How Does Updated Guidance On Qualified Transportation Fringe Affect Nonprofits?
Tax-exempt entities, in particular, need to pay special attention to the newly updated guidance released by the IRS with regard to parking expenses and qualified transportation fringe (QTF) benefits as these rules could have some major implications.
Under the Tax Cuts and Jobs Act, paying for employee parking may no longer be tax deductible. For tax-exempt organizations, the amount of nondeductible QTF expense provides a corresponding increase to unrelated business taxable income (UBTI). If this additional increase creates UBTI of $1,000 or more, a Form 990-T must be filed by the organization.
Recently released guidance provides interim insight on the determination of the amount of nondeductible qualified parking expenses. The recent notice also provides guidance to tax-exempt organizations that will be affected by these code section changes. For now, any tax-exempt organization that owns or leases parking facilities for its employees may use any reasonable method to make such determination. Organizations can rely on the guidance provided by the safe harbor notice until proposed regulations are published.
Safe Harbor Steps
- Calculate the disallowance for reserved employee parking spaces. This is calculated by multiplying the percentage of reserved employee spots by the taxpayer’s total parking facility expenses.
- Determine the primary use of the remaining spaces. This primary use test determines if the primary use of the remaining parking spots is for the general public, then the remaining parking expenses are excluded. Primary use means that greater than 50 percent of actual parking spots are tested during regular hours of operation.
- Calculate the allowance for reserved non-employee spaces. For the spots remaining that are not for the general public, the amount of reserved non-employee spots must be determined in relation to the remaining total parking spots. That percentage is then multiplied by the total remaining parking expenses. The total amount is not included in UBTI.
- Determine remaining use and allocable expenses. If there are any remaining parking expenses not categorized as UBTI or not UBTI after the previous three steps, the organization must reasonably determine the employee use of the remaining parking spots during the normal activity hours and the related expenses allocable to employee parking spots.
Check out this slideshow to learn more about how the Tax Cuts and Jobs Act has impacted nonprofit organizations.
Example 1
St. Michael, a tax-exempt organization that operates a school and a church, owns a parking lot by the buildings. St. Michael incurs total parking expenses of $10,000. The organization’s parking lot has 500 spots that are used by a mix of parishioners, visitors, students and employees. There are 10 spots reserved for specific employees. During St. Michael’s regular weekday hours, there are typically about 50 employees parked in the lot in the non-reserved spots, which leaves about 440 non-reserved empty parking spots. On the weekends, there are nearly 400 congregants parking in the lot in non-reserved spots and 20 employees using the non-reserved spots.
Due to the fact that St. Michael has 10 reserved spots for employees, $200 ((10/500) x $10,000 = $200) is the number of total parking expenses that is nondeductible for reserved employee spots. Thus, the organization must increase its UBTI by $200, the amount of the deduction disallowed.
Because the number of parking spots used varies significantly between weekdays and weekend, St. Michael uses a reasonable method to determine that the primary use of the remainder of its parking lot is to provide parking to the general public. Of their parking spaces, 90 percent (440/490 = 90 percent) are used by the public during the weekdays and 95 percent (470/490) of the spots are used by the public on the weekends. The empty, non-reserved parking spots are treated as being provided to the general public. This makes their expenses allocable to these spots excepted from the disallowance under the primary use test, and only $200 of the $10,000 is subject to the disallowance. Therefore, only $200 of the expenses for the provision of the QTF will result in an increase to UBTI.
If St. Michael does not have gross income from any unrelated trades or businesses of $800 or more included in computing its UBTI (to reach the $1,000 filing threshold), the organization is not required to file a Form 990-T for that year.
Example 2
Metro General is a hospital that owns its parking lot. Metro General incurs $10,000 of total parking expenses. A mix of patients, visitors and employees use the 500 parking spots. About 50 spots are reserved for hospital management, and about 100 employees park in the non-reserved spots during the normal operating hours of the hospital.
Since there are 50 reserved spots for employees, $1,000 ((50/500) x $10,000 = $1,000) is the amount of total parking expenses that is nondeductible for reserved employee spots. Metro General must increase its UBTI by $1,000, the amount of the deduction that is disallowed.
The primary use of the remainder of the hospital’s parking lot is to provide parking to the general public as 78 percent (350/450 = 78 percent) of the remaining spots are open to the public. Thus, expenses allocable to these spots are excepted from the disallowance under the primary use test, and only $1,000 is subject to the disallowance. Therefore, only $1,000 of the expenses for the provision of the QTF will result in an increase in UBTI.
Metro General will have to add the $1,000 increase of UBTI to its gross income from unrelated trades or businesses. The hospital is required to file a Form 990-T because the $1,000 increase to UBTI meets the filing threshold.
The calculations and classifications can be cumbersome to determine. We are here to help you with this as well as other matters stemming from the Tax Cuts and Jobs Act. Contact our not-for-profit group for guidance.