Nonprofit Resources


IRS Issues Interim Guidance on “Parking Tax”

On December 10, 2018, the IRS and Treasury released much-anticipated guidance on the “parking tax” under Internal Revenue Code (IRC) section 512(a)(7). As we suspected, paying a third party for employee parking and reimbursing employees for parking is taxable.

As expected, the “imputed UBTI” is based on costs paid or incurred, not on the value of employee parking.

Notice 2018-99 says:

For purposes of this notice, “total parking expenses” include, but are not limited to, repairs, maintenance, utility costs, insurance, property taxes, interest, snow and ice removal, leaf removal, trash removal, cleaning, landscape costs, parking lot attendant expenses, security, and rent or lease payments or a portion of a rent or lease payment (if not broken out separately). A deduction for an allowance for depreciation on a parking structure owned by a taxpayer and used for parking by the taxpayer’s employees is an allowance for the exhaustion, wear and tear, and obsolescence of property, and not a parking expense for purposes of this notice.

As described above, the great news is that depreciation is excluded from the costs that are aggregated in arriving at the imputed income.

Notice 2018-99 also includes a somewhat algebraic, four-step computation for determining the percentage of employee parking spaces and whether unused spaces may be included in the organization’s denominator. Each organization will need to work through the four-step framework (or another reasonable methodology) for computing their employee parking percentage, UBIT, or both.

Here’s an example from the Notice:

Example 9. Tax-Exempt Organization J, a religious organization that operates a church and a school, owns a surface parking lot adjacent to its buildings. J incurs $10,000 of total parking expenses. J’s parking lot has 500 spots that are used by its congregants, students, visitors, and employees, and 10 spots that are reserved for certain employees. During the normal hours of J’s activities on weekdays, J usually has approximately 50 employees parking in the lot in non-reserved spots and approximately 440 non-reserved parking spots that are empty. During the normal hours of J’s activities on weekends, J usually has approximately 400 congregants parking in the lot in non-reserved spots and 20 employees parking in the lot in non-reserved spots.

Step 1. Because J has 10 reserved spots for certain employees, $200 ((10/500) x $10,000 = $200) is the amount of total parking expenses that is nondeductible for reserved employee spots under § 274(a)(4). Thus, under § 512(a)(7), J must increase its UBTI by $200, the amount of the deduction disallowed under § 274(a)(4). [Note that Notice 2018-99 also offers organizations an opportunity to retroactively change employee parking arrangements until March 31, 2019. This may reduce or eliminate any additional unrelated business taxable income (UBTI) under IRC 512(a)(7) for some organizations.]

Step 2. Because usage of the parking spots varies significantly between days of the week, J uses a reasonable method to determine that the primary use of the remainder of J’s parking lot is to provide parking to the general public because 90% (440/490 = 90%) of the spots are used by the public during the weekdays and 95% (470/490) of the spots are used by the public on the weekends. The empty, non-reserved parking spots are treated as provided to the general public. Thus, expenses allocable to these spots are excepted from the § 274(a) disallowance by § 274(e)(7) under the primary use test, and only $200 of the $10,000 is subject to the § 274(a)(4) disallowance. Therefore, only $200 of the expenses for the provision of the QTF will result in an increase to UBTI under § 512(a)(7).

If J 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), J is not required to file a Form 990-T for that year.

Limited Penalty Relief for Estimated Payments

In addition, Notice 2018-100 includes limited penalty relief for some organizations who have not paid estimated payments that would have otherwise been owed for tax periods (or portions thereof) after December 31, 2017.

We are concerned about the wording in that Notice that states:

Accordingly, in the interest of sound tax administration, the addition to tax under section 6655 for failure to make estimated income tax payments otherwise required to be made on or before December 17, 2018, is waived for certain tax-exempt organizations that provide qualified transportation fringes (as defined in section 132(f)) and any parking facility used in connection with qualified parking (as defined in section 132(f)(5)(C)) to an employee to the extent that the underpayment of estimated income tax results from enactment of section 13304(c) and section 13703 of the Act. This relief is available only to any tax-exempt organization that was not required to file a Form 990-T for the taxable year immediately preceding the organization’s first taxable year ending after December 31, 2017. This relief is limited to tax-exempt organizations that timely file Form 990-T and timely pay the amount reported for the taxable year for which relief is granted. Taxpayers who do not qualify for relief under this notice may avoid an addition to tax for underpayment of estimated income tax if they meet one of the statutory safe harbor or exception provisions under section 6654 or section 6655 of the Code. [Emphasis added.]

This could be a concern for organizations with a May 31, 2018, or June 30, 2018 year-end who did not file or extend Form 990-T at October 15, 2018, or November 15, 2018, and pay estimated taxes at those dates. The issue will likely be whether the fact that guidance was not issued until after the due date would qualify as reasonable cause or meet an exception under IRC section 6655.

We recommend that you work with your tax advisors on how the guidance under IRC section 512(a)(7) might affect your organization’s tax situations for years ending after December 31, 2017. The recent guidance provided in Notices 2018-99 and 2018-100 will affect each organization based upon its unique circumstances.

Note, too, that there is still a movement in Congress to repeal this law.

If you have any questions, please do not hesitate to contact us online or at [email protected].

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