Not-for-profit organizations drew the short end of the stick when the new tax law commonly known as the Tax Cuts and Jobs Act (TCJA) made parking expenses incurred on behalf of their employees a taxable increase to unrelated business taxable income (UBTI). Commercial enterprises were equally affected by this law change, but for many not-for-profits, the change comes as a shock. The UBTI inclusions are likely to lead to tax bills at year-end, which is particularly surprising for organizations that historically had no UBTI. Fortunately, the IRS heard the collective pleas for change, and may be remodeling its approach to give not-for-profits some relief.
This rule change did not render parking expenses categorically includible in UBTI; the tax law continues to allow organizations to exclude from UBTI parking expenses for customers and the general public. Parking expenses paid or incurred on behalf of an organization’s employees are the concern.
When an organization contracts with a third party to provide employees with parking, determining the associated parking expense and calculating the UBTI portion is straightforward. When an organization owns or leases its parking lot, the calculation is more nuanced.
Total parking expenses are difficult to ascertain. Potential expenses include snow removal, insurance, property taxes, repair and maintenance costs, and many other unseen costs. Even as organizations determine their total of such parking expenses, calculating the UBTI includible portion is a challenge. It requires a four-step calculation.
Once not-for-profits determine total parking expenses and the UBTI includible portion of those expenses—tasks that are easier said than done—they must file Form 990-T and pay any unrelated business income tax that results.
The IRS indicated during a Federal Bar Association Insurance Tax Seminar in May that it is looking at alternative approaches to quantify the parking expense calculation. Until further guidance comes, the only relief available to not-for-profits is a temporary respite from potential penalties for failure to timely deposit estimated taxes.
Typically, if a not-for-profit’s unrelated business income tax exceeds $500, it must pay estimated taxes quarterly throughout the year, or face up to a 25% penalty for failure to timely deposit those estimated taxes. Fortunately, the IRS agreed to waive this penalty if:
(1)The unrelated business income tax bill was a result of the parking expense’s inclusion in UBTI;
(2)The organization did not pay unrelated business income tax during the year before; and
(3)The organization pays the tax due timely (by the Form 990-T due date).
This solution only provides relief for the first tax year that ends after Dec. 31, 2017. Going forward, not-for-profit organizations are required to pay estimated taxes quarterly, just as they and other businesses otherwise do.
The calculation of total parking expenses, not the UBTI inclusion itself, is often the most burdensome task. The IRS is considering various methods to simplify this calculation.
Institute a Safe Harbor for Leased Parking Expenses
If the IRS adopts this approach, not-for-profits that lease their buildings can designate a certain percentage of their total lease expense—perhaps 5 or 10%—as parking costs. From there, not-for-profits can calculate the includible portion in UBTI using the four-step method.
Allow Taxpayers to Use Average Parking Costs by Region
The IRS is also considering an option that would allow taxpayers to use regional averages as a metric for total parking expenses. Taxpayers would then calculate the includible portion in UBTI using the four-step method.
Walk Back the Guidance Prohibiting Value as a Gauge for Expense
In guidance that was released in December 2018, the IRS stated that the value of parking spaces should not inform taxpayers’ expense calculations. It argued that expenses may exceed intrinsic values, and the TCJA is written to disallow a deduction (or require a UBTI increase) only for the expense. Since the original IRS guidance was released, not-for-profits have argued that it is impractical to calculate actual parking expenses, and that a reference to value is reasonable. The IRS heard these comments and is evaluating potential changes to its prior guidance that prohibited this value-based approach to approximate expenses.
Changes Affect More Than Just Parking
The IRS is considering yet another change to the tax law: making employer-provided snacks 100% deductible again.
Although not-for-profits are more likely to worry about their parking expenses includible in UBTI, they will be interested to hear that the IRS is looking for ways to make more employer-provided snacks fully deductible. As it stands, snacks are generally 100% deductible if they are provided during recreational or social activities and are used primarily to benefit employees. The IRS knows that it is impractical for many taxpayers to treat snacks, like food offered in the break room, as a non-deductible expense. The IRS is considering an approach whereby taxpayers can deduct a certain dollar amount of snacks per employee. Not-for-profits are impacted by this provision only when they claim such deductions (or disallow them) against the gross income of an unrelated business activity.
Only time will tell if these potential changes are announced. While we wait for the IRS to decide, not-for-profits will need to use the existing guidance as it is written. If you have any questions about your parking expenses, please contact us.
Published on August 29, 2019