IRS Issues Guidance Regarding Parking Fringe Benefits
Although many tax-exempt organizations and not-for-profits (“NFPs”) with fiscal year ends may have filed their first returns to report unrelated business taxable income for parking (“Parking UBTI”) from qualified transportation fringe benefits provided to employees, the IRS has issued some helpful guidance in Notice 2018-99. Additionally, Notice 2018-100 provides that NFPs will not be subject to a penalty for failure to make timely estimated payments related to Parking UBTI if certain conditions are met.
Four-Step Process Provided For Organizations Owning or Leasing Parking Facility
Until further guidance is issued, NFPs may calculate Parking UBTI using any “reasonable method.” However, the IRS has provided a four-step process that can be relied upon as a reasonable method, and identified certain approaches that will not be considered reasonable (e.g. using the value of employee parking to determine expenses or failing to allocate expenses to reserved employee spots). The organization must first identify expenses attributable to spots reserved for employees, which will be treated as Parking UBTI, and then determine whether any remaining spots are primarily (i.e. greater than 50 percent) used to provide parking to the general public (such as clients, visitors, students, patients, etc.). If the primary purpose of the parking spots is to provide parking to the general public, then none of the expenses pertaining to those spots will be considered to be Parking UBTI, even if there is some employee usage of spots. If, however, the primary purpose of the spots is to provide parking to employees, then the expenses must be distributed between employees and the public based on actual or estimated usage by both groups. The amount allocable to employees will be considered to be Parking UBTI.
Option to Reduce UBTI
Employers have until March 31, 2019, to make changes to their parking arrangements to reduce or eliminate the number of parking spots they reserve for their employees. If changes are made, they will be applied retroactively to January 1, 2018. Should an NFP choose to make the change, they could potentially reduce, or even eliminate, all Parking UBTI depending on their parking arrangements.
Waiver of Underpayment Penalty
Underpayment penalty relief applies to an NFP that was subject to Parking UBTI and was required to make estimated tax payments on the UBTI prior to December 17, 2018. The NFP must not have been required to file Form 990-T for the tax year immediately preceding the first tax year ending after December 31, 2017 (e.g. for an NFP with a June 30 year end, this means that they would not have filed Form 990-T for the tax year ending June 30, 2017.) Lastly, the NFP must file Form 990-T and pay the tax due with such return in a timely manner. Remember, for tax payments to be considered timely, they must be made by the original due date of the return, not the extended due date.
If you have questions about this new guidance, reach out to a Cherry Bekaert advisor and start the conversation. We welcome your questions and will be happy to talk with you.