tax exempt

Changes in qualified transportation fringe benefits for parking

by Nicole Oeltjen

Tax Senior at Atchley & Associates, LLP

Per the Tax Cuts and Jobs Act signed into law in 2017, tax-exempt organizations that provide their employees with qualified transportation fringe benefits, which includes on-sight parking – are now subject to unrelated business tax. The IRS issued further guidance on the new parking and transportation tax in late December 2018, which applies to expenses paid or incurred after December 31, 2017. Organizations are still allowed to subsidize commuting and parking expenses through a bona fide reimbursement arrangement, pre-taxed qualified “cafeteria” plans, or compensation reduction agreements so that the employee can exclude the amount on their W2. An employer may provide qualified transportation benefits-including parking-to each employee at a value of $265 a month (2019) and the benefit is exempt from employee wages and payroll tax. However, any amount provided to the employee will now be reported on a 990-T and is considered unrelated business income and taxed at a corporate rate of 21%. There are additional rules regarding payroll that are not covered in this discussion.

Per the updates to IRC Section 274(l)(1), ” No deduction shall be allowed under this chapter for any expense incurred for providing any transportation, or any payment or reimbursement, to an employee of the taxpayer in connection with travel between the employee’s residence and place of employment, except as necessary for ensuring the safety of the employee.” This means, that since the organization can no longer deduct the costs allocated to employee parking, the costs will now be considered unrelated business income, unless the organization does not have any employee reserved parking spots AND more than 50% of the available parking spots are primarily used by the general public. This applies to organizations that either own their own parking lot, rent a building that has parking, or pays for parking for their employees offsite.

 

Qualified Transportation Fringe Benefits

  • Transit passes (passes, tokens, fare cards, vouchers, etc.) for mass transit such as by bus, train, monorail, subway, ferry, streetcars, tramcars, etc.
  • Vanpooling via a commuter highway vehicle equipped to carry at least six passengers in addition to the driver
  • Bicycle expenses such as for the purchase, improvement, repair or storage of a bicycle used for commuting
  • Parking facilities (garages, lots, etc.) on or near the employer’s business premises, or on or near a location from which an employee commutes to work (“park and ride”)

 

Costs associated with parking that are no longer deductible if provided to employees, and are now taxable per IRS Notice 2018-99:

− Rent or lease payments, or portions of rent or lease payments (if not broken out separately)

− Repairs and maintenance                      − Trash removal; cleaning

− Utilities                                                       − Landscape costs

− Insurance                                                  − Parking lot attendant expenses

− Property taxes                                           − Security

− Interest                                                       − Other

− Snow/ice/leaf removal

 

Costs that will remain deductible, and are not taxable per IRS Notice 2018-99.

− Depreciation, if the parking facility is owned by the employer

− Expenses for items not located on or in the parking facility, including items related to property next to the parking facility, such as landscaping or lighting

 

Initial questions to determine whether the organization is subject to tax

  • Does the organization have a parking lot, or lease a parking lot, that provides employee parking during the organization’s business hours?
  • Does the organization have reserved spots designated to employees or board members stated with a sign or marked by a barrier to entry?
  • Of the parking spots available at the organization’s office location, are the majority of the parking spots used by the organization’s employees? Majority is >50%
  • Is the organization providing employees with bus fare, paying for parking, or providing other transportation benefits?

 

Determine the amount of unrelated business income

Step 1: Calculate the disallowed expense for reserved employee parking spots:

  • Identify the number of spots in the parking facility that are exclusively reserved for the organization’s employees. Reserved is defined by, but not limited to, specific signage, separate facility, portion of the facility segregated by a barrier to entry or limited by terms of access.
  • Determine the percentage of reserved employee spots in relation to the total parking spots
  • Multiply the percentage by the organization’s total parking expenses. This amount is the total parking expenses that is a disallowed expense under the new tax law and is considered unrelated business income.

