One of the more controversial provisions of the Tax Cuts and Jobs Act (TCJA) enacted in December, 2017, is the provision affecting the disallowance of certain fringe benefits deductions. Importantly, the provision also includes a related requirement that negatively affects many nonprofit organizations.
The TCJA added rules to preclude for-profit employers from deducting qualified transportation fringe benefits expenses paid or incurred after December 31, 2017. Qualified transportation fringe benefits include amounts paid for van pools, transit passes, bicycle commuting, and qualified parking.
The disallowance is effective for years beginning after December 31, 2017 and, thus, is effective for calendar year 2018. Given the disallowance, affected for-profit taxpayers can expect to realize higher levels of taxable income going forward.
Unfortunately, another new (but corresponding) tax statute added by the TCJA requires tax exempt organizations to increase their unrelated business income by any amount that is not allowable as a deduction and which is paid for any qualified parking. This provision subjects tax exempt organizations to a potential unrelated business income tax liability equal to the general corporate income tax rate of 21 percent applied to the cost of the qualified parking expenses they provide to their employees.
To aid both for-profit and tax exempt employers, the Treasury Department and IRS recently released guidance for both taxable and tax exempt organizations to help those organizations determine how taxable income (including unrelated business taxable income) will be increased by the nondeductible portion of the qualified fringe benefit expenses paid.
The new guidance, issued in the Form of two separate IRS Notices, provides two types of calculations required for determining the total qualified fringe benefit expense disallowance related to parking. The calculation methodology selected in any particular situation is dependent on whether the employer contracts with an unrelated third party for the cost of the parking or they own or lease the parking lot.
Employer Pays Third Party Parking Space Provider
When an employer contracts with a third party for the use of the parking lot, the disallowance is generally the amount that the employer pays to the third party. However, if that monthly amount exceeds $260 an employee, the employer must treat the excess as additional compensation. Thus, the monthly amount in excess of $260 is excluded from the disallowance amount, as that payment ultimately is deducted as employee compensation.
Employer Owns or Leases the Parking Lot
According to the IRS, until it issues further guidance, employers may use any reasonable method to calculate the disallowance in cases where the employer owns or leases the parking lot.
To date, the IRS has provided a four-step reasonableness method:
- Calculate the disallowance for reserved employee spots.
- Determine the primary use of the remaining spots (for the general public (over 50 percent) or for employees).
- Calculate the allowance for reserved nonemployee spots.
- Determine the remaining use and allocable expenses.
Under the new guidance, the IRS permits organizations to change reserved spots into non-reserved (through signage and access) by March 31, 2019, and treat those spots as non-reserved retroactively to January 1, 2018.
For example, consider an organization with a 500-space parking lot where 50 spaces are reserved for employees and the remainder are open for the public. The organization would have to pay taxes on 10% of its costs. But every reserved-parking sign the organization removes between now and March 31, 2019 could reduce its tax bill. Once the taxable income goes below $1,000, tax exempt organizations do not owe tax and, as such, do not have to prepare a Form 990-T, Exempt Organization Income Tax Return.
Estimated Tax Penalty Relief
As it is expected that certain tax exempt organizations may be caught off guard by the new rules, the IRS recognizes that some tax exempt organizations may find they owe unrelated business income tax and have to pay estimated income tax for the first time. These organizations will not have been able to use the preceding-year safe harbor, and, as a result, may need more time to develop knowledge and processes to comply with estimated tax payment requirements.
In light of this situation, the IRS is waiving the addition to tax (penalties) for failure to make estimated income tax payments for an exempt organization that:
- provides qualified transportation fringes to an employee for which estimated income tax payments, affected by changes made by TCJA and otherwise be required to be made on or before December 17, 2018;
- was not required to file a Form 990-T, Exempt Organization Business Income Tax Return, for the tax year preceding the organization’s first tax year ending after December 31, 2017; and
- timely pays the amount reported for the tax year for which relief is granted.
To claim the waiver, the exempt organization must write “Notice 2018-100” on the top of its Form 990-T.
Note that tax exempt organizations must make quarterly estimated tax in quarterly installment payments if its estimated tax is expected to be $500 or more. At a 21 percent flat corporate tax rate, the federal taxable income level at which estimated income tax payments are required is $2,381. ($2,381 x 21%) Keep in mind, as noted above, tax exempt organizations with unrelated business taxable income at $1,000 and less, do not need to file the return and pay any tax.
The potential tax on tax exempt organizations’ qualified transportation benefit expenses has received heavy criticism from both charities and religious organizations, who argue that the tax would cause them to divert resources that they would otherwise use to further their missions. While there is no question that this is, in fact, the case, there is no option at this time other than to comply with the new rules.
As always, we will continue to monitor this issue for further guidance from the IRS and the status of the ongoing repeal of these laws.
Internal Revenue Service Notice 2018-99,
Internal Revenue Service Notice 2018-100