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Unrelated Business Taxable Income from Employer-Provided Parking and Other Qualified Transportation Fringe Benefits

An IRS Double-Feature

December 14, 2018

Beginning on January 1, 2018, a tax-exempt organization that provides parking or other qualified transportation fringe benefits for its employees must treat its costs of providing those benefits as unrelated business taxable income (“UBTI”). This new UBTI provision is unprecedented in its application, as it treats expenses as income. This provision created substantial uncertainty in the exempt organization community as there was no formal guidance from the IRS describing how to calculate the UBTI from the parking benefits. Exacerbating the situation was the passing of estimated tax payment deadlines.

On December 11, 2018, the IRS released two notices to help curtail the uncertainty about how to comply with the new UBTI provision. Notice 2018-99 provides guidance on calculating UBTI from employer-provided parking and other qualified transportation fringe benefits. Notice 2018-100 waives the addition to tax for the underpayment of 2018 estimated income tax, to the extent an underpayment is from UBTI arising from employer-provided parking and other qualified transportation fringe benefits.

Background

Beginning January 1, 2018, new Internal Revenue Code section 512(a)(7) treats certain expenses of an exempt organization related to its provision of employee parking as UBTI. The expenses treated as UBTI match the amount of parking-related expenses a for-profit business would be prohibited from deducting under the Tax Cuts and Jobs Act of 2017.

In addition, an exempt organization with UBTI from new Code section 512(a)(7) may have to make estimated tax payments during 2018. Failing to make timely estimated tax payments can result in tax additions and tax penalties.

IRS NOTICE 2018-99

IRS Notice 2018-99 provides guidance in calculating the amount of UBTI that arises from employee use of an exempt organization’s parking facilities. The notice provides guidance for situations in which the exempt organization pays a third party for employee parking spots and for situations in which the exempt organization owns or leases a parking facility.

If the exempt organization pays a third party for employee parking spots, the UBTI generally is equal to the total annual cost of employee parking paid to the third party, less any parking-related amounts included as wage income to the exempt organization’s employees.

If the exempt organization owns or leases a parking facility, Notice 2018-99 states that the parking-related UBTI can be calculated using any reasonable method. Notice 2018-99 provides a four-step safe-harbor that the IRS has deemed to be a reasonable method. The IRS’s safe harbor involves (1) calculating the parking-related expenses attributable to parking spots reserved exclusively for employees; (2) determining the primary use of the remaining parking spots and, in particular, identifying parking spots available to the general public; (3) calculating the parking-related expenses attributable to parking spots reserved for nonemployees; and (4) determining remaining parking spot uses and allocating parking-related expenses.

In addition, Notice 2018-99 provides the following helpful guidance:

  • Parking expenses that can create UBTI 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.
  • Depreciation is not considered a parking expense that can create UBTI.
  • Expenses paid for items not located on or in the parking facility, including items related to property next to the parking facility, such as landscaping or lighting, also are not included as parking expenses that can create UBTI.
  • UBTI arising from employer-provided parking is not considered to be a separate trade or business activity for purposes of the recently enacted siloing rules for unrelated trade or business activities.
  • The amount of UBTI arising from employer-provided parking is greatly increased by the number of parking spots reserved exclusively for employees. However, until March 31, 2019, taxpayers that have reserved employee spots may change their parking arrangements to decrease or eliminate their reserved employee spots and treat those parking spots as not reserved employee spots retroactively to January 1, 2018.

IRS NOTICE 2018-100

IRS Notice 2018-100 provides that the addition to tax for failing to make 2018 estimated income tax payments is waived for certain tax-exempt organizations. The following requirements must be satisfied to qualify for the waiver:

  • The exempt organization must offer employer-provided parking or qualified transportation fringe benefits to its employees.
  • The underpayment of estimated tax must have arisen from new Code Section 512(a)(7)’s application of the unrelated business income tax to employer-provided parking and/or other qualified transportation fringe benefits.
  • The exempt organization must not have been required to file an IRS Form 990-T, Exempt Organization Business Income Tax Return, for the preceding year.
  • The exempt organization must timely file its Form 990-T and timely pay the tax amount reported for the taxable year for which relief is granted.

The exempt organization must write “Notice 2018-100” on the top of its Form 990-T.

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