IRS Provides Interim Guidance Regarding Determination of Employer-Provided Nondeductible Employee Parking Expenses For Unrelated Business Income Reporting Purposes
SynopsisThe IRS recently issued Notice 2018-99, (the Notice), to provide interim guidance (until proposed regulations are issued) for determining the amount of nondeductible employer-provided employee parking expenses relevant to the Tax Cuts and Jobs Act’s (TCJA) new rules in Section 512(a)(7). This new addition to the Internal Revenue Code requires certain employer-provided qualified transportation fringe benefits to be recognized as unrelated business income by tax-exempt entities.
In GeneralInternal Revenue Code (IRC) Section 132 excludes certain amounts of employer-provided “qualified transportation fringes” (generally, transportation in a commuter highway vehicle between work and home, transit passes and qualified parking) from an employee’s compensation. However, under the TCJA, effective for 2018 and after, IRC Section 274(a)(4) denies the employer a deduction for providing employees with these fringes (unless the expenses are treated as taxable compensation to the employees who receive them, in which case the expense may be deductible as compensation under Section 162, or deductible because the expense is necessary for ensuring the safety of employees under Section 274(l)). There have been many questions as to how employers are to determine the amount of their nondeductible employee parking expenses. Such knowledge is needed for a tax-exempt entity to determine whether the amount is sufficient to be reportable as unrelated business income on Form 990-T.
In general, the Notice provides that the determination of the nondeductible amount depends upon whether the employer pays a third party to provide parking for its employees or, alternatively, the employer owns or leases a parking facility at which its employees park.
- Third Party Parking - the disallowance amount is generally the total annual amount paid by the employer to the third party. However, as only a specified annual amount can be provided to employees on a tax-free basis ($260 per month for 2018), the cost per employee in excess of the limitation amount is required to be treated as taxable compensation to the employee. Accordingly, only the amount up to $260 per month, per employee, comes within the scope of recognizable unrelated business income for the not-for-profit entity.
- Employer Owns or Leases All or a Part of the Parking Facility - the Notice states that any reasonable method may be used. However, the Notice also provides the following specific four-step method, which is deemed to be reasonable for making calculations with respect to a parking facility owned or leased by a tax-exempt entity:
- Step 1: Determine the percentage of the facility’s parking spaces which are reserved exclusively for the employer’s employees, and multiply the total parking expenses amount by this percentage to determine the nondeductible amount for those spaces.
- Step 2: If there are parking spaces which are not reserved exclusively for the employer’s employees that are used primarily for the use of the general public (greater than 50% of the actual or estimated usage during normal business hours on a typical business day), those spaces are excepted from the deduction exclusion. Accordingly, if this “greater than 50%” test is passed, then the related expenses are excluded from treatment as unrelated business income, and the calculation process is completed. However, if the spaces considered in Step 2 do not meet this 50% test, then proceeding to Step 3 becomes necessary.
- Step 3: After adjusting for any parking spaces reserved exclusively for the employer’s employees from Step 1, the employer may identify the number of parking spaces, if any, which are exclusively reserved for nonemployees (e.g., denoted by “Customer Parking Only” signs). (If there are no parking spaces exclusively reserved for nonemployees, then immediately proceeding to Step 4 is in order.) If there are parking spaces exclusively reserved for nonemployees, the organization determines the percentage of those spaces out of all the remaining parking spaces, and multiplies the expenses for the remaining total parking expenses by that percentage – the product is the amount of the deduction for the remaining total parking expenses that is not disallowed, and does not have to be considered for unrelated business income purposes. (Note that in Step 3 of Example 5 in the Notice, the amount of expenses used is the original total, not the remainder after Step 1, which appears to be an error.)
- Step 4: After Steps 1 – 3 have been completed, if there are any remaining parking spaces, the employer must reasonably determine the employee use of these remaining spaces during normal business hours on a typical business day, and the related expenses allocable to these employee parking spaces. The amount determined becomes recognizable unrelated business income. (The Notice provides that the number of employee parking spaces may be based on actual or estimated use, which in turn may be based upon the number of spaces, the number of employees, the hours of use or other measures.)
What Does CohnReznick Think?
The introduction of IRC Section 512(a)(7) by way of the TCJA presents tax-exempt entities with new considerations for unrelated business income. This new law became effective for all organizations as of January 1, 2018, regardless of tax year-end. Essentially, any tax-exempt organization, no matter how large or how small, which has employees and parking arrangements, must consider the effects of the new law. However, Section 512(a)(7) itself does not explain how taxable amounts are to be determined. Instead, the new rule leaves this task to future guidance and regulations. Accordingly, Notice 2018-99 represents at least preliminary information that the not-for-profit community has been awaiting for almost a year.
For organizations that have reserved spots for employees, the Notice states that, if these are removed by March 31, 2019, then Step 1 of the calculation will not apply retroactively to January 1, 2018.
Notable is the difference in attitudes between the new law and the Notice regarding the recognition of depreciation expense as a parking facilities expense. Section 512(a)(7) specifically references depreciation as a cost with respect to facilities used for parking. However, the Notice just as specifically states that depreciation does not represent a “parking expense” for unrelated business income calculation purposes.
Step 4 of the four-step calculation process might be of most significance to those organizations that have been anticipating guidance. A popular interpretation of Section 512(a)(7) was that an owned or leased parking facility would not be subject to an increase in unrealized business income if it was also available to the public for parking. However, the calculation associated with Step 4 clearly intends to include expenses of owned and leased parking facilities that are predominantly used by an organization’s employees.
Also of interest, the Notice specifies that the Treasury Department and the IRS have determined that the taxable compensation deduction exception under Section 274(e)(2) does apply to employer-provided employee parking, and, thus, increases unrelated business income. However, the Notice does not provide any amplification regarding the Section 274(l) deduction exception for employer-provided employee commuter benefits “necessary for ensuring the safety of the employee.” We continue to await additional guidance regarding the Section 274(l) exception.
The Notice does offer several examples for making calculations required by 512(a)(7), and it also states that its guidance can be relied upon until future guidance is provided. Nonetheless, the examples do not cover all potential situations, and we continue to look forward to greater detail when proposed regulations are provided. Until such time, tax-exempt organizations that have employees and offer qualified transportation benefits should utilize the guidance provided by the Notice.
ContactFor more information, please contact Dana Fried, Managing Director National Tax Services, at Dana.Fried@CohnReznick.com or 516-417-5064, or Glenn Shelton, Senior Tax Manager, Exempt Organization Tax Compliance, at Glenn.Shelton@CohnReznick.com or 301-280-3077.
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