Don’t forget about tax reform!
2018 brought a lot of things for many nonprofits to stress about – wages, Affordable Care Act/health care changes, things the leader of the free world kept doing, etc. One thing that this lawyer thinks not enough nonprofits were worried about is the impact of tax reform that was passed at the end of 2017. As I have blogged about before, smaller nonprofits that have never been subject to the unrelated business income tax should take notice – because many more of them are going to be paying it than ever before. We have more guidance so if you weren’t paying attention before, time to catch up!
New TAX on an expense?!?!!?
As a reminder, one of the [annoying/obnoxious/choose your adjective] things that tax reform did is impose a tax on the expense associated with paying certain fringe benefits. The tax applies to transportation and parking benefits that are provided to employees as fringe benefits (and generally aren’t taxable to the employee): transit in a commuter vehicle between the employee’s home and work; a transit pass; and parking provided to the employee either on or near the business of their employer.
Beginning with amounts incurred on January 1, 2018, tax exempt organizations are subject to a 21% tax on these amounts. For some organizations that don’t otherwise have to pay unrelated business income tax, it may be their first time having to file a 990-T. Luckily (?) the IRS has said that organizations that only have to fill out part of the form if their only unrelated business taxable income is related to qualified transportation benefits.
What we know.
As a product of Congress’ infinite wisdom (and the fact that the legislation creating this got shoved through without much vetting), we haven’t had any real clue as to how to calculate the tax here. The underpaid and underappreciated folks at the IRS and Treasury have been kind enough to give us a little bit of guidance here and there and eventually we will even have regulations giving us more guidance (though not while the government is shutdown). Here are the basics of what we know:
- These amounts are not considered to be a trade or business that has to be separately calculated under new UBIT-siloing rules. If your organization has no other trade or business income, then smile and go to the next sentence. If your organization has other trade or business income, this is still good news. If your organization has net operating losses from 2017 and prior, it may even be able to use those amount to reduce the tax owed.
- We are looking at the EXPENSE(s) to the employer – not the value to the employee.
- If an organization pays a third party an amount that enables employees to park at the third party’s parking lot or garage, then that amount is generally going to be taxable to the employer. However, if the amount is greater on a monthly basis than the amount that can be excluded from an employee’s income ($265 in 2019), then the taxable amount per month per employee is limited to $265 and the rest is taxable as wages to the employee (i.e., someone has to pay the tax).
- If an organization owns or leases all or a portion of a parking facility, then it can use “any reasonable method” to determine the taxable amount, subject to the following: 1) A method is not reasonable if it is calculating the taxable amount based on the “value” to the employees (vs. the expense) and 2) A method is not reasonable for years beginning January 1, 2019 and later if the method fails to allocate expenses to reserved employee spots.
- Total parking expenses 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 attendant expenses, security, and rent or lease payments. Depreciation expenses may not be deducted for purposes of calculating total parking expenses.
- Organizations with reserved employee spots have until March 31, 2019 to change the parking arrangements so as to eliminate or decrease the amount of reserved employee spots. Any changes made by March 31st can be retroactively applied to January 1.
- Not having reserved employee spots is not sufficient to escape the tax. The next step is to look at whether the “primary use” of the remaining spots are for use by the general public. This is tested by looking at the use on a typical business day. If greater than 50% of the primary use is for the general public, then analysis is done. If not…
- If the primary use is not to provide parking to the general public, then the organization is generally going to be taxed on the expenses related to the parking, except that it can exclude spots that are exclusively reserved for non-employees.
Don’t know what your organization may owe for yet? Yeah, that is because it is more complicated than can be easily explained in a blog post. For organizations that have expenses attributable to parking or employee transit, it is probably best that they consult with someone with expertise to help them understand what they need to do to comply. If folks like brain twisters – check out Notice 2018-99 for explanations and examples. Best to think about it sooner rather than later – since many just started the second tax year this nonsense applies to.