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The Bottom Line on Parking Benefits

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By now, many of our readers may have heard about what was a little-known wrinkle in the new tax law. Whether you have or haven’t, we are going to break it down for you and get to the bottom line on the matter.

Many of you reading this article are senior management in nonprofit organizations that are usually exempt from corporate income tax.  The only time you would worry about the organization paying tax, presumably, would be on any income that might be unrelated to your mission.  After the new tax law becomes effective (1/1/18) for your organization, however, you likely will be filing the 990T form with your annual 990 to report income resulting from non-deductible parking costs and expenses that are incurred by your organization to accommodate employee parking.  What? That’s right…If you provide parking for your employees, you now must calculate the cost of providing that “fringe benefit” to them, and report that amount as unrelated business income (UBI) on your 990T.  In addition, nonprofits are now taxed at the new corporate tax rate of 21% so, for instance, if annual parking costs attributable to your employees is $10,000, you will now be subject to UBI tax of $2,100.

As a practicing CPA for the last 35 years, I thought (and still do think) that this is ludicrous.  Where will it stop?  Will we have to pay tax on our employees’ desks, chairs and office space?  But I did not make the law; I am simply here to tell you that it exists, break it down in some comprehensible fashion, and, whenever possible, help you figure out how to minimize your tax exposure.  So here goes.

There are two separate and distinct concepts to understand.  First is what constitutes taxable compensation to your employees in the form of a fringe benefit.  More likely than not, if your organization is in a city where parking space is limited and at a premium cost, you may have to kick in to help the employees pay for their transportation and parking.  In this scenario, the employee may be receiving a fringe benefit for parking and other transportation activities (rail and bus card, carpool vans, bicycle commuting) where:

  • An employer can provide a non-taxable benefit to employees for the fair market value (FMV) of transportation activities up to $260 for 2018 ($265 for 2019) per employee per month (IRC 132(f)).
  • Any amount of FMV in excess of $260 is taxable to the employee.
  • The employer can have a pre-tax plan that allows the employee to pay into the transportation activities with pre-tax dollars.
  • The FMV may not be the same as the COST.

Now, the second concept of the COST of Transportation and Parking Activities comes into play.

  • Transportation COST – The cost of other transportation should be easy to determine and is not deductible regardless of the taxability to the employee.
    • All employer paid costs not included in taxable employee compensation are not deductible by the employer (i.e. add to UBI).
      1. Rail cards
      2. Bus cards
      3. Carpool vans
      4. Bicycle commuting

  • COST of Parking There are three types of Parking COSTs and a specific methodology to follow to identify the costs of the third type.
    • Type 1 – Lease parking spots from third party.
      • The cost paid per spot per employee per month is not deductible unless included in taxable employee compensation (i.e. add to UBI).
    • Type 2 – Rent space in a building that includes the use of associated parking spots.
      • An allocation of the monthly rental payment must be made to the parking spots used by employees (See 4-step method to determine employee use costs.).
      • This allocated rental cost is not deductible by the employer (i.e., add to UBI).
    • Type 3 – Own a building that has parking spots for employee use.
      • The cost of maintaining the entire lot needs to be determined (common costs: property taxes, lighting, repairs, snow removal, interest, cleaning, trash removal, leaf removal, lot attendant, etc.) (specifically excluded: depreciation, items outside of the parking lot).
      • These total costs are then tested to determine the amount that is not deductible (i.e. add to UBI) (see 4-step method to determine employee use costs).

4- Step Method

  • Step 1 – Determine the number of reserved employee spots (employers have until 3/31/19 to remove employee reserved signage to retroactively treat as removed on 1/1/18).
    • The cost for each of these spots is 100% not deductible (i.e. add to UBI).
  • Step 2 – Determine the number of total spots less the reserved employee spots.
    • Determine the primary use of the remaining spots – employee or public.
    • If the public can use 50% or more of the not-reserved for employee spots, the remaining parking lot COSTs are not disallowed and are not added to UBI (e.g., You have 10 spots and four employees (no reserved spaces); public is greater than 50% so you do not have to do any further calculation and no amount is disallowed or added to UBI).
  • Step 3 – Determine the number of spots reserved for other than employees (i.e. visitors, customers, partners, sole proprietors and 2% shareholders).
    • The COST for each of these spots is not disallowed and not added to UBI.
  • Step 4 – Determine the remaining use of all unreserved spaces by employees and allocatable expense that is related to the COST of providing employees the use of those spots. This amount is not deductible (i.e. add to UBI).

Ok, so how did we do?  If you would like to work through these new laws and calculations with us, please reach out to see how we can assist you and your organization with identifying the costs that now need to be reported on your 2018 Form 990T.  You still have time to remove those employee-designated parking signs!  And, by the way, there are many nonprofit advocacy groups who are lobbying Congress to revoke this new law as it applies to exempt organizations.  Stay tuned…and contact us at sritter@mercadien.com or 609-689-9700 for more information.

 

 

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