Yes, starting Jan. 1, 2018, Congress wants to tax nonprofits on parking. Hidden in the 2017 Tax Cuts and Jobs Act is a provision taxing employer-provided parking for nonprofit organizations.
Nonprofits have long been subject to tax on unrelated business income (UBI), which is reported on Form 990-T. This new tax, however, is a tax on an expense rather than income. Employee parking is now considered to be a taxable “qualified transportation fringe benefit” (QTF). Other taxable QTFs are transit passes and commuter vehicle transportation between the employee’s home and workplace. The amount of QTF expense must now be combined with the organization’s gross unrelated business income. If the total exceeds $1,000, then the organization must file Form 990-T to report taxable income. The new tax rate is a flat 21%.
Parking Tax Scenarios
In this post, we focus on how organization-provided employee parking may be taxed under the new law. IRS Notice 2018-99 illustrates the tax impact of various parking scenarios. We give you three scenarios below, followed by a comprehensive example.
Scenario 1: A nonprofit organization pays a third-party to provide employee parking. In 2018 the entire amount of parking expense up to $260 per employee per month or $3,120 per year is taxable. Any amount over these limits in 2018 must be included in employee wages. In 2019, the taxable amount increases to $265/month or $3,180/year.
Scenario 2: An organization owns or rents a parking lot used by employees and the general public that meets two criteria: 1) No spots are reserved for employees; and 2) The primary purpose is parking for the general public, i.e., more than 50% of the spaces are used by non-employees. In this example, none of the organization’s parking expenses are taxable.
Scenario 3: An organization owns or rents a parking lot used by employees and the general public that does not meet the two criteria in the scenario above. A portion of the organization’s parking expenses may be taxable.
Steps to determine parking tax
First calculate the total cost of providing employee parking for the calendar year.
IRS Notice 2018-99 lists parking facility expenses to include:
- Repairs & maintenance
- Utility costs
- Property taxes
- Snow and ice removal
- Leaf removal
- Cleaning & trash removal
- Landscape costs
- Parking lot attendant expenses
- Rent or lease payments, or a portion of a rent or lease payment (if not broken out separately)
Fortunately, depreciation on parking facilities is not an expense for purposes of the parking tax.
Proceed through the four steps to calculate taxable parking expenses based on how the parking area is used.
The source of our example comes from a presentation by Withum CPA staff at the Edyth Bush Institute’s 2019 Tax Briefing for Nonprofits on January 17, 2019 and is based on IRS Notice 2018-99. Here are the facts:
- 1,000 parking spots
- 150 reserved for employees
- 500 used by employees in non‐reserved spots
- 50 non‐employee reserved parking spots
- Total parking related expenses of $40,000
Step 1: Calculate the taxable amount of expense for reserved employee parking.
Determine the ratio of reserved employee spots to total parking spots.
- 150 spots reserved for employees/1,000 total parking spots = 15%
- Multiply the above ratio by total parking expenses.
- 15% x $40,000 = $6,000 taxable expense for reserved employee parking
This amount is treated as taxable income up to $260 per employee per month for 2018 or $265 per employee per month for 2019.
Step 2: Determine the primary use of the remaining spaces.
If >50% of the 850 remaining spots is primarily used by the general public, then those spaces are not nontaxable and you can STOP here. The only taxable expense would be the $6,000 calculated in Step 1. However, in our scenario >50% of the remaining spots are used by employees (500 non‐reserved employee spots/850 remaining unreserved spots = 59%). In this case, continue to Step 3.
Step 3: Calculate the amount excluded from tax for reserved non-employee spaces.
Calculate the ratio of spots reserved for non-employees, such as visitors and customers, to total unreserved parking spots.
- 50 non‐employee reserved spaces/850 remaining unreserved spots = 5.88%
Then multiply the above 5.88% by total expenses less the amount subject to tax per Step 1.
- 5.88% x ($40,000 total expenses ‐ $6,000 employee reserved expenses) = $2,000
Therefore, $2,000 is excluded from taxable expenses. If there are no reserved non-employee spots, skip this step and proceed directly to Step 4.
Step 4: Determine the remaining use and allocate expenses.
Allocate the remaining expenses not accounted for in Steps 1-3.
- $40,000 total parking expenses ‐ $6,000 taxable expense from Step 1 ‐ $2,000 nontaxable expense from Step 3 = $32,000 of remaining expenses
- 1,000 total parking spots – 150 reserved for employees – 50 reserved for non-employees = 800 remaining unreserved spots
- 500 unreserved employee spots / 800 remaining unreserved spots = 62.5%
- 62.5% of remaining spots used by employees X $32,000 of remaining expenses = $20,000 of parking expense subject to tax
Total taxable expense in this scenario is $6,000 from Step 1 + $20,000 from Step 4 = $26,000. The tax due is $26,000 X 21% flat rate = $5,460.
Yes, it’s complicated! But there is a ray of hope if you think your organization may be subject to the parking tax.
Reduce organizational tax exposure. Act immediately.
The new rules apply to parking expenses paid or incurred beginning Jan. 1, 2018. However, you still have a small window to make changes that can reduce or eliminate your liability for parking tax. According to the IRS, “employers will have until March 31, 2019, to change their parking arrangements to reduce or eliminate the number of parking spots they reserve for their employees. By making this change, many churches, schools, hospitals and other tax-exempt organizations may be able to reduce their associated UBTI. In some cases, the organization may avoid having to file a Form 990-T, Exempt Organization Business Income Tax Return, altogether. Such a change made in parking arrangements will apply retroactively to Jan. 1, 2018.
We encourage you to read IRS Notice 2018-99 for more information on how to determine taxable income in various parking scenarios. Also see www.nonprofitparkingtax.com. And you may want to let your representatives in Congress know what you think.