transportation

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.

Meals, entertainment and transportation may cost businesses more under the TCJA

Along with tax rate reductions and a new deduction for pass-through qualified business income, the new tax law brings the reduction or elimination of tax deductions for certain business expenses. Two expense areas where the Tax Cuts and Jobs Act (TCJA) changes the rules — and not to businesses’ benefit — are meals/entertainment and transportation. In effect, the reduced tax benefits will mean these expenses are more costly to a business’s bottom line.

Meals and entertainment

Prior to the TCJA, taxpayers generally could deduct 50% of expenses for business-related meals and entertainment. Meals provided to an employee for the convenience of the employer on the employer’s business premises were 100% deductible by the employer and tax-free to the recipient employee.

Under the new law, for amounts paid or incurred after December 31, 2017, deductions for business-related entertainment expenses are disallowed.

Meal expenses incurred while traveling on business are still 50% deductible, but the 50% limit now also applies to meals provided via an on-premises cafeteria or otherwise on the employer’s premises for the convenience of the employer. After 2025, the cost of meals provided through an on-premises cafeteria or otherwise on the employer’s premises will no longer be deductible.

Transportation

The TCJA disallows employer deductions for the cost of providing commuting transportation to an employee (such as hiring a car service), unless the transportation is necessary for the employee’s safety.

The new law also eliminates employer deductions for the cost of providing qualified employee transportation fringe benefits. Examples include parking allowances, mass transit passes and van pooling. These benefits are, however, still tax-free to recipient employees.

Transportation expenses for employee work-related travel away from home are still deductible (and tax-free to the employee), as long as they otherwise qualify for such tax treatment. (Note that, for 2018 through 2025, employees can’t deduct unreimbursed employee business expenses, such as travel expenses, as a miscellaneous itemized deduction.)

Assessing the impact

The TCJA’s changes to deductions for meals, entertainment and transportation expenses may affect your business’s budget. Depending on how much you typically spend on such expenses, you may want to consider changing some of your policies and/or benefits offerings in these areas. We’d be pleased to help you assess the impact on your business.

© 2018