December 12, 2018
On December 10, 2018, the IRS issued long-awaited interim guidance to tax-exempt organizations under Internal Revenue Code (IRC) Section 512(a)(7). Notice 2018-99 provides guidance on determining the amount of parking expenses for qualified transportation fringe benefits (QTFs) that are now unrelated business taxable income (UBTI). On the same day, the IRS also issued Notice 2018-100 that provides for some penalty relief for failure to pay estimated tax payments because of recent changes in the tax law. Consequently, many tax-exempt organizations not previously required to file Form 990-T will begin filing accordingly.
Parking Benefits
The release of Notice 2018-99 follows previous guidance issued by Notice 2018-67 regarding Tax Cuts and Jobs Act (TCJA) changes that no longer allow an exempt organization to offset UBTI income from one activity with a UBTI loss from another. Notice 2018-99 clarifies the impact of the statement in Notice 2018-67 that the increase in UBTI under 501(a)(7) is not an unrelated trade or business. Notice 2018-99 provides that until further guidance is issued, an organization with UBTI from QTFs can offset this income with a loss from an unrelated trade or business if that organization has only one unrelated trade or business. Based on the language in the Notice, if an organization has two unrelated trades or businesses and UBTI from QTFs, the QTFs income cannot be offset by a loss in one of the other unrelated trades or businesses.
IRC Section 512(a)(7) was added by the TCJA and is effective for amounts paid for QTFs after December 31, 2017. While QTFs include both parking and transit passes, Notice 2018-99 does not address questions regarding the calculation of UBTI for the provision of transit passes. IRC Section 512(a)(7) provides that a tax-exempt employer that provides QTFs has an increase in unrelated business income for any amount paid or incurred by the tax-exempt organization for the QTF. Highlights of the guidance included in Notice 2018-99 are:
- Tax-exempt organizations that own or lease all or a portion of one or more parking facilities can use any reasonable method to calculate its UBTI
- The value of the parking to the employee to determine UBTI is not a reasonable method
- The four-step process set forth in Notice 2018-99 is deemed to be a reasonable method (see below)
- Depreciation on the parking structure is not a parking expense for purposes of the Notice (and therefore does not increase a tax-exempt organization’s UBTI)
- “Total parking expenses” include (but aren’t 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)
- Employers with reserved employee spots have until March 31, 2019 to decrease or eliminate reserved employee spots that will be retroactive to January 1, 2018
Where an employer pays a third party for employee parking spots, the UBTI is generally the total annual cost of the employee parking paid to the third party. Where a tax-exempt organization owns or leases all or a portion of a parking facility, the four-step process below is deemed reasonable:
Step 1. Calculate the disallowance for reserved employee spots
Reserved parking spots are those reserved exclusively for the employees. This may be done, for example, through signage or limitation of access to the area. The percentage of reserved parking spots in relation to total parking spots is multiplied by the total parking expenses, resulting in UBTI.
Step 2. Determine the primary use of remaining spots (the “primary use test”)
If the primary use of the remaining spots is for the general public, then the parking expenses associated with these spots is not UBTI. The Notice provides that “primary use” means greater than 50% of the actual or estimated usage of the parking spots in the parking facility. Primary use of the parking spots is tested during normal business hours on a typical business day, or in the case of an exempt organization, during the normal hours of the exempt organization’s activities on a typical day.
Step 3. Calculate the allowance for reserved non-employee spots
If the primary purpose in Step 2 is not for the general public, the exempt organization can exclude the costs associated with any parking spots that are reserved for non-employees (e.g. customers or visitors). Such spots may be identified, for example, by signage (Customers Only) or by restricted access. The expenses attributable to these spots is determined by the percentage of reserved non-employee spots in relation to the remaining total parking spots, and multiply that percentage by the taxpayer’s remaining total parking expenses.
Step 4. Determine remaining use and allocable expenses
If, after completing steps 1-3, there are any remaining parking expenses not categorized, the taxpayer must reasonably determine the employee use of the remaining spots. Employee use is determined as use during normal business hours on a typical day. The Notice provides examples of the Step 4 calculation (see examples 7 and 8).
The IRS is asking for public comments on Notice 2018-99 by February 22, 2019.
Penalty Relief
IRS Notice 2018-100 provides estimated tax penalty relief to tax-exempt organizations that provide QTFs. Due to the change in the tax law, many tax-exempt organizations will be required to file a 990-T due to an increase of unrelated business income equal to the expenses incurred on QTFs.
Taxpayers are generally required to pay federal income taxes as they earn income, if that income exceeds $500. The IRS requires estimated taxes to be paid quarterly, typically in four equal installments due on the 15th day of the fourth, sixth, ninth, and twelfth month of the fiscal year. For calendar year filers, those dates would be April 15, June 15, September 15 and December 15. The IRS imposes an addition to the tax for failure to make sufficient and timely payments of estimated income tax.
Generally, the required annual payment is the lesser of the current year tax, or 100% of the tax shown on the return for the preceding taxable year. This rule does not apply if the preceding taxable year was less than 12 months, or if the organization did not file a return for such preceding taxable year showing a tax liability.
Notice 2018-100 provides relief to tax-exempt organizations, which provide QTFs from additional tax for failure to make estimated income tax payments. This relief is available only to tax-exempt organizations who a) were not required to file a Form 990-T for the taxable year immediately preceding the organization’s first taxable year ending after December 31, 2017, and b) have filed the Form 990-T in a timely manner and payed the amount reported for the taxable year in which relief is granted. For organizations who were required to file a 990-T in the year immediately preceding the taxable year ending after December 31, 2017, the organization may find relief if they meet one of the statutory safe harbor or exemption provisions under Sections 6654 or section 6655 of the code. In order to obtain relief under Notice 2018-100, the tax-exempt organization should write “Notice 2018-100” at the top of its Form 990-T.
Nonprofits should read IRS Notices 2018-99 and 2018-100 to fully understand the interim guidance and address all guidelines applicable to their organizations. For questions about parking benefits and penalty relief, contact Richard J. Locastro, CPA, JD at rlocastro@grfcpa.com or 301-951-9090.