Last year’s
Tax Cuts and Jobs Act created a 21% tax on transportation-related fringe
benefits provided by nonprofits.
That does
not sound so bad until you consider that qualified transportation fringe
benefits include:
1.
Transit
passes or reimbursement for the same
2.
Use
of a commuter highway vehicle or reimbursement for the same
3.
Qualified
bicycle commuting reimbursement
4.
Qualified
parking expenses or reimbursement for the same
That last
one proved to be a shocker.
What started
the issue was the new deduction disallowance for qualified transportation
fringe benefits paid by taxable employers. For example, if the employer pays
for employee parking, up to $260 per month can be excluded from the employee’s 2018
W-2. In the past the employer could deduct that $260 on its tax return. Now it
could not. Congress felt that – if taxable employers were to be affected – then
nonprofit employers should also be affected.
But how does
a nonprofit even pay tax?
It can
happen, and it is called unrelated business income. In general, it means that
the nonprofit is veering away from its charitable mission and is conducting an
activity that is virtually indistinguishable from a for-profit business next
door.
The
nonprofit has to separately account for this activity. The IRS then spots it a
$1,000 exemption. If it has more than a $1,000 in profit then it has to pay tax
at the corporate rate – which is now 21%.
This change entered
the tax Code in December, 2017 via Code Section 512(a)(7):
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)
).
There are three
things to note here:
(1) Congress is treating these disallowed
deductions as if they were income to the nonprofit.
(2) We have to track down the meaning of “qualified
parking,” and
(3) The phrase “deduction is not allowable” has a
meaning that is not immediately apparent.
Let’s start
with qualified parking, defined as:
… parking
provided to an employee on or near the business premises of the employer or on
or near a location from which the employee commutes to work ….
Qualified
parking does not include parking provided near the employee’s residence.
Employer-provided
parking includes parking on property an employer owns or leases, parking for
which the employer pays, or parking for which an employer reimburses an
employee.
So we know
that qualified parking is provided near the employer and the employer pays for,
reimburses, leases or owns the parking facility.
This makes
sense if there is a public garage across the street and the employer pays the
garage directly or reimburses an employee who paid the garage. However, how
does this work if the employer owns the parking lot? More specifically, how does this work if the
parking lot is available to employees, customers – that is, to everyone and for
free?
There is
(what appears to be) a Congressional mistake when drafting Code Section
512(a)(7).
In 1994 the
IRS published a rule in Notice 94-3, conveniently titled “IRS Explains Rules
For Qualified Transportation Fringe Benefits.” Here is Question 10 and its
example:
EXAMPLE. Employer Z operates an industrial plant in a rural
area in which no commercial parking is available. Z furnishes ample parking for
its employees on the business premises, free of charge. The parking provided by
Z has a fair market value of $0 because an individual other than an employee
ordinarily would not pay to park there.
The answer
makes sense. Anyone can park on that lot for free. If an employee parks there,
it seems reasonable that the value of the parking would be zero (-0-).
That is not
what Code Section 512(a)(7) did:
Unrelated
business taxable income of an organization shall be increased by any amount for
which a deduction is not allowable ….
There is no
reference here to value. To the contrary, the reference is to a deduction – which to an accountant means
cost.
Parking may be free to the user, but it will cost something to maintain that
parking facility. The cost may be a lot or a little, but there is a cost.
The Notice
94-3 rule that tax practitioners had gotten used to was overturned.
Needless to
say, there were many questions on what the new rules meant and how to apply
them. Consider that a nonprofit is supposed to make quarterly estimated tax
payments against any expected unrelated-business-income tax, and guidance was
needed sooner rather than later. On December 10, 2018 the IRS published interim
guidance (Notice 2018-99) on qualified transportation fringe benefits.
It started
with the easiest example:
A taxable employer pays a garage $12,000 annually so that its
employees can park. None of this exceeds the $260 monthly threshold per
employee for 2018. The entire $12,000 is non-deductible by the employer.