Step 2: Determine the primary use of remaining spots using the primary use test:

  • Identify the remaining parking spots in the parking facility and determine whether they are used primarily by employees or the general public. Primary use means greater than 50% of actual or estimated usage of the parking spots in the parking facility. This is tested during normal hours of the organization’s activities on a typical day. Non-reserved parking spots that are available to the general public but are empty during normal hours of operation are treated as general public spots.
  • General public is defined, but not limited to, customers, visitors, individuals delivering goods or services to the organization, patients of a health care facility, students of an educational institution and congregants of a religious organization.
  • Signage is not required to qualify for general use parking in the primary use test.
  • The organization can aggregate parking lots in multiple locations if all in the same city.

Step 3: Calculate the disallowed expenses for reserved nonemployee parking spots:

  • Determine if the organization has reserved for nonemployee parking spots. An example would be if there was signage indicating “customer parking only.” If yes, then the allocated expenses are deductible as a business expense, not subject to UBIT.

Step 4: Determine employee use of the remaining parking spots:

  • Specifically identify the number of employee spots based on actual or estimated usage. Actual or estimated usage may be based on:
    • number of spots
    • number of employees
    • the hours of use
    • or other measures.

 

Notes:

  • Organizations have until March 31st, 2019 to change signage and access in their parking facilities to eliminate reserved employee parking. Such parking spots can be treated as unreserved retroactively to January 1, 2018.
  • If the costs allocated to employee parking is less than $1,000 for the year, and the organization does not have any other unrelated business income, then the organization is under the filing requirement to report unrelated business income on Form 990-T.
  • At this time, accountants are taking the costs of the parking lot as the value for UBIT. No other guidance has been given to determine value if the organization does not have parking costs.
  • For fiscal year organizations, the qualified transportation benefits paid or incurred before January 1, 2018 are still deductible to the organization, and are not considered in the calculation for unrelated business income.

Tax Exempt Organizations Disaster Relief Written Acknowledgements

by Karen Atchley, CPA

Partner at Atchley & Associates, LLP

The Disaster Tax Relief and Airport and Airway Extension Act of 2017 was signed into law on September 28, 2017 (hereafter referred to as The Disaster Tax Relief Act).  The legislation provides tax relief to the victims of Hurricanes Harvey, Irma and Maria and funds the Federal Aviation Administration through March 2018.

Although this new law affects individuals and employers, the purpose of this paper is to advise tax exempt organizations concerning one specific area of the new law relating to issuance of charitable contribution acknowledgement letters.  The law added a temporary suspension of the adjusted gross income (AGI) limitations that are imposed on qualified charitable contributions. The taxpayer must make an election for the temporary suspension of the AGI limitations to apply.

 In general, the law prior to the September 28, 2017 legislation provides that individual’s cash contributions are deductible in any one year up to 50% of AGI and noncash contributions are deductible in any one year up to either 20% or 30% of AGI.  Contributions limited by AGI are carried forward to subsequent years for up to five years.

A qualified charitable contribution under the new law is a contribution that was paid during the period beginning August 23, 2017 and ending on December 31, 2017, in cash to an organization described in section 170(b)(1)(A), for relief efforts in the Hurricane Harvey, Irma, or Maria disaster areas.  The contribution must be substantiated with a contemporaneous written acknowledgement from the charitable organization that states that the contribution was or is to be used for relief efforts.

Most charitable organizations are aware of Internal Revenue Code (IRC) Section 170(f)(8)(A), which requires that the organization must provide the donor with a written acknowledgement of the donor contribution if the contribution was for $250 or more.  IRC Section 6115 requires the charitable organization to provide the donor with a written statement if a contribution is made for $75 or more if part of the contribution is for goods or services (quid pro quo) and the statement must contain a good-faith estimate of the value of goods and services that the charity has provided to the donor.  What charitable organizations may not know is that The Disaster Tax Relief Act requires written acknowledgement that not only states that the contribution was or is to be used for relief efforts but also requires a letter to the donor regardless of the size of the contribution.

In summary, charitable organizations that collected funds that were collected during 2017 and used in the relief efforts in the Hurricane Harvey, Irma or Maria disaster areas will want to start working on their acknowledgement letters for 2017 early in 2018 since all qualified relief contributions require an acknowledgement letter.

Note: Regulations may subsequently be issued that affect this provision of the tax law.  Check with your tax advisor to determine whether any subsequent tax law changes are made.  This paper is not intended to address all the provisions of The Disaster Relief Act but only the provision relating to the issuance of written acknowledgements.