Nonprofits and Taxable Parking Expenses
Navigating the Possibility of Incurring UBTI
Nonprofit organizations that provide employee parking benefits may be surprised to learn that they may be subject to incur unrelated business taxable income (UBTI). In addition, organizations with no UBTI may now be required to file form 990-T.
The Tax Cuts and Jobs Act (Act) amended Section 274 of the Internal Revenue Code (IRC) to disallow for-profit employers from deducting certain expenses related to transportation fringe benefits provided to their employees. The Act added IRC Section 512(a)(7) to what constitutes UBTI for nonprofits and other tax-exempt entities. The Act states that tax-exempt entities are required to increase their UBTI by expenses related to transportation fringe benefits provided to their employees. The transportation fringe benefits subject to this tax include expenses associated with:
- Transportation in a commuter highway,
- Transit passes, and
- Parking facilities.
Ostensibly, this new Section 512(a)(7) was added to level the playing field between tax-exempt and taxable entities. Since taxable entities lost a business deduction for qualified fringe transportation benefits under Section 274, Congress decided that nonprofits should be taxed for providing their employees transportation benefits. Perhaps, the most confusing aspect of Section 512(a)(7) is that it falls under the unrelated business taxable income statute, yet Section 512(a)(7) levies a tax on a nonprofit’s expenses related to the employee transportation benefits, not its income. As a result, nonprofits that never paid UBTI may now be subject to a 21 percent tax and have to file the form 990-T.
In an effort to give some guidance to nonprofits on this issue, the IRS issued Notice 2018-99 (“Notice”). The 512(a)(7) primarily addresses the tax for certain qualified transportation benefits,  the Notice provides guidance on calculating the UBTI tax as related to parking expenses.
Qualified parking expenses include: parking lot attendant/security expenses; insurance, property taxes, interest; rent or lease payments (this includes partial payments); utilities; cleaning and removal of snow, ice, trash, or leaves; and repairs, maintenance, or landscaping. Depreciation is not considered an expense and thus is not included when calculating the total amount of qualified parking expenses subject to UBTI. Nonprofits may also use their own reasonable method, so long as such method is not “unreasonable.” Unreasonable methods include: (1) using the value of employee parking; and (2) allocating no expenses to reserved parking.
The Notice goes on to provide guidance on how much of the nonprofit’s parking expenses constitute qualified parking expenses subject to UBTI. If a nonprofit pays a third-party vendor for parking, the organization’s parking expenses is the annual amount paid to the third-party vendor for parking, up to the current per employee threshold of $265 per month. If the organization pays in excess of the $265 amount, any excess is considered compensation to the employee and is not included in the organization’s parking expenses subject to UBTI.
For those organizations that own or lease parking facilities, the Notice provides a complicated four-step method to determine the qualified parking expenses and calculate the applicable UBTI, if any. The methodology includes a “primary use test,” which states that if over 50 percent of the actual or estimated use of the parking lot spots are for public use “then the remaining total parking expenses for the parking facility” are not subject to the expense calculation and thus exempted from UBTI. If the organization is not exempted from UBTI by way of the “primary use test,” the Notice provides two additional steps to assist the organization in calculating the total UBTI.
While the Notice
provides some clarity to nonprofits who may be subject to the tax, the tax
itself remains widely disliked by many in the nonprofit sector. Dislike of the
law has led to South Carolina Congressman James Cylburn (D) to file H.R. 1223
“to repeal the increase in unrelated business taxable income by amount of
certain fringe benefit expenses.” In the meantime, if you have any questions
regarding whether your organization is subject to this new tax or how to
calculate it, please contact an attorney at Bea & VandenBerk.
 Section 512(a)(7) also levies a tax on expenses for “any on-premises athletic facility” subject to exceptions.