IRS Provides Limited Clarification for Certain Tax-Exempt Employers
Tax-Exempt Organizations Alert 12/13/18 Michael C. Wieber, Norah L. Jones and Jacob L. Zerkle
On December 10, 2018, the Internal Revenue Service (the “IRS”) simultaneously issued Notice 2018-99 and Notice 2018-100. The Notices, respectively, (1) assist tax-exempt organizations in determining the amount of employee parking expenses that will be treated as unrelated business taxable income (“UBTI”) and (2) provide tax penalty relief to certain tax-exempt organizations.
As noted in a previous Tax-Exempt Organizations Alert, the Tax Cuts and Jobs Act (the “Act”) expanded the definition of UBTI to, among other things, include certain qualified parking benefits provided by tax-exempt employers to their employees. The Act states that a tax-exempt organization will have UBTI to the extent it pays or incurs expenses for qualified parking, but only if the payment or expense would not be otherwise deductible under the regular business expense deduction rules. The Act created much uncertainty in the tax-exempt community regarding how these provisions would be interpreted and applied, specifically for organizations required to file a Form 990-T for the first time.
Calculating Parking UBTI
IRS Notice 2018-99 addresses ambiguity created by the Act in the employer-provided parking context, such as how to calculate UBTI (a) when a tax-exempt organization pays a third party for parking provided to the organization’s employees and (b) when a tax-exempt organization owns or leases all or a portion of one or more parking facilities where its employees park.
If a tax-exempt organization pays a third party for employee parking facilities, the total annual amount paid to the third party generally will constitute UBTI (subject to certain limitations). Similarly, where a tax-exempt organization leases a parking lot, the entire amount is considered an expense (although a portion may be excluded from UBTI treatment). Significantly, however, where the tax-exempt organization owns a lot, neither the value of the parking to employees nor a rough equivalent (such as the amount of depreciation that would be deductible to a taxable organization) is used in determining "expense" for the UBTI calculation. That is, owning the lot could result in the organization avoiding UBTI on parking entirely or nearly so (as costs of lighting, maintenance, security guards and so forth are expenses an organization may incur even when it owns the lot).
Much of the discussion in Notice 2018-99 centers on situations where the employer pays expenses related to a lot it owns, pays for use of a parking places, or leases parking facilities from a third party. In each case, once the amount of the expense is determined, the Notice requires that organizations use a reasonable method for determining the expense (and thus, UBTI) attributable to qualified employee parking.
As a safe harbor, the Notice offers a four-step methodology to calculate the portion of parking expense that is subject to UBTI rules, such that, if the rules are followed, the organization's determination will be deemed to be “reasonable” for these purposes: (1) calculate the disallowance for reserved employee spots; (2) determine the primary use of remaining spots; (3) calculate the allowance for reserved nonemployee spots; and (4) determine remaining use and allocable expenses. Each element is discussed in more detail in the Notice.
Notably, though, after calculating the number of reserved employee spots in Step 1, if greater than 50% of the remaining parking spots are available for use by the general public on a typical business day (even if frequently empty), the expense incurred for all of the remaining spots is excluded from UBTI. Although the IRS will be looking for potentially abusive calculations, this is a significant win for employers who have more parking spots available for visitors than for employees.
The Notice stresses that a tax-exempt organization must calculate its UBTI from employer-provided parking by identifying or estimating the cost of providing (and not the value of) parking benefits to employees. Importantly, however, the Notice then provides that, until March 31, 2019, a tax-exempt employer may change its parking arrangements to reduce or eliminate the number of parking spots reserved for its employees. By making this change, many churches, schools, hospitals, and other tax-exempt organizations may be able to reduce or even eliminate their associated UBTI. Changes made in parking arrangements pursuant to this rule will apply retroactively to January 1, 2018.
As stated in the IRS news release accompanying these Notices, the IRS acknowledges that this guidance falls late in the year and taxpayers that own or lease parking facilities may have already adopted reasonable methods to determine the amount of their nondeductible parking expenses for 2018. Accordingly, tax-exempt organizations may rely on this new guidance until further guidance is issued or use any reasonable method for determining nondeductible parking expenses related to employer-provided parking. The Department of the Treasury and the IRS intend to publish proposed regulations under sections 274 and 512 of the Internal Revenue Code (the “IRC”). Tax-exempt organizations affected by these provisions may submit comments prior to February 22, 2019.
Tax Penalty Relief
Enactment of Section 512(a)(7) of the Act almost certainly resulted in certain tax-exempt organizations owing UBTI and having a Form 990-T filing obligation for the first time. Accordingly, such organizations normally would be subject to penalty for failure to make estimated tax payments during the course of 2018. Notice 2018-100 provides that this penalty will be waived if certain conditions are met. Relief is limited to tax-exempt organizations that (i) were not required to file a Form 990-T for the last filing season; (2) timely file Form 990-T; and (3) timely pay the amount reported for the taxable year for which relief is granted. To claim the waiver under this Notice, a tax-exempt organization must write “Notice 2018-100” on the top of its Form 990-T. An exempt organization with less than $1,000 of UBTI is not required to file Form 990-T.
That all said, tax-exempt organizations that already file Forms 990-T should be certain that they have paid required estimated taxes as necessary to qualify for one of the applicable exemptions to penalties (such as paying estimates for 2018 at least equal to the 100% of its 2017 UBIT).
The attorneys in the Tax-Exempt Organizations and Employee Benefits Groups at Quarles & Brady are reviewing the implications of each Notice for tax-exempt employers and are happy to discuss the potential applicability to your organization. For more information, please contact: