IRS Published Notice 

With the passage of the Tax Cuts and Jobs Act at the end of 2017, significant changes were made regarding how to determine the amount of employee parking expenses with respect to qualified transportation fringes (QTFs) that is nondeductible for employers. 

The IRS Tax Code was amended by the Act so that deductions for QTF expenses provided by an employer for its employees are now disallowed.  A nonprofit’s Unrelated Business Taxable Income (UBTI) is going to be increased by the amount of the nondeductible QTF expense. 

Unfortunately, what the Act does not define is how to determine the amount of the QTF expense that is nondeductible and will be treated as an increase in UBTI! To address this lack of clarification, over the week of December 10, 2018, the IRS published an interim notice offering guidance for calculating the amount that will be disallowed under the Tax Act.  

The IRS has also announced it intends to publish final guidance on how to calculate nondeductible parking expenses, other QTFs, and the calculation of increased UBTI attributable to QTFs. But for now, the recent interim notice will represent the official guidance for employers that have previously been able to take advantage of deductions when offering transportation benefits to their employees.   

Details of the Internal Revenue Code Sections 274 (a) (4) and 512 (a) (7)

  • The message is clear: No deduction is allowed under the Code as spelled out in section 274 (a) (4) for the expense of any Qualified Transportation Fringes (QTF) provided by employers (for the purposes of this article, the employers are nonprofit organizations) to their employees. Additionally, an employer/nonprofit may not take a deduction for QTFs regardless of whether the benefit is provided as a supplement to an employee’s compensation, either in-kind or through a bona fide cash reimbursement arrangement, or even through a compensation reduction agreement.

  • Although the value of the QTF is relevant in determining the exclusion and whether the exception applies, the disallowed deduction relates to the expense of providing a QTF, not to its value.

  • There are three categories that are considered as QTFs: transportation in a highway commuter vehicle between the employees’ residence and the place of employment;   any transit pass; qualified parking (i.e., parking provided to an employee on or near the business premises of the employer or on or near a location from which the employee commutes to work.)

  • The definition of employee for this ruling includes any individual currently employed by the Organization, including common law employees and statutory employees. Partners, two percent shareholders of S Corporations, sole proprietors and independent contractors are not considered employees.

  • Exceptions specified under section 274 (e) include: expenses that are treated by the employer as compensation/wages to its employees and expenses for parking made available to the general public.

Calculations to Determine Disallowed Deduction

The most important aspects stated in the recently released Notice for determining the nondeductible amount depend on two key factors -  (1) Whether the nonprofit/employer pays a third party to provide reserved parking for its employees or (2) If the nonprofit/employer owns or leases a parking facility, or a portion of a facility, where its employees park.  

1. The Nonprofit/Employer Pays a Third Party to Provide Employee Parking
Under this scenario, if the employer pays a third party an amount so that its employees may park at the third party’s garage, the disallowance is generally calculated simply as the employer’s total annual cost of the employee parking paid to the third party. An issue occurs if the amount exceeds the monthly limitation on exclusion which is $260 for 2018. In that case, Section 274 states that the excess must be treated by the employer as compensation and wages to the employee and is exempted from the employer’s disallowance amount.

2. The Nonprofit/Employer Owns or Leases All or a Portion of a Parking Facility

Under these circumstances, if the employer owns or leases all or a portion of one or more parking facilities (indoor or outdoor garages, lots and other structures) where employees park on or near the premises of their employment or on or near a location from which they commute, the disallowance should be calculated using the four basic steps approved by the IRS as a “reasonable” method for calculations.  

One distinction to note is that if the employer owns or leases more than one facility in a single geographic location, they can aggregate the number of spots in the facilities. However, if the employer owns or leases more than one parking facility in multiple geographic locations, they cannot aggregate the parking spots to calculate expenses. 

Expenses include repair, maintenance, utility costs, insurance, property taxes, interest, snow, ice, leaf, and trash removal, cleaning and landscaping costs, parking attendant expenses, security, rent or lease payments.

Application of the Four-Step ‘Reasonable’ Methodology

Although the calculations determining the disallowance under those conditions where the employer owns or leases all or a portion of a parking facility is complicated, we will list an abbreviated summary of the major points here.

