IRS issued Notice 2018-99 regarding tax-exempt organizations and nondeductible parking fringe expenses paid or incurred after December 31, 2017. The new rules respond to questions from taxpayers about calculating the amount of parking expenses, which are no longer tax deductible and, for some entities, must be reported. The notice also helps tax-exempt organizations to determine how these nondeductible parking expenses create or increase unrelated business taxable income (UBTI).
The Tax Cuts and Jobs Act, signed into law December 22, 2017, delivered historic tax relief for workers, families, and job creators. It also made several changes to the Tax Code, and among them provided that employers could no longer deduct costs for subsidized or paid commuter benefits such as parking and transit programs.
A key part of this guidance is a special rule enabling many employers to retroactively reduce the amount of their nondeductible parking expenses. The proposed regulations include guidance on the determination of nondeductible parking expenses and other expenses for qualified transportation fringes and the calculation of increased UBTI. 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.
How a taxpayer determines the nondeductible amount depends on whether the taxpayer pays a third party to provide parking for its employees or owns or leases all or a portion of a parking facility where its employees park. In the first instance, the disallowance amount is based on the amount paid to the third party by the taxpayer; and, in the second, a taxpayer may use any reasonable method in determining the disallowance amount.
As a safe harbor, the notice describes a four-step method that will be considered reasonable to calculate the portion of parking expenses that are subject to UBTI. The notice also states that using the value of employee parking to determine expenses allocable to employee parking in a parking facility owned or leased by the taxpayer is not a reasonable method, because a deduction is disallowed for expenses of providing qualified transportation fringes regardless of its value.
In addition, for tax years beginning on or after January 1, 2019, a method that fails to allocate expenses to reserved employee spots cannot be a reasonable method.
Provides tax penalty relief in 2018 to tax-exempt organizations that offer these benefits and were not required to file a Form 990-T (Exempt Organization Business Income Tax Return) last filing season.
Note that a tax-exempt organization that has less than $1,000 in unrelated business income is not required to file a Form 990-T and thus is not required to pay the unrelated business income tax.
By retroactively reducing the amount of their nondeductible parking expense, many churches, schools, hospitals, and other tax-exempt organizations may be able to reduce their associated UBIT. Such a change made in parking arrangements may apply retroactively to January 1, 2018.
The information contained in this article is not intended to be legal, accounting, or other professional advice. We assume no liability whatsoever in connection with its use, nor are these comments directed to specific situations.
Janet LeTourneau, ACFCI, is the director of compliance services at WageWorks. She draws upon more than 25 years of experience with flexible benefits plans and tax laws to perform consulting services and monitor quality control.
LeTourneau is a frequent speaker to employer groups and conferences and was formerly on the board of directors for the Employers Council on Flexible Compensation (ECFC) and is a current member of the ECFC Technical Advisory Committee (TAC). She is the lead instructor for the Section 125 administrators training workshop.
LeTourneau was one of the first people in the country to earn the Advanced Certification in Flexible Compensation Instruction designation sponsored by the Employers Council on Flexible Compensation. She is a certified trainer in the ACFCI program.
LeTourneau can be reached by telephone at 262-236-3021 or by email at firstname.lastname@example.org.