Nonprofit Parking Tax: Expired Meters and the UBI "Fine"
The Tax Cuts and Jobs Act (TCJA) contains numerous provisions that impact taxation for individuals, businesses, and nonprofits; both directly and indirectly. The TCJA includes many tax cuts, however, some provisions may increase taxes for nonprofits. One provision, which became effective Jan. 1, 2018, falls under the new Internal Revenue Code Section 512(a)(7). This provision imposes unrelated business income tax (UBIT) on qualified transportation benefits – a cost, not income stream.
UBIT was initially enacted to even the playing field between nonprofit and for-profit organizations; to not unwittingly provide a competitive advantage to not-for-profit organizations conducting a trade or business venture like those carried on by for-profit organizations. The case that started this treatment was the donation of Mueller Macaroni Company to the New York University Law School in 1948 by a group of wealthy graduates.
The UBI regulations that followed state an activity may generate unrelated business income if it is (1) a trade or business, (2) regularly carried on, and (3) not substantially related to furthering the exempt purpose of the organization (IRC §512(a)(1)). If an organization’s UBI is $1,000 or more, Form 990-T must be prepared. UBI is taxed at 21 percent for not-for-profit corporations, the new corporate tax rate under the TCJA. Charitable trusts compute the tax using a graduated rate table. If an organization expects to owe at least $500 in UBIT they must also submit quarterly estimated tax payments. Failing to file Form 990-T comes at a cost – the minimum penalty being the smaller of the tax due or $210.
Prior to the TCJA, employers were able to provide certain tax-free transportation fringe benefits for employees. Tax reform, however, made certain qualified transportation fringe (QTF) benefit expenses paid after Dec. 31, 2017 nondeductible for for-profit organizations. Thus, in the spirit of UBI and the “equal footing” theory, Congress implemented IRC §512(a)(7) for nonprofits. IRC §512(a)(7) imposes a tax on the cost of such QTF.
Under the new law, UBIT will be increased by any amount paid or incurred by the organization for any parking facility used in connection with qualified parking. Qualified parking is defined as parking the organization provides to its employees on or near the organization’s premises, including commuter parking.
Many nonprofits are unaware of this new provision and have never previously had to file Form 990-T. On Nov. 28, the outgoing House Ways and Means Chairman, Rep. Kevin Brady, filed an amendment to pending tax legislation that would repeal this controversial new tax. More recently, on Dec. 10, 2018, Notice 2018-99 was released to provide interim guidance.
Notice 2018-99 also announced the Department of Treasury and the Internal Revenue Service intend to publish proposed regulations under Sections 274 and 512 (and 6012 with regard to the exempt organization’s filing requirements). Until further guidance is issued organizations may rely on Notice 2018-99, or any reasonable method, to determine the amounts treated as UBI.
Notice 2018-99 specifies “total parking expenses” include, but are not limited to:
- Utility costs
- Taxes paid for real estate
- Interest on debt
- Snow, ice, leaf and trash removal
- Landscape costs
- Parking lot attendant expenses
- Rent or lease payments or a portion of a rent or lease payment (if not separately broken out)
Once the total cost of the parking facility is calculated, organizations that own or lease their parking facilities can follow the four step process outlined in Notice 2018-99 to calculate the disallowed deduction which would be the increase in UBI under Section 512(a)(7). The steps are: (1) Calculate the disallowance for reserved employee spots; (2) Determine the primary use of remaining spots; (3) Calculate the allowance for reserved non-employee spots; (4) Determine remaining use and allocable expenses.
Prior to the issuance of Notice 2018-99 nonprofits were in a predicament. They were stalled in a parking space with an expired meter, without a clear understanding of how to exit the parking stall or feed the meter. Notice 2018-99 is helpful, but nonprofits are still awaiting the promised proposed regulations.
Now that more organizations are aware of the new law, it is important to remain alert to potential changes and updates. Please consult with your tax advisor to understand how your organization may be impacted by this new provision, thoroughly review the guidance in Notice 2018-99 and keep up to date on continued changes.
Read this article in The Asset here.