Take Action By March 31, 2019!
One of the new requirements of The Tax Cuts and Jobs act of 2017 (“the 2017 Act”) is that nonprofit organizations, including churches, must treat employer-provided parking benefits as unrelated business taxable income (“UBTI”), subject to Form 990-T filing if these benefits are not already taxed to the employee (generally, they are not). If your nonprofit organization has ever paid tax with the filing of Form 990-T, you know that the IRS requires this tax be paid in quarterly estimates, similar to what would be required if your organization was a for-profit entity filing a C Corporation return. If the tax is not paid through quarterly estimates, penalties and interest would generally be assessed if the total tax is $500 or more. On December 10, 2018, the IRS issued guidance to help nonprofit organizations concerned not only with how to calculate this benefit, but also with their failure to pay these quarterly estimates during 2018. Could the IRS be forgoing penalties? Perhaps the IRS is, indeed, kinder and gentler.
There has been much confusion in determining the proper amount to report as UBTI. Notice 2018-99 provides some needed interim guidance until final regulations are issued. This interim guidance distinguishes between situations where the organization owns or leases the parking area and situations where the organization pays a third party to provide parking services to the organization’s employees.
First, if the organization owns or directly leases the parking area, the IRS has provided the following four-step method:
Calculate the expenses associated with any reserved employee spots;
Determine the “primary use” of the remaining parking area;
Calculate the expenses associated with any parking spots that are reserved for nonemployees – these costs are not included as UBTI since those spots cannot be used by employees;
Determine remaining use and associated expenses, if any.
Keep in mind that the associated expenses determine the potential taxable income, not the fair value of the parking area, which certainly makes this an odd tax. Expenses associated with the parking area may include, but are not limited to: repairs, maintenance, insurance, utilities, snow removal, weed control, parking lot attendant services, rent, etc. Depreciation is not included as it is considered a capital expense.
Notice 2018-99 states that under the “primary use test,” the remaining parking area will qualify as a public use area if greater than 50% of the actual or estimated use during normal operating hours is available for public use. Simply put, if less than 50% of the unreserved parking area is used regularly by employees during normal operating hours, the organization passes the primary use test for the remaining parking area. The associated expenses with this unreserved area, then, are not included as UBTI.
Organizations have until March 31, 2019 to make clear which parking areas are reserved employee spots and which are not. These changes can be done by removing signage or blockades that would clearly limit access for nonemployees. Any changes made by March 31, 2019 can be treated as if they were made on January 1, 2018 (yes, the beginning of 2018).
For example, if your organization has 50 parking spots and reserves 10 of those spots for its employees, it would be looking at claiming 20% of its costs associated with the parking area as income subject to a 21% tax. If your organization acts between now and March 31, 2019, in removing those reserved parking signs, that action may reduce or completely remove this tax.
Secondly, if the organization pays a third party for the parking area for its employees, the reportable amount is the total paid to the third party for that area during the year, up to $260 per employee, which is the 2018 exclusion limitation under Code Section 132(f)(2). For example, if an employer paid a third party $300 per month, per employee, for five employee parking spaces for all of 2018, $15,600 ($260 x 5 x 12) would be taxable as UBTI. The $2,400 excess over $250 per employee ($40 x 5 x 12) would be taxable to the employees ($480 taxable to each employee). This excess is not also added to the UBTI income.
Notice 2018-100 provides relief to nonprofit organizations that were not required to file Form 990-T for the previous year. In those cases, the IRS is allowing organizations to quickly comply in catching up any tax estimates that are due. To claim this penalty waiver, you must write “Notice 2018-100” at the top of your 2018 Form 990-T. If your organization already filed Form 990-T for the previous year, you will not be eligible for this waiver, unfortunately.
Nonprofit organizations will still be allowed the annual $1,000 specific deduction against UBTI. Any remaining UBTI is taxed at the flat corporate rate, which was reduced from 35% to 21% for 2018.