a suggestion and is not specifically tailored to the nuances of every organization, the Service’s example of a reasonable calculation provides an official safe harbor to ensure the proper allocation of expenses when preparing the upcoming Form 990-T. It’s also important to remember what costs the Service considers to be parking expenses. These costs may include but are not limited to repairs, insurance, property taxes, security, and landscaping but not depreciation.
Finally, the Service provides two pieces of beneficial commentary to nonprofit entities. First, the Service clarifies that qualified transportation fringe benefits are not considered to be a trade or business for tax purposes. This means any organization with only one unrelated trade or business and qualified transportation fringe benefits would not have two separate lines of business. While that seems like a minor clarification, it actually means losses generated in 2018 or later years from a sole unrelated trade or business can be used to offset the taxable amount of qualified transportation fringe benefits. Second, the Service affirms that similar to previous years an exempt organization is not required to file Form 990-T unless their gross amount of combined unrelated business income and taxable qualified transportation fringe benefits exceeds the $1,000 specific deduction.
If you have questions about the impact of tax reform on your organization, please contact us.