The IRS has released preliminary guidance on new Code Section 512(a)(7), the “parking tax,” which taxes exempt employers on the expenses incurred in providing either parking or transit passes to their employees. This provision converts applicable expenses into unrelated business taxable income (UBTI). Because the provision was effective for expenses incurred on or after Jan. 1, 2018, exempt organizations had been operating in the dark until the issuance of Notices 2018-99 and 2018-100 on December 10. Below is what you need to know now about these notices. A more complete explanation and analysis is available here.
The rules can be briefly described as follows:
- The notices confirm that the cost of providing the benefits — not their value — constitutes the amount to be added to UBTI. The notice expressly precludes any connection between the parking costs as defined and commensurate fair market value.
- Although the overall guidance indicates that “any reasonable method” can be used to determine the appropriate costs to allocate to employee parking, Notice 2018-99 provides guidance that organizations may rely on until regulations are issued.
- In situations in which a third party is paid a specified amount per employee for use of a parking space or a transit pass, the total amount paid for all employees (capped at $260 per month per employee) will be the amount subject to tax. Third-party payments include salary reduction arrangements whereby employees withhold a portion of their wages for parking or transit expenses on a pretax basis.
- When an employer owns or leases a parking lot or structure, the rules become more complicated and are subject to a four-step process to determine the amount subject to tax.
- There is general guidance on which costs must be included in the “pool” of costs to be allocated between the use by employees and use by others, including repairs and maintenance, utilities, and snow and debris clearing. Interestingly, depreciation is expressly excluded from the cost pool. Many questions still remain about the cost pool.
- Costs allocable to parking spaces reserved for employee use will be subject to tax. The percentage of reserved spots relative to all available spaces, multiplied by the overall cost pool, is deemed UBTI. There is an opportunity to revise reserved parking policies by March 31, 2019, to decrease or eliminate this issue retroactively to Jan. 1, 2018.
- A primary use test will allow many employers with lots that are used primarily by the general public (i.e. customers, clients, visitors, patients, students, religious congregants, vendors) to exclude much or all of their costs from taxation. A mechanical test is applied to make this determination. If more than half of the spaces are used primarily for nonemployee purposes, the organization will have no UBTI or UBTI only to the extent of reserved parking noted in the prior bullet.
- If organizations use more than half of their parking spaces for employee purposes, then the UBTI is determined as a percentage of all employee spots multiplied by the total parking costs.
- Net operating losses from other unrelated business activities may be used to offset the deemed income from parking benefits, as long as there is only one other trade or business. Otherwise, the losses must be siloed under the guidance provided in Notice 2018-67. Pre-2018 losses should be available to offset the parking income.
- Estimated tax penalty relief will generally be available to exempt employers who are required to file a Form 990-T for the first time due to the Section 512(a)(7) provisions. Other employers will need to rely on the general exceptions to the estimated tax rules for relief.
For additional details on these provisions, please read more.