You can’t get there from here, the saying goes. Now there’s a coda: At least not without paying a tax.
The Tax Cuts and Jobs Act made certain transportation fringe benefits taxable to not-for-profit organizations and, potentially, their employees.
Historically, unrelated business income (UBI) has been limited to the income generated by an activity that is regularly carried out by a not-for-profit organization, but that does not further its exempt purpose.
Such income was and is subject to tax (unrelated business income tax, or UBIT) at the corporate income tax rate.
A not-for-profit organization that has unrelated business income (UBI) of $1,000 or more for the tax year must file IRS Form 990-T. Less than $1,000 is considered de minimis and no filing is required.
If the not-for-profit anticipates that it will pay tax of $500 or more on its UBI, it must pay estimated taxes.
Tax Reform and Transportation Fringe Benefits (Not-for-Profit Organizations)
Historically, not-for-profit organizations did not pay tax on the value of the transportation fringe benefits they offered their employees. These benefits are costs to the organization, after all, not income.
Now however, as a result of tax reform, the concept of unrelated business income has been turned upside down.
UBIT and Transportation Fringe Benefits (Not-for-Profit Organizations)
If your not-for-profit organization provides certain transportation benefits and/or parking for its employees, it cannot deduct the costs. Instead, it must pay tax on the cost of providing those benefits, even though that cost is not income in the traditional sense.
As of January 1, 2018, these costs — also referred to as qualified transportation fringe benefits, or QTFs — must be included in your organization’s unrelated business income tax calculation.
UBIT and Transportation Fringe Benefits (Employees of Not-for-Profit Organizations)
Generally, transportation fringe benefits are not included in your employee’s gross income, however there is a limit. If the value of an employee’s transportation fringe benefits, including parking, exceeds $260 per month for 2018 ($265 per month for 2019), the excess benefit is taxable to your employee and deductible by your organization.
Beginning with 2018, qualified bicycle commuting reimbursements are also subject to this limit and therefore potentially taxable fringe benefits to your employees.
Any amount taxable to the employee is not considered taxable to the not-for-profit employer as a transportation fringe benefit.
UBIT and Employer-Paid or -Reimbursed Transportation Costs
A not-for-profit that pays for or reimburses employees for certain transportation costs must include the cost in unrelated business income. Transportation costs include transit passes, van pools and other carpooling, flexible spending arrangements, even bicycle commuting costs.
As a result, these costs are included in your organization’s UBIT calculation. That means the costs are subject to tax at the current 21 percent rate. It also means there are no offsetting expenses or deductions allowed in the calculation.
UBIT and Employer-Owned or -Leased Parking Facilities
Parking fringe benefits, or qualified parking, generally refers to the cost of parking that your not-for-profit organization provides to employees who would have to pay for their own parking without this employer-benefit.
The benefit amount includes the costs associated with an owned or leased parking facility used to provide employee parking when the employee works at or near your business premises or another location where the employee commutes to work. It also includes the costs of providing employee parking in a facility that your organization does not own.
As a general rule, these costs are now taxable to your organization as income for the UBIT calculation, although there is an exception for parking provided to the general public. The costs applicable to such public parking are deductible for tax purposes and are not considered income subject to UBIT.
Parking specifically reserved for employees is not deductible and is considered income subject to UBIT. However, the IRS provided not-for-profits with an option, available only for a limited time. Until March 31, 2019 your organization can reduce or eliminate parking spots reserved for employees in order to reduce or eliminate taxable income — and potentially even eliminate the need to file Form 990-T. The impact of any such changes on UBIT is retroactive to January 1, 2018.
Another exception is for the cost of employee parking you provide in a lot or garage that doesn’t charge for parking and is located on your organization’s property. The cost is not considered income subject to tax. Finally, parking that employees pay for with after-tax dollars is not subject to UBIT.
Determining the Cost of Nondeductible Parking for UBIT
Recognizing that a not-for-profit organization may already have their own approaches for determining the cost associated of nondeductible parking spaces, the IRS announced that an organization may use any reasonable method. Determining these costs for tax purposes may require additional recordkeeping.
It’s important to understand that the income calculation is based on the cost of providing the parking, not its value or fair market value. These costs can include expenses for rent or mortgage and interest, security and attendant services, repairs and maintenance, cleaning and trash removal, utilities, insurance, property taxes, snow removal and landscaping. They do not include depreciation.
