Editor’s note: Effective December 20, 2019, nonprofit parking and transportation benefits will no longer be counted as unrelated business taxable income. This full repeal was part of the Taxpayer Certainty and Disaster Tax Relief Act of 2019 and is retroactive for 2018 and 2019.
Does your nonprofit offer free parking or cover transportation costs as part of its employee benefits package? If so, language in the Tax Cuts and Jobs Act may make these expenses taxable.
While the tax reform provision regarding certain nonprofit fringe benefits has received less attention than other aspects like the new excise tax on executive compensation or changes in the way net operating losses are applied, it carries a significant impact for the calculation of unrelated business taxable income (UBTI). Read on to learn more about this new treatment of qualified parking fringe benefits and discover strategies to mitigate its impact on your nonprofit’s tax burden.
What is qualified parking?
Qualified parking is defined as parking provided to employees on or near the business work premises, or parking on or near a location from which employees commute to work by commuted highway vehicle, mass transit or van pool. Before 2018, an employee could exclude up to $255 per month of employer-provided parking as a qualified transportation benefit and the employer could deduct 100 percent of the expense.
Qualified parking now included in UBTI
Beginning in 2018, an employee can exclude up to $260 per month of employer-provided parking as a qualified transportation benefit. Employers are no longer able to deduct any of those expenses. Not only are nonprofit employers barred from taking this deduction, they must also include the cost of these fringe benefits at UBTI.
Here is an example to illustrate the change:
In 2017, XYZ Foundation paid Employee A salary of $30,000 and paid $3,060 annually on her behalf for parking at the municipal parking garage located on the same city block as XYZ’s headquarters. XYZ Foundation did not pick up any UBTI and Employee A picked up taxable wages of $30,000. The $3,060 was not taxable as a qualified parking fringe benefit.
In 2018, XYZ Foundation pays the same amounts to the employee and for parking. As a result, XYZ Foundation picks up $3,060 of UBTI, which is taxed at 21 percent and increases XYZ’s tax burden by $642.60. The employee sees no change in the treatment of her wages.
More guidance to calculate taxable parking benefits
On December 11, 2018, the IRS issued additional interim guidance on this topic, which includes a number of examples and scenarios that will help nonprofits think more strategically about their parking facilities and the impact on UBTI. Here are some of the key clarifications and considerations from the guidance:
- If the organization pays a third party for employee parking spots only, the UBTI is limited to the lesser of the total cost or the monthly exclusion limit of $260 per employee per month.
- If the organization leases an entire parking lot, or portion of a parking lot, the following analysis is required:
- Reserved employee parking as a percentage of total parking expense is included in UBTI.
- If members of the general public use the remainder of a nonprofit’s parking, then the remaining expense for parking is not included in UBTI.
- The portion of expenses related to parking spots that are reserved non-employee spots is not included in UBTI.
The IRS also announced it its December 11 guidance that it will waive the penalty for nonpayment or underpayment of estimated taxes related to qualified parking expenses.
Strategies to mitigate impact of new qualified parking benefit treatment
Nonprofit leaders seeking to avoid an increase in UBTI due to parking benefits should consider two options: renegotiating their organization’s parking lease or increasing employee wages.
Organizations that rent parking space and office or operating locations from the same landlord should consider renegotiating their lease to increase office rent and include free parking. Under this approach, 100 percent of the rent expense is an allowable deduction and no parking costs are picked up as UBTI. This option would not affect employee wages.
If the lease renegotiation option is not viable, nonprofits should consider moving the amount traditionally paid for parking to employee wages and having employees cover the cost of their own parking. Under this approach, the organization eliminates exposure to UBTI; however, employers and employees will be subject to wage taxes on the increased payroll. Using this option reduces the employer’s tax burden from the 21 percent for UBTI to 7.65 percent, which is for the employer portion of FICA taxes.
The IRS recently updated its original guidance on the tax treatment of qualified parking to eliminate a previous strategy of using a compensation reduction plan for transportation costs. Now, nonprofits without the lease renegotiation option only have one way to avoid the 21 percent on qualified parking: remove the parking expense completely through an after-tax compensation adjustment.
In its December 11, 2018 guidance discussed above, the IRS permits organizations to change reserved spots into non-reserved (through signage and access) by March 31, 2019, and treat those spots as non-reserved retroactively to January 1, 2018.
Your organization does not have to adapt to tax reform alone. RKL is here to help.
With the largest and most respected nonprofit tax team in Pennsylvania, RKL is on the forefront of helping organizations adapt to the new tax reform landscape. Our team stands ready to assess your unique circumstances and implement tax strategies that reserve more of your hard-earned funding for the important work you do. Contact Ruthann Woll, Principal in RKL’s Tax Services Group, for support, context and perspective around this or any other aspect of tax reform.