Thousands of nonprofits that provide parking benefits for their employees
are subject to a new income tax on those benefits and have only weeks to
avoid or minimize that tax liability for 2018.
The 2017 Tax Act — enacted in December 2017 and effective January 1,
2018 — requires tax-exempt organizations to pay a 21 percent tax on
expenses they incur to provide qualified transportation fringe benefits to
their employees. The deadline for filing Form 990-T to report 2018 taxable
income and pay the tax is May 15, 2019, and IRS interim guidelines
give nonprofits only until March 31, 2019, to adjust employee parking
arrangements to avoid or minimize taxes for 2018.
The 2017 Tax Act amended Internal Revenue Code Section 512(a) to require
tax-exempt organizations to increase their unrelated business taxable
income, or UBTI, by an amount paid or incurred for qualified transportation
fringe benefits provided to employees. These fringe benefits include mass
transit passes and employee parking arrangements.
Even nonprofit employers obligated by state law or city ordinance to
provide mass transit options to employees must pay tax on expenses for this
type of employee perk. For example, New York, San Francisco and Washington,
D.C., require many for-profit and nonprofit employers operating in the area
to offer commuter benefits to their employees. Now, complying with these
ordinances can subject nonprofits to tax. Unfortunately for nonprofits, the
new law became effective less than a month after its passage, leaving
little time to make adjustments to avoid these additional taxes.
Many employers, including nonprofits, provide their employees nearby
parking options as a convenience of employment. For example, some employers
contract with third parties that own parking facilities nearby to allow
employees to park at the third parties’ facilities. Before the change in
law, an employer could cover the cost of the employee’s parking and the
employee could exclude a certain amount of this transportation fringe
benefit from income. The 2018 monthly exclusion limitation for employees
was $260, meaning that
if the monthly parking cost did not exceed $260, the employee did not have
to recognize any income for this fringe benefit.
Under the new law, the nonprofit is subject to tax at a rate of 21 percent
of the amount paid for this fringe benefit. If the actual cost for the
parking arrangement per employee exceeded the $260 monthly limit in 2018,
the excess continues to be treated as compensation to the employee and is
not taxable to the employer.
For example, a tax-exempt organization covering the cost of monthly parking
for 10 employees for all of 2018, at the $260 limit per month per employee,
is deemed to have additional UBTI equal to the $31,200 paid to the
third-party parking facility owner. If this organization had no other UBTI
or allowable deductions from UBTI in 2018, then the amount of tax due for
2018 under the new law is $6,552.
In other instances, an employer that owns or leases a parking facility may
offer free parking to its employees. A “parking facility” that would be
subject to the UBTI rules would include indoor and outdoor parking garages
and other structures, parking lots and other areas where employees may park
at or near the place of business of a commuting location. In this case, the
employer incurs costs to maintain the parking facility. These costs might
include the following:
snow, ice, leaf and trash removal
- parking lot attendant or security personnel expenses
rent or lease payments
Under the new law, these expenses are considered taxable to the tax-exempt
organization. The IRS has confirmed, however, that depreciation expenses associated with
an employer-owned parking structure would not be subject to the UBTI rules
because they are not considered a parking expense. Nonprofits may use any
reasonable method to calculate the expenses associated with these parking
facilities that would be subject to the UBTI rules.
IRS Notice 2018-99
provides new guidance that gives nonprofits until March 31, 2019, to
retroactively reduce the amount of their parking expenses that would be
considered UBTI by changing their parking arrangements. Because the
expenses of parking available to the general public are not subject to this
tax, one way to minimize tax is to reduce or eliminate the number of
parking spaces that nonprofits reserve for their employees.
Tax-exempt organizations may be able to avoid having any UBTI if they are
willing to eliminate spaces marked as reserved for employees. If a
tax-exempt organization feels it must reserve certain spaces for key
employees, the proportionate amount of the expenses allocated to those
spaces will be included in UBTI, but the organization can avoid additional
UBTI and tax due if it can demonstrate that the primary use for the
non-reserved spaces of its parking facility is for the general public. As
examples, the general public includes customers, clients, visitors,
patients of a healthcare facility, students of an education institution and
congregants of a religious organization.
Employer Pre-Tax Arrangements
If an employer does not have its own parking facility, it may offer its
employees the option of bona fide cash reimbursement arrangements or
compensation reduction agreements that allow employees to pay for parking
pre-tax. For compensation reduction agreements, the employer withholds the
cost of parking from an employee’s paycheck on a pre-tax basis and remits
the funds to the owner of the parking facility on behalf of the employee.
These type of arrangements are common, and as long as the amount withheld
from an employee’s paycheck does not exceed the monthly limit ($260 for
2018), the employee does not have to pay income tax on the parking benefit.
One might think compensation reduction arrangements would not be covered by
the changes in the new law because the employer is not out of pocket any
money to cover the transportation fringe. However, at a tax conference in
March 2018, an IRS official stated that the IRS would interpret this new
section as imposing tax not only on employer subsidies for transportation
fringe benefits, but also on the amounts employees voluntarily ask to be
deducted from their paychecks and placed into pre-tax qualified plans to
pay for commuting expenses. Recent IRS guidance seems to adopt this
interpretation, which may cause many nonprofits to stop offering such
benefits to avoid the tax.
These new rules will require tax returns from many exempt organizations
that have never before filed with the IRS — including organizations that do
not engage in any actual unrelated trade or business activity and organizations, such as
churches, that are exempt from filing information returns. Religious
organizations and many other tax-exempt employers continue to urge Congress
to postpone or repeal these provisions. Despite support from individual
lawmakers, however, no such legislation has passed.
McGuireWoods’ Nonprofit and Tax-Exempt Organizations Group
nonprofit and tax-exempt organizations group provides advice and guidance that enable charities and other nonprofits to
operate more efficiently and effectively in today’s increasingly
complicated, regulated and competitive environment.
Private Wealth Services
private wealth services team stands ready to help clients and their advisors obtain estate planning
results that benefit themselves and their families from tax and non-tax
perspectives. The team has been ranked by Chambers, the international
rating service for attorneys, as one of the top wealth management legal
practices in the country for several years. Our professionals are dedicated
to estate planning and the analysis of related tax and fiduciary issues.
for a full list of team lawyers and their locations.