The Tax Cuts and Jobs Act (TCJA) was signed into law in December 2017. However, the scope and scale are still being determined as tax-exempt organizations await continued guidance. More than a year later, the Internal Revenue Service (IRS) continues to issue guidance on many of the TCJA’s topics and will continue to provide guidance into the foreseeable future as organizations implement the new tax law.
On December 10, 2018, the IRS issued Notice 2018-99, which “provides interim guidance for taxpayers to determine the amount of parking expenses for qualified transportation fringes (QTFs) that is nondeductible under § 274(a)(4) of the Internal Revenue Code (Code) and for tax-exempt organizations to determine the corresponding increase in the amount of unrelated business taxable income (UBTI) under § 512(a)(7) attributable to the nondeductible parking expenses.”
The newly amended Section 274(a)(4) requires expenses paid or incurred by employers after December 31, 2017 for employee parking to no longer be deductible, while Section 512(a)(7) requires tax-exempt organizations to increase their UBTI by the amount of employee parking expenses that are nondeductible under Section 274(a)(4).
The Notice offers two methods for calculating the disallowed deduction and increase UBTI. The determination of which method to use is based primarily on the way the benefit is offered to the employee.
Method A: Taxpayer Pays a Third Party for Employee Parking Spots
Notice 2018-99 states that “if a taxpayer pays a third party an amount so that its employees may park at the third party’s parking lot or garage, the section 274(a)(4) disallowance generally is calculated as the taxpayer’s total annual cost of employee parking paid to the third party. However, if the amount the taxpayer pays to a third party for an employee’s parking exceeds the section 132(f)(2) monthly limitation on exclusion ($260 per employee for 2018), that excess amount must be treated by the taxpayer as compensation and wages to the employee. In other words, the total of the monthly amount in excess of $260 that is treated as compensation and wages is excepted from the taxpayer’s section 274(a) disallowance amount by section 274(e)(2).”
In short, the $260 exclusion per employee is no longer deductible and is now considered UBTI. Any amount paid in excess of the $260 is deductible by taxpayers and will be included in the employees’ W-2s.
Method B: Taxpayer Owns or Leases All or a Portion of a Parking Facility
The second method offered in Notice 2018-99 allows, until further guidance is available, for any “reasonable method” to be used to determine disallowed deductions. For purposes of following the current guidance, 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).
The notice provides the following four-step approach, which is deemed to be reliable as a reasonable method.
Step 1: Calculate the disallowance for reserved employee spots.
The taxpayer is required to calculate the percentage of reserved employee spots compared to the total spots that are available and then multiply that percentage by the total parking expenses.
Step 2: Determine the primary use of remaining spots (the “primary use test”).
If the “primary use” of the remaining spots is for general public use, then the remaining parking costs are fully deductible. This is determined by comparing the employee-used spots to the overall remaining spots available to the public (not including the reserved employee spots). If the percentage available to the public exceeds 50 percent, then the parking costs are deductible. If the percentage available is less than 50 percent, proceed to Step 3.
Step 3: Calculate the allowance for reserved nonemployee spots.
If the taxpayer specifically reserves spots for non-employee use, then the percentage of spaces reserved for nonemployee use is used to determine the deductible amount of parking costs.
Step 4: Determine remaining use and allocable expenses.
If any parking expenses remain after applying steps 1-3, then taxpayers must use any reasonable method available to allocate the remaining expenses. A reasonable method may include the actual or estimated usage of spots by employees, the hours of use, etc.
The IRS has provided tax-exempt organizations transition relief in a couple of ways:
- Any increase in taxes for failure to file timely estimated tax payments due to the new parking benefits rules, on or before December 17, 2018, will be waived.
- Taxpayers can reassess their parking arrangements, including designated/reserved spots, and make retroactive changes before March 31, 2019.
Although Notice 2018-99 answers many of the questions and concerns that were outstanding since the Act was signed, there remain additional questions. For example, the notice implies that although the fair market value of the provided parking may be zero, taxpayers are still required to apply the previously discussed methods for eliminating any applicable parking expenses, thus increasing UBTI.
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