As a general rule, for reserved parking, the cost of spots reserved for employees is not deductible and is subject to UBIT. The cost of spots reserved for nonemployees is deductible and is not subject to UBIT. The cost of nonreserved spots depends on how the spots are used.
If more than 50 percent of a parking lot’s spaces are used to provide parking to the general public, not employees, then all of the costs for non-employee parking are excluded from the UBIT calculation. In making the 50 percent determination, organizations should factor in such things as how the spaces are labeled and the normal business hours.
IRS Method for Calculating Unrelated Business Taxable Income (UBTI) from Parking
The IRS has established a four-step method that it considers a reasonable method for determining the amount of parking-related costs/expenses that cannot be deducted but must be include in income:
1. Calculate the number of parking spots that are reserved for employees. The costs allocable to these spots cannot be deducted.
2. Determine the primary use of the remaining parking spots — the primary use test. Parking spots that are typically empty during normal business hours but are available to the general public are considered to be primarily used by the general public. If the primary use of more than 50 percent of the remaining spots during normal business hours is for public parking, the costs are fully deductible. Alternatively, if the primary use for 50 percent or fewer of the spots is not for parking by the general public, advance to step 3.
3. Calculate the number of spots and related deduction for reserved nonemployee spots, which include spots reserved for visitors, customers, independent contractors, partners, two percent or higher S corporation shareholders or sole proprietors.
4. For any remaining costs, determine the use of the remaining spaces and allocate those costs based on a reasonable method.
Examples: Unrelated Business Taxable Income (UBTI) Calculations
Your not-for-profit organization leases six parking spots in a nearby garage for the benefit of your employees. The cost of that parking is unrelated business taxable income and is not allowed as a deduction. The cost must be included on the 990-T.
As previously noted, there is an exception if the cost for any employee exceeds $260/month for 2018. In this case, the excess is taxable to the employee, not your not-for-profit organization.
Your not-for-profit organization owns or leases an employee-only parking lot that is secured by a keypass. All costs related to that parking lot are included as income in the UBIT calculation.
Your not-for-profit organization owns a lot with 50 parking spots for employees and visitors. You incur $10,000 in total parking expenses related to the lot. There is no keypass required to access the lot. You reserve five spots for management and have 40 employees parking in the lot in non-reserved spots on a typical business day. Additionally, you have 10 nonemployee spots reserved for visitors.
You calculate UBTI as follows.
First, determine all of the costs associated with the parking lot, representing the total cost to be allocated. In this example, the total cost is $10,000.
The total expense for the five reserved management parking spots is $1,000 — five spots divided by 50 total spots (10 percent), then multiplied by $10,000 in expenses. This is the amount of the total parking cost that is nondeductible as reserved employee parking and is considered UBTI.
89 percent of the remaining parking spots (40 spots divided by the remaining 45 spots) are used primarily to provide parking to employees and not the general public. As this result is greater than 50 percent, the remaining costs are not fully deductible and additional calculations are required. (If 50 percent or more of the spots were instead used for public parking, all costs would have been fully deductible, with no further calculations required.)
Of the remaining 45 spots, 10 spots (or 22 percent) are reserved for visitors. The costs allocable to these spots (22 percent of $10,000) are not subject to UBI and do qualify for a deduction.
Finally, determine employee use of the remaining 35 parking spots and allocate remaining costs accordingly. You can use a survey or any another reasonable method. Note that any parking spots that are typically empty during regular business hours are considered nonemployee-use spots.
Planning Tips for Your Not-for-Profit Organization
It’s important to reevaluate the transportation and parking fringe benefits you offer — and related expenses and assets, like parking garages— on an annual basis. Did the parking rates you pay increase for employees? Do you offer employees a new transit pass option or other new benefit? Did the mix of people using your parking garage change to include more visitors or more employees?
By revaluating the transportation fringe benefits you offer at the beginning of each year, you gain insight into the UBIT your organization will be required to pay. This insight helps you to determine whether your organization will be required to make estimated tax payments during the year. It also helps to establish your recordkeeping requirements if you think you’ll be subject to tax.
Finally, clearly document your UBI and cost/expense estimates and other determinations with regard to UBI and UBIT for tax purposes.
Have questions about transportation fringe benefits?