Congress slipped an unwanted surprise for exempt organizations into the final version of the 2017 Tax Act: A provision that converts qualified transportation benefits paid by a tax-exempt employer on behalf of its employees into unrelated business income. Qualified transportation benefits include both employer-provided parking and mass transit passes. So, now organizations will pay an expense — and the related tax — on behalf of their employees in the normal course of business. This treatment is effective for amounts paid or incurred after Dec. 31, 2017.
While it seems counterintuitive that providing parking or transit benefits should lead to a 21 percent income tax expense, we suggest organizations evaluate potential exposure to this provision based on the following considerations:
- Payment of transit and parking passes: Direct payment by employers on behalf of employees of either transit or parking passes appears to trigger taxable income in an amount equal to these payments.
- Participation in employee salary reduction programs: Transportation benefits funded through the reduction of an employee’s salary will likely trigger taxable income equal to the amount of such payments. This is true even though the benefits are funded by the employee directly and not the employer.
- Employer-provided parking in high- or moderate-cost parking locations: Guidance suggests that employers who provide parking for employees in an area where parking is usually paid for must assess the value of that parking. Several commentators have suggested that the “value” would be the lesser of fair market value or cost based on prevailing tax concepts in the area. In some instances, this could be as easy as comparing the parking rate in adjacent lots. In other instances, a more detailed analysis may be necessary, such as analyzing the costs incurred directly or indirectly to maintain or lease the parking spaces.
- Employer-provided parking in low- or no-cost parking locations: It’s not clear whether the IRS will apply the standards identified for high or moderate cost locations. However, prior guidance suggests that in geographies where parking is typically offered at no cost to staff and visitors, the lower of market or cost might be measured at zero.
We recommend that organizations evaluate the potential impact of the provision based on current information and plan accordingly.
Until further guidance is provided, tax-exempt organizations have to decide how to handle estimated tax payments for expenses incurred after Dec. 31, 2017. Estimated tax payments are generally due on the 15th day of the fourth, sixth, ninth, and 12th months of the tax year, so these payments are currently required for the tax on parking benefits. Organizations that are paying for parking passes in urban areas for employees should track the expenses of those benefits and estimate their tax liability, since this is the most clear-cut situation that will be subject to tax. Organizations in other situations will need to decide how to balance the risk of the unknown.
Given the uncertainty around the application of these new rules, some organizations are adopting a wait-and-see approach, while others are making their best estimate of the impact of the rules to calculate and pay estimated taxes. Unfortunately, either approach can result in penalty for underpayment of taxes, since regardless of best efforts, tax payments could ultimately be inadequate without further guidance.
Numerous comments have already been submitted to the IRS recommending that implementation of this provision be delayed, or that enforcement of penalties be delayed until further guidance is issued. On June 15, 2018, an IRS official indicated that they are considering a proposal to delay the qualified parking provisions until more guidance is released. Recently, there have been legislative initiatives proposed in Congress to repeal this provision, and there are rumors the White House may consider supporting a repeal as well. Until any regulatory delay is officially announced or the law is repealed, we recommend that organizations continue to evaluate the potential impact of the provision based on current information and plan accordingly.