Tax On Transportation Benefits? How Do I Calculate That?
On December 18, 2018, the Internal Revenue Service (IRS) issued an interim guidance regarding the treatment of Qualified Transportation Fringe (QTF) benefit expenses paid or incurred after December 31, 2017. The rules are intended to assist tax-exempt organizations in calculating the related tax referred to as Unrelated Business Taxable Income (UBTI) on these benefits.
Where Do I Start?
First, it’s important to define exactly what QTFs are. QTFs are defined by the Internal Revenue Code as:
- Transportation in a commuter highway vehicle between home and work
- Any transit pass
- Qualified parking (parking provided to an employee on or near the business premises of the employer on or near the location from which the employee commutes to work)
QTFs can be issued by the employer in the following ways:
- In kind
- Bona fide cash reimbursement arrangement
- Compensation adjustment arrangement
The maximum monthly excludable amount from employee income is $260 for 2018 and $265 for 2019. This is unchanged by the Tax Cuts and Jobs Act of 2017
What If My Organization Pays Someone for Employee Parking?
If your organization pays a third party for employee parking, the disallowance, or taxable amount, is generally calculated as the total annual cost of employee parking paid to the third party. However, if the amount your organization pays to a third party for employee parking exceeds the monthly limitation on exclusion ($260 per employee), that excess amount must be treated as compensation and wages to the employee. As a result, the total of the monthly amount in excess of $260 that is treated as compensation and wages is not taxable to the Organization.
Helpful pointer: If you pay a third party for employee as well as visitor parking you may be able to avoid UBTI if 50% or more of the parking spots are for the general public.
Unresolved question: What if free parking is embedded in a building space lease? What reasonable method exists? If there is an additional charge for parking spots not covered by the lease, is that the amount that should be used to “value” the free spaces? The IRS says value should not be used in these calculations so what should I do?
Unresolved question: What if free parking is embedded in building space lease and the facility itself meets the definition of 50% or more available for the general public (see the section below regarding owning or leasing a parking facility). Does the general public use apply for all tenants making the parking not subject to tax?
Nationally, practitioners are working to get answers to these unresolved questions, and we will pass along information as it becomes available.
What If My Organization Owns Or Leases A Parking Facility?
If your organization owns or leases all or a portion of a parking facility, where your employees park UBTI may be calculated using any reasonable method. However, the IRS recommends using the method as defined below. Note the IRS defines ‘parking facility’ as indoor and outdoor garages and other structures, as well as parking lots and other areas, where employees may park on or near the business premises of the employer or on or near a location from which the employee commutes to work. The IRS defines ‘total parking expenses’ as 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).
IRS Recommended Method
Step One: Identifying the number of spots in the parking facility exclusively reserved for your employees. Then determine the percentage of reserved employee spots in relation to total parking spots and multiply that percentage by your total parking expenses for the parking facility. This amount is UBTI.
Step Two: Determine the primary use of the remaining spots. If the primary use (50% or more) of the remaining parking spots in the parking facility is to provide parking to the general public, then the remaining total parking expenses for the parking facility are not taxable. Stop here if all parking spots are accounted for in these first two steps.
Step Three: If the primary use of the remaining parking spots is not to provide parking to the general public, calculate the allowance for reserved non-employee spots. Identify the number of spots exclusively reserved for non-employees (i.e. clients, visitors, etc.) then determine the percentage of reserved non-employee spots in relation to the remaining total parking spots and multiply that percentage by your organization’s remaining total parking expenses. The product is the amount not subject to UBTI.
Step Four: Determine remaining use and allowable expenses. If you complete Steps 1-3 above and the remaining parking expenses are not specifically categorized as deductible or nondeductible, you can reasonably determine the employee use of the remaining parking spots during normal business hours on a typical business day and the related expenses allowable to employee parking spots. Methods to determine employee use of the remaining parking spots may include specifically identifying the number of employee spots based on actual or estimated usage. Actual or estimated usage may be based on the number of spots, the number of employees, the hours of use, or other measures.
Helpful pointer: You have until March 31, 2019 to change parking arrangements to remove or eliminate reserved employee spots which will be treated as retroactive to January 1, 2018.
The IRS Notice contains several examples of calculations that we encourage you to consider.
What If Employee Parking Expenses Are Related To A UBTI Activity?
Under the Tax Cuts and Jobs Act, tax-exempt organizations are required to increase their UBTI by any amount for which a deduction is not allowable for any QTF. However, Section 512(a)(7) does not apply to the extent the amount paid or incurred is directly connected with an unrelated trade or business that is regularly carried on by the organization. In such case, the amount of the QTF expenses directly connected with the unrelated trade or business is disallowed as a deduction in calculating the UBTI attributable to such unrelated trade or business, but no separate tax is to be paid.
How Do I Calculate The Tax And File A Return?
Section 512(b)(12) generally provides a specific deduction of $1,000 as a modification to the UBTI. Tax-exempt organizations are required to file a Form 990-T if they have gross income of $1,000 or more. Organizations for which the sum of (1) gross income from unrelated trades or businesses and (2) the increase of UBTI under is less than $1,000 are not required to file a Form 990-T. UBTI is taxed at the corporate tax rate of 21%.
Will My Organization Be Assessed Penalties?
The IRS also issued last month Notice 2018-100. Through this Notice, the IRS is offering to waive underpayment penalties for tax exempt organizations that offered QTF and were not required to file a form 990-T for the tax year preceding the organization’s first tax year ending after December 31, 2017. With the enactment of Section 512(a)(7), tax exempt organizations may owe UBIT and must pay estimated income tax for the first time. Recognizing that these organizations may need additional time for compliance, the IRS is waiving 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 as a result of the changes by the Tax Cuts and Jobs Act.
Note that this transitional relief is only available for tax-exempt organizations that were not required to file Form 990-T for the tax year immediately preceding the organization's first tax year ending after December 31, 2017. The relief is also only limited to tax-exempt organizations that timely file Form 990-T and timely pay the amount reported for the tax year for which relief is granted. Organizations must write "Notice 2018-100" on the top of the Form 990-T filed for the applicable tax year to claim this relief.
Request For Comments
The Treasury Department and the IRS request comments by the deadline of February 22, 2019. Comments can be submitted electronically via the Federal eRulemaking Portal. (Type IRS 2018-0038) in the search field on the homepage to find the notice and submit comments).
Important Notes: This summary is not meant to substitute for reading the IRS notices in their entirety. The IRS intends to publish proposed regulations under Sections 274 and 512 (and under 6012 with regard to exempt organization’s related filing requirement). The proposed regulations will include guidance on the calculation of increased UBTI attributable to QTFs. Until these regulations are issued, the IRS has instructed that you can use any reasonable method as provided in Section B of the IRS’s interim guidance to determine the amounts.
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