Introduce
any complexity and there are steps to the calculation:
(1) Calculate the cost for reserved employee spots.
a.
These
costs are disallowed.
(2) Calculate the primary use of the remaining spots.
a.
If
more than 50% is for customers, clients and the general public, the calculation
ends.
i. Any remaining cost is fully
deductible.
b.
If
more than 50% is for employees, there is math:
i. Calculate the cost for reserved
nonemployee parking; these costs are allowed.
ii. Calculate the cost for nonreserved employee
parking; these costs are disallowed.
Let’s go
through an example from the Notice.
An accounting firm leases a parking lot for $10,000 next to
its office. The lot has 100 spaces, used by clients and employees. The firm has
60 employees.
(1) There are no reserved employee parking spaces
a.
We
have zero (-0-) from this step.
(2) The primary use is for employees (60/100).
a.
We
have math.
(3) There are no reserved nonemployee parking
spaces (think visitor parking).
a.
We
have zero (-0-) from this step.
(4) One must use a reasonable allocation method.
The accounting firm determines that employee use constitutes 60% (60/100) of
parking lot use during business days, with no adjustment for evenings, weekends
or holidays. The disallowance is $6,000 ($10,000 times 60%).
An
accounting firm is a taxable entity, so the $6,000 is not deductible on its
return.
What if we
were talking about a nonprofit? Then the $6,000 magically “transforms” into unrelated
business taxable income. The IRS spots $1,000 exemption, so the taxable amount
is $5,000. Apply a 21% tax rate and the tax on the parking lot is $1,050.
What if the
employer owns the parking lot? What costs could there be to a parking lot?
The IRS
thought of this:
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.
At a minimum,
I anticipate that one is allocating insurance and taxes.
So a
nonprofit can have tax because it provides parking to its employees. You may
have heard this referred to as the “church parking lot tax.” Yes, churches are
501(c)(3)s, meaning they are nonprofits just like the March of Dimes. Granted,
there are additional tax breaks to being a church, such as not having to file a
Form 990. The unrelated business income tax is not filed on a Form 990,
however; it is filed on a Form 990-T. They both have “990” in their name, but
they are separate tax forms. Who knows how many churches will have to file a
Form 990-T for the first time for 2018, even though their board has never filed
– or even seen - a Form 990.
How can a
church have income from its parking lot?
If it
charges for parking, obviously. That however is a low probability event.
Another way
would be to have reserved employee parking spaces. Those are allocated cost
(which morphs into income) immediately.
A third way is
the employee:nonemployee calculation. That calculation would be tricky because
of the uneven use of a church over an average week. One would somehow weight
the use of the parking lot. Church employees are there Monday through Friday.
The congregation is there on Sunday and (maybe) one night during the week. Perhaps
employee parking is weighted using a factor of eight (hours) and congregational
use is weighted using a factor of 2.5 (hours). Hopefully the result is to get congregational
use above 50%. Why?
Remember: if
nonemployee use at step (2) is more than 50%, the calculation ends. All the
church would have to pay tax on is income from reserved employee parking. If
that is below $1,000, there is no tax.
There is an
effort to include a repeal of Code Section 512(a)(7) on any extender or other
bill that Congress may pass, but that would require Congress to be able to pass
a bill – any bill – in the near future.
The Notice
also has one of the more unusual “make-up” provisions I have seen. Say that you
want to do away reserved employee parking (that is, step (1)) because the tax
gets expensive. It is way too late to do anything for 2018, as the guidance came
out in December. The Notice allows you to make the change by March 31, 2019 and
consider it retroactive to January 1, 2018.
Our church would
have no step (1) income as long as it did away with reserved employee parking
by March 31, 2019. That would mean taking down the sign saying “Pastor Parking
Only,” but that may be the best alternative until Congress can correct this
mess.
