Thanks to the Tax Cuts and Jobs Act (TCJA), if your nonprofit provides parking to its employees, it may now need to pay unrelated business income tax (UBIT) on the value of that parking benefit. That’s right – your tax-exempt organization may now need to pay income tax on an expense.

Unrelated business income is the income that a tax-exempt organization generates from (1) a trade or business, (2) that is regularly carried on, and (3) that is not substantially related to furthering the organization’s exempt purposes. There are a number of modifications, exclusions, and exceptions to the unrelated business income rules that will influence the amount of unrelated business taxable income, which is the amount that is subject to UBIT. But now, a nonprofit doesn’t even need to earn any unrelated business income to have unrelated business taxable income. Unfortunately, there’s still much we don’t know about how this new tax applies.

[UPDATE (December 24, 2019): The nonsensical and unpopular “parking tax” law was repealed on December 20, 2019 retroactive to 2017.]

What We Know

[UPDATE (December 10, 2018): Notice 2018-99 – Parking Expenses for Qualified Transportation Fringes Under § 274(a)(4) and § 512(a)(7) of the Internal Revenue Code; Notice 2018-100 – Relief from Additions to Tax for Underpayment of Estimated Income Tax for Tax- Exempt Organizations That Provide Certain Qualified Transportation Fringes]

Qualified parking is considered a qualified transportation fringe benefit (QTFB), and, as a result of the TCJA, tax-exempt nonprofits providing QTFBs to their employees will now have to pay taxes on such amounts.

Qualified parking is parking provided to an employee by an employer –

1. On or near the employer’s business premises; or
2. At a location from which the employee commutes to work (including commuting by carpool, commuter highway vehicle, mass transit facilities, or transportation provided by any person in the business of transporting persons for compensation or hire).

Parking is provided by an employer if –

1. The parking is on property that the employer owns or leases;
2. The employer pays for the parking; or
3. The employer reimburses the employee for parking expenses.

QTFBs (including qualified parking) can be provided to employees pursuant to a compensation reduction agreement, and an employee who elects such QTFBs may not be required to include the amount of compensation reduction in income, subject to certain requirements and limitations.

The tax that a tax-exempt nonprofit would  pay for providing a QTFB to its employees is 21 percent. Amounts paid for QTFBs on or after January 1, 2018 are subject to the tax, no matter what the fiscal year is of the organization. The UBIT liability would also be reported on Form 990-T (if the nonprofit has $1,000 or more of unrelated business income, including QTFB amounts), which may be unfamiliar to nonprofits (including a substantial number of churches and houses of worship) that have never had to file the 990-T before because they have never had any unrelated business taxable income.

What We Don’t Know

If parking is made available to employees pursuant to a compensation reduction agreement, the employer may not in substance be “providing” parking in any of the three ways listed above because it’s the employee that is truly paying for the parking. Many argue that this is therefore not a fringe benefit and should not be taxed as such.

The National Council of Nonprofits, in its preliminary comments submitted to Treasury and the IRS on April 24, raised the following questions that, according to its follow-up and more comprehensive letter dated June 21, still have not been answered:

• When a nonprofit employer makes payments into a pre-tax qualified plan at the request of individual employees so that the employees can direct their own money to defray the expenses of mass-transit passes or parking expenses, are those payments subject to the tax?
• When an employer is required by state or local law to make pre-tax qualified plans available so that employees can take mass-transit, are those mandatory payments subject to tax?
• What types of transportation fringe benefits are covered by the new code section? For instance, when an employer reimburses employees for transportation expenses to attend an out-of-town conference, are those amounts paid to the employee subject to the tax? Or are “commuting expenses” defined more narrowly as transportation to the employee’s primary place of work? What if an employee is a remote worker and is “commuting” to the nonprofit’s primary place of business for an all-staff meeting and the nonprofit employer pays for the remote worker’s occasional transportation costs?
• When an employer owns a building and sets aside parking spaces for its employees so that those employees do not have to pay to park their vehicles at their workplace, does the employer have to pay a tax on the monetary value of those parking spaces? If so, how will they be valued?
• Similarly, if the employer leases a building and parking spaces for its employees are included in the lease, does the employer have to pay a tax on the monetary value of those parking spaces that are provided for its employees? And if so, how will the cost of the parking spaces be valued?

