New Guidance Will Require More Nonprofits to Pay Unrelated Business Income Tax
December 18, 2018 — The tax-exempt sector has received the much-anticipated interim guidance from the Internal Revenue Service regarding the application of qualified transportation fringe (QTF) benefits. Under this interim guidance, many tax-exempt organizations will now be required to pay unrelated business income tax. While this is not the relief the tax-exempt sector was expecting, there are continuing advocacy efforts to minimize the effects of the new regulations.
Until further guidance is issued, we recommend every tax-exempt organization, including organizations exempt from filing a form 990, review the following details and ensure compliance with the new QTF benefit treatment.
The Tax Cuts and Jobs Act, passed in 2017, disallowed a deduction for expenses of QTF benefits paid by taxpayers for the benefit of their employees. As part of this Act, a new code section was added that requires tax-exempt organizations to include the disallowed QTF expenses as taxable unrelated business income. In response, tax-exempt organizations and practitioners have submitted their concerns and recommendations to the IRS. The remainder of this article summarizes the interim guidance provided by the IRS in notice 2018-99 and 2018-100.
Take Action Now
Ensure you can answer the following questions:
- What transportation benefits or parking facilities do you provide to your employees?
- What are the associated costs?
If the total expense of transportation or parking expenses exceeds $1,000 for any tax year, or a portion of a tax year after December 31, 2017, you may be required to file a form 990-T and pay the unrelated business income tax.
Act now to determine what your organization’s filing requirements are and prepare to pay the tax due. The IRS has provided the following transitional relief:
- Special waiver from underpayment of estimated taxes for organizations with no previous unrelated business income tax filing requirements.
- Ability to minimize, or eliminate, the amount of unrelated business income tax related to the new qualified transportation fringe benefits if specific actions are completed by March 31, 2019.
Understanding the Details
The IRS has defined what constitutes a qualified transportation fringe benefit, parking facility, and parking expenses, and provided clear exclusions from taxability along with a step-by-step process for determining applicability. These key details are summarized below. We recommend that you review these details and their specific applicability to your organization with your tax advisor.
Qualified transportation fringe (QTF) benefits include:
- Transportation in a commuter highway vehicle between the employee’s residence and place of employment;
- Any transit pass; and
- Qualified parking (defined as parking provided to an employee on or near the business premises of the employer or on a near location from which the employee commutes to work.)
Determining the amount of QTF parking
- When you pay a third party for employee parking spots – The amount of taxable QTF parking is equal to the annual cost of employee parking paid to the third party. (Subject to the monthly limitation on exclusion from employees’ wages.)
- When your organization owns or leases all or a portion of the parking facility – The IRS has stated that an organization can use any reasonable method for determining the expenses associated with providing the parking benefit. They have provided a 4-step analysis they deem reasonable. *Note that the value of the parking benefit is not a reasonable method.
Parking facility: includes indoor or outdoor garages and other structures, as well as parking lots and other areas, where employees may park on or near the business premises or near a location an employee may commute from. Aggregation of multiple parking facilities in a single geographic location is permitted, however multiple parking facilities in separate geographic locations may not be aggregated.
Parking expenses: include, but are not limited to, repairs, maintenance, utility costs, insurance, property taxes, interest, snow and ice removal, leaf removal, trash removal, cleaning, landscape costs, parking lot attendant expenses, security, and rent or lease payments for the portion applicable to a parking facility (which should be allocated if not broken out separately). *Note, an allowance for depreciation of a parking structure is not considered a parking expense. Expenses paid for items not located on or in the parking facility, such as landscaping and lighting are also not included.
Consider Whether You Qualify for an Exclusion
The IRS provided the following exclusions:
- Amount of the QTF included as compensation/wages to the employee will not be treated as taxable UBI to the organization.
- If the primary use of parking spots (not designated for employee use) is to provide parking for the general public, the portion of parking expenses allocable to the public area is not subject to unrelated business income.
- The general public includes, but is not limited to, customers, client, 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. *Note, the general public does not include employees or independent contractors or the organization
- Reserved Employee Spots, Employee Parking Only – organizations have until March 31, 2019, to change their parking arrangements (change signage, access, etc.) to decrease or eliminate their reserved employee spots and treat the implemented changes as retroactive to January 1, 2018. This allows organizations to minimize UBTI due or avoid the requirement to file a 990-T completely.
This article is a brief overview of the recently published interim guidance.
Ashley Rehn, CPA
Ashley Rehn is a director and the tax-exempt service area leader. She provides tax compliance and consulting services for a variety of exempt organizations including charities, foundations, charter schools, member organizations, business leagues, civic organizations, and social clubs. Ashley assists clients with tax planning, form 990 series preparation, and research. Specific areas of expertise include unrelated business income, private foundation compliance and excise tax reporting, entity structuring (including multiple entities and joint ventures), monitoring and analysis of public charity status, and board education. Ashley is a holder of the Not-For-Profit Certificate I issued by the AICPA. The Not-for-Profit Certificate I offers a comprehensive, foundational overview of a non-profit’s unique financial needs. Certificate holders learn to recognize applicable GAAP reporting standards, identify state and federal filing requirements, understand best practices in board governance, risk assessment, and internal controls, and are able to outline the planning steps of a successful audit engagement. She has provided public accounting services at Redpath and Company since 2007.
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