Tax-Exempt Alert: IRS Issues Guidance on Parking Expenses
By Olga Oganesov, CPA and John M. Robinson, CPA
As part of the Tax Cuts and Jobs Act, rules related to the deductibility of Qualified Transportation Fringe Parking Expense benefits have been modified. Qualified transportation fringe benefits (QTFs) are defined to include: 1) transportation in a commuter highway vehicle between the employee’s residence and place of employment, 2) any transit pass, and 3) qualified parking. Qualified parking is 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. QTFs for qualified parking are excluded from employee wages, up to the monthly IRS limit, which for 2018 is $260 per month per . This limit increases to $265 in 2019. QTFs for qualified parking above the monthly IRS limit are required to be included in employee wages. Under the Tax Cuts and Jobs Act, effective on 1/1/2018, QTFs for qualified parking are now disallowed as a deduction by for-profit taxpayers. Similarly, tax-exempt organizations will now be required to include QTFs for qualified parking as unrelated business income subject to tax, so that tax-exempt organizations do not receive an unfair advantage. The IRS has recently issued guidance to assist taxpayers in determining the amount of QTFs for qualified parking that are no longer tax deductible by for-profit taxpayers or that are now includible in unrelated business income by tax-exempt organizations.
Many tax-exempt organizations may not be required to report any expenses related to QTFs for qualified parking as unrelated business income. If an organization who owns or leases a parking lot meets both of the following conditions, it will have no unrelated business income related to QTFs for qualified parking. Those two conditions are:
- There are no spots reserved for employees (tax-exempt organizations may change their parking arrangements to decrease or eliminate reserved spots for employees by 3/31/19 and the change will be treated as having occurred at 1/1/18).
- Greater than 50% of parking spots are for use of the general public (general public includes the organization’s customers, clients, visitors, vendors, population served, etc.) In figuring the percentage of spots for use of the general public, the number of spaces normally used by the organization’s employees during normal working hours is not counted. For example, Organization A has a 50-space parking lot. No spaces are reserved for employees. During normal working hours, employees of Organization A typically use 30 spaces in the parking lot. Therefore, 30 of 50 spaces, or 60%, are used by employees. As a result, only 40% of spaces are considered to be available to the general public.
Organizations who do not meet these two conditions may need to report expenses related to QTFs for qualified parking as unrelated business income. The method of determining the amount to be reported as income depends on whether the taxpayer pays a third party to provide parking for its employees or the taxpayer owns or leases a parking facility where its employees park.
An employer who pays a third party for employee parking spots includes the cost of those spots as unrelated business income up to the IRS limit ($260 per month per employee for 2018). Amounts over the IRS limit are not considered QTFs for qualified parking, should be included in employees’ wages, and are not included in unrelated business income.
An employer who owns or leases a parking facility must prorate an amount of expense related to employee parking that may be subject to unrelated business income. Until further guidance is issued, the disallowance may be calculated using any reasonable method. The IRS has indicated that a method using the following steps will be considered a reasonable method.
Step 1: Determine the amount of parking expenses. Generally, the IRS indicates that the tax-exempt organizations should identify all direct and allocable expenses paid in connection with the parking lot, including 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 a portion of rent or lease payments (if not broken out separately). Depreciation is not to be taken into account. Expenses paid for items related to property adjacent to the parking lot, such as landscaping or lighting, are also not included.
Step 2: Calculate the percentage of spaces reserved for employees. This percentage of parking expenses will be included in unrelated business income.
Step 3. Calculate the percentage of spaces reserved for visitors, customers, vendors, etc. of the tax-exempt organization. This percentage of parking expenses will not be included in unrelated business income.
Step 4: Calculate the percentage of unreserved spaces available to the general public (defined above). If more than 50% is used by general public, no disallowance related to unreserved spaces. If less than 50% is used by general public, the percentage attributable to employee use is disallowed. As noted previously, in figuring the percentage of spots for use of the general public, the number of spaces normally used by the organization’s employees during normal working hours is not counted. If less than 50% is used by the general public, the percentage normally used by employees will be included in unrelated business income.
Step 5: Determine the total amount to be reported as unrelated business income. The total amount of QTFs for parking benefits to be included in unrelated business income will be the sum of the amounts calculated in Steps 2 and 4 above. No deductions are allowed against this amount, except the $1,000 specific deduction. Therefore, if the total disallowed amount is less than $1,000 and the tax-exempt organization has no other unrelated business income, the organization will not need to file Form 990-T.
Please contact your tax advisor if you have any questions about these rules.
Olga Oganesov Tax Principal, CPA
Olga is a tax senior manager, responsible for providing tax compliance and consulting services to a wide variety of clients. Since joining the firm in 2006, she has worked primarily with non-profit organizations and clients involved in the affordable housing industry, including tax credit properties, U.S. Department of Housing and Urban Development and U.S. […]
John M. Robinson Tax Principal, CPA
John is a tax principal and has worked at BRC since 2001. He is responsible for providing tax compliance and consulting services to a wide variety of clients. His primary industry experience includes individuals, manufacturing, retail and wholesale, and not-for-profit organizations. Education Appalachian State University – Bachelor of Science in Business Administration, Concentration in Accounting […]