The American Institute of CPAs (AICPA) also raises several questions in its letter to Treasury and the IRS dated April 2, 2018 related to Internal Revenue Code (IRC) Section 274 (Disallowance of certain entertainment, etc., expenses), not limited to tax-exempt organizations. Among the classifications AICPA requests:

• Confirm that if an employee is partially taxed on the FMV [fair market value] of parking (for amounts above the section 132(f) limit), the employer is entitled to a 100% tax deduction for the amount includable in taxable compensation.
• Provide that to the extent that part or all of the section 132(f) exclusion is related to a salary reduction arrangement under which the employee pays for the parking or transit passes on a pre-tax basis, the amount subject to the section 132(f) salary reduction arrangement (which is not paid as salary) is nondeductible under section 274(a)(4). However, if the pre- tax salary reduction amount exceeds the employer’s cost of providing the parking, only the employer’s cost of providing the parking is nondeductible.
• Pursuant to Notice 94-3, where an area that has ample parking available to employees, clients, contractors and other visitors at no charge, such as where an employer is a tenant in a mall and the mall, as part of the tenancy arrangement, provides free parking to all employees, customers and contractors (with no preferential parking), we suggest clarifying that there is no loss of deduction under section 274(a)(4). In this case, the employee has no taxable compensation and does not use section 132(f) because the value of the parking provided is $0.

Recommendations

• Determine your costs of employee parking and other QTFBs offered on a tax-free or tax-sheltered basis.
• Plan to report such costs as unrelated business taxable income and pay federal taxes on such amounts (if they exceed $1,000).
• If you’re not enrolled in the Treasury Department’s Electronic Federal Tax Payment System (EFTPS), enroll here.
• Consider whether you’ll need to make quarterly estimated income tax payments.
• Determine whether state taxes are also implicated because your state laws follow the federal laws on unrelated business income.
• Consider whether you can continue to offer employee parking on a tax-free or tax-sheltered basis and/or whether you would prefer to discontinue the parking benefit and increase the pay to your employees to offset such amount (which they can use to pay for parking) and the consequent increase in income taxes your employees will now have to pay.
• The National Council of Nonprofits, the American Institute of Certified Public Accountants, the American Society of Association Executives, and many others in calling on the Treasury Department and the IRS to delay new UBIT liabilities unless and until the government provides clear guidance. I encourage you to send your comment to the IRS online about delaying implementation of the UBIT rules. It’s simple. The comment form requires just your email, the name of the applicable form (“Form 990-T”), and your brief comment. The National Council of Nonprofits offers the following suggested comment:
  

  For legal, policy, and practical reasons, and consistent with established precedent, Treasury and the IRS should immediately delay implementing those two new UBIT subsections until one year after Final Rules are promulgated, to provide both the necessary official guidance for compliance and a reasonable transition period for nonprofits to develop the necessary record-keeping systems.

For Tax Nerds*

* Thanks to Alexander Reid of Morgan, Lewis & Bockius LLP for raising the issue below at several conferences.

IRC Section 512(a) provides in pertinent part (emphasis added):

(7) Increase in unrelated business taxable income by disallowed fringe
Unrelated business taxable income of an organization shall be increased by any amount for which a deduction is not allowable under this chapter by reason of section 274 and which is paid or incurred by such organization for any qualified transportation fringe (as defined in section 132(f)), any parking facility used in connection with qualified parking (as defined in section 132(f)(5)(C)), or any on-premises athletic facility (as defined in section 132(j)(4)(B)). The preceding sentence shall not apply to the extent the amount paid or incurred is directly connected with an unrelated trade or business which is regularly carried on by the organization. The Secretary shall issue such regulations or other guidance as may be necessary or appropriate to carry out the purposes of this paragraph, including regulations or other guidance providing for the appropriate allocation of depreciation and other costs with respect to facilities used for parking or for on-premises athletic facilities.

So, it’s a two-part test to determine whether a particular item is included as unrelated business taxable income under 512(a)(7):

1. It’s “paid or incurred by” the organization for, among other things, (a) a qualified transportation fringe, which is defined to include “qualified parking” provided by an employer to an employee; and (b) any parking facility used in connection with qualified parking.
   • Is parking made available through a compensation agreement, particularly when required under local law (as is the case in San Francisco, Berkeley, Richmond (CA), New York City, and Washington DC), really “paid or incurred by” the organization?
   • Why did the statute include “any parking facility used in connection with qualified parking” if “qualified parking” is included as a qualified transportation fringe? What does the former pick up that the latter did not?
2. It’s an amount for which a deduction is not allowable by reason of IRC Section 274. A qualified transportation fringe provided to an employee is not deductible under IRC Section 274(a)(4). But “a parking facility used in connection with qualified parking” was stricken from an earlier version of the legislation. This suggests that a parking facility used in connection with qualified parking, which is referenced in the first part of the two-part test, does not meet the second part of the test. This would mean that Section 274 does not necessarily disallow a deduction for amounts paid by an employer for a parking facility used in connection with qualified parking and such amounts would not be included in unrelated business taxable income.