The IRS Notice includes ten examples for the nonprofits/employers to review, but we strongly suggest that you speak with your financial advisor, CPA or other trusted advisors regarding your unique situation as there are many definitions and exceptions that may impact your organization’s own disallowance. You can also call us at SobelCo at 973-994-9494.

Step One: Calculate the disallowance of spots reserved for employee. This means that the employer must first identify the number of spots that are exclusively reserved for their employees in the facility (or in the employer’s portion of the facility) and secondly determine the percentage of employee reserved spots in relation to total spots in the facility. Then thirdly, the employer must multiply that percentage by the total parking expenses for the facility.  The result is the amount of the deduction for total parking expenses that is now disallowed under Section 274(a) (4).

Step Two: Determine the primary use of the remaining spots. This means the employer must look at the spots that are not reserved for employees and decide if the primary use (primary use is considered to be 50% usage) is to provide parking for the general public. If this is the case, then the remaining spots are exempted from the disallowance and not treated as an increase in UBTI.

Step Three: Calculate the allowance for reserved nonemployee spots. If the remaining spots are not used for general public parking, the employer can identify the number of spots in the facility or in the employer’s portion that are reserved for non-employees, who may be visitors, clients, partners, sole proprietors, and two percent shareholders of S corporations. If there are reserved non-employee spots, the nonprofit should follow the same process as described above which requires determining the percentage of spots reserved in relation to the total remaining parking spots in the facility and then multiplying that percentage by the total remaining parking lot expenses, as previously listed, to determine the amount exempted from the disallowance.  

Step Four: Determine remaining use and allocable expenses.  In this final step, if the employer has completed the first three steps and still has remaining parking expenses that are not specifically categorized as deductible or nondeductible, it must reasonably determine the employee use of the other remaining spots and the related expenses allocable to those employee spots.  Actual or estimated usage can be calculated based on: the number of employee spots, the number of employees, hours of use and other data.   

Relief for Nonprofits 

The enactment of section 512 (a) (7) will have a critical impact on nonprofits and in fact may result in some nonprofit organizations owing unrelated business income tax, thus requiring them to pay estimated income tax for the first time. As a result, the organizations may need additional time to develop the processes and gain the knowledge to comply with estimated income tax payment requirements.   

Accordingly, after the issuing of Notice 2018-99, the IRS issued Notice 2018-100 to provide certain nonprofit organizations with a waiver regarding the addition to tax under Section 6655 for underpayment of estimated income tax payments that are required to be made on or before December 17, 2018.  

Therefore the addition to tax for failure to make estimated income tax payments will be waived  if the underpayment of estimated income tax results from the changes to the tax treatment of QTFs under sections 13304 C and 13703 for a nonprofit organization that both provides qualified transportation fringes that fit the definition in Section 132 (f) to an employee for which estimated income tax payments, affected by sections 274 and 512, would otherwise be required to be made on or before December 17, 2018 and also was not required to file Form 990—T for the taxable year preceding the organization’s first taxable year ending after December 31, 2017. 

This tax relief waiver is only for nonprofit organizations that are timely in their filing of Form 990-T and are timely in paying the amount reported for the taxable year for which the relief is granted.     

Leaders of nonprofit organizations should speak with their advisors regarding taking advantage of the waiver as well as discussing the alternative possibility of qualifying for one of the statutory safe harbor or exception provisions.

Comments and Feedback

Both the U.S. Treasury and the IRS have sought comments for future guidance as they continue to clarify the treatments of QTFs as outlined in the new Tax Act under the sections 274 and 512. Comments must be submitted by February 22, 2019 and must include a reference to Notice 2018-99.

  • Offer comments online at www.regulations.gov. Type IRS-2018-0038 in the search field.

  • Comments can be mailed to:

                                                      Internal Revenue Service
                                                      Attn: CC:PA:LPD:PR (Notice 2018-99)
                                                      Room 5203
                                                      P O Box 7604
                                                      Ben Franklin Station
                                                      Washington, DC 20044

  • Comments can be delivered by hand to:

                                                      Courier’s Desk
                                                      Internal Revenue Service
                                                     Attn: CC:PA:LPD:PR (Notice 2018-99)
                                                     1111 Constitution Avenue, NW
                                                     Washington, DC 20224                                                         

Please feel free to contact Bridget Hartnett or Adrienne Dubinin at SobelCo if you have any questions at 973-994-9494.