Insights on new guidance from the IRS.
Concerns and questions arose last year regarding an obscure provision in the Tax Cuts and Jobs Act of 2017—a provision requiring nonprofit employers pay an unrelated business income tax for expenses associated with qualified transportation fringe benefit plans provided to employees.
Controversy arose surrounding the legislation in regard to its application to parking lots naturally associated with the nonprofit's facilities. Legal and accounting experts differed on how the so-called “parking lot tax” would work, and how the Internal Revenue Service would interpret and implement the new provisions. The uncertainty was eased—albeit temporarily—when interim guidance was issued in late December.
The IRS has provided its initial interpretation of the new law, which may foreshadow its ultimate position when it eventually provides permanent guidance. The good news: many nonprofits, including most churches, will not face this tax. The bad news: some nonprofits and churches will. The guidance provides a four-step process for determining whether your organization’s or church’s parking situation will still trigger this tax.
The Four Steps
In IRS Notice 2018-99, the IRS provided the recommended analysis. The recommended analysis encompasses 4 steps, but many organizations may stop the analysis after the second step.
Determine the number of spaces specifically reserved for the organization's employees. The expenses related to these spaces create unrelated business income.
Example: An organization has 500 parking spaces and designates 50 parking spaces exclusively for employees, then 10 percent of the expenses associated with the parking lot will count as unrelated business income. (For organizations desiring to avoid this automatic potential for taxable income, the IRS is allowing employers to remove the reserved space designation as late as March 31, 2019, and the IRS will consider it retroactive to January 1, 2018.)
Determine the spaces not specifically reserved for any staff members. If at least 51 percent of the remaining spaces in the parking lot are available to the general public, then all the remaining spaces are considered as utilized for the general public. Expenses related to those spaces do not create unrelated business income. For churches, the spaces available to their attendees are classified as general public use, even if they are unoccupied most of the time.
Example: A museum has 400 parking spaces available in its parking lot. None of the spaces are specifically reserved for any employees, but employees may utilize any of the 400 spaces. An analysis indicates the museum has 100 employees regularly using the parking spaces. The remaining 300 spaces are available for the general public, including the organization’s visitors or members. Since the 300 spaces for general use are at least 51 percent of the total spaces, none of the expenses associated the parking lot are included in unrelated business income.
Example: A church’s denominational offices have a parking lot with 100 parking spaces. Regularly, 75 of the spaces are utilized for the denomination’s employees. The remaining 25 of the spaces are available for the few visitors that may come to the denomination’s offices. Since more than 50% of the parking spaces are used by employees, a portion of the expenses associated with the parking lot are included in unrelated business income and the organization must proceed to Step 3 of the process.
If it is determined in Step 2 that the parking spaces are not primarily used for the general public, then determine the number of spaces specifically reserved for non-employee use. For example, reserved non-employee spaces include spaces reserved for visitors and customers. The expenses related to these spaces do not create unrelated business income.
Example: The denominational offices have a parking lot with 100 parking spaces, and it has 10 spaces that are specifically reserved for visitors and are not available to employees. When the expenses are analyzed, 10 percent (10/100) may be excluded from unrelated business income.
If it is determined in Step 2 that the parking spaces are not primarily used for the general public, then it must be determined what expenses will be allocated to the employee spaces. The organization may use an actual number of spaces and number of days the employees use the parking spaces, or it may adopt any reasonable method to determine this usage on a typical day. The employee usage is multiplied by the actual parking expenses to arrive at the unrelated business income amount.
Example: An organization has 500 parking spaces and regularly has 300 employees utilizing parking spaces. Since this is the typical use of the parking lot, then the organization may treat 60 percent of its total parking expenses as unrelated business income.
A church’s denominational offices are in an office building owned by the organization. The organization’s parking lot has 150 parking spaces. Ten of the spaces are reserved for key staff members. Ten of the spaces are specifically marked for visitors and the remaining spaces are available for employees or other general public use. The denominational office employees 85 people that utilize the parking lot regularly during the normal work week. In 2018, the organization spent $5,000 on general maintenance and upkeep of the parking area.
Step 1: The 10 spaces specifically reserved for the key staff members represent 6.67% of the parking spaces, so $333.50 (6.67% of the $5,000) must be included in unrelated business income.
Step 2: The remaining 140 spaces are analyzed to see if more than 50% are utilized for the general public. 10 spaces are reserved for visitors, so these 10 are used by the “general public”. Of the remaining 130 spaces, 85 spaces (65%) of the spaces are used by employees. Since the employee-use is more than 50% of the spaces, a portion of the remaining parking lot expenses must be included in unrelated business income.
Step 3: Before determining the remaining expenses included in unrelated business income, expenses may be allocated to the parking spots specifically reserved for visitors. There were 10 visitor spaces, so 6.67% or $333.50 of the expenses are allocated to these spaces and are not included in unrelated business income.
Step 4: After allocating expenses to the internally reserved spaces (Step 1) and to the visitor spaces (Step 3), it is determined what expenses are allocated to the employee used spaces. While there may be more difficult or extensive calculations, the easiest is to determine the percentage of the employee used spaces (85) to the total spaces available in the parking lot (150) and allocate 56.67% (85/150) of the expenses to the employee spaces or $2,833.50.
The organization must report as unrelated business income the $2,833.50 (Step 4) plus the $333.50 (Step 1) for a total of $3,166.50 reported on Form 990-T as unrelated business income.
Reporting the Unrelated Business Income
Form 990-T is required if unrelated business income amount is $1,000 or more during the year. The return is due 4 ½ months after the end of the organization/church’s fiscal year. For organizations with a calendar year end, a return is due May 15, 2019 to report taxable expenses incurred in 2018. If a church has another source of unrelated business income, a loss from the other source may be netted against the income created through this provision and reduce the tax due.
Many organizations may discover they have an expected filing obligation. The IRS’ interpretation took unexpected turns and created an analysis not anticipated by most tax professionals. Even as this information is presented, there are actions underway to repeal the provision. However, despite broad bi-partisan support, the repeal has not occurred. Organizations should plan to perform the above analysis and timely file Form 990-T until a repeal of the law is finalized.
My thanks to Frank Sommerville, JD/CPA for his contribution to this blog post, as it represents our combined efforts to sort through and analyze the requirements of this new provision. The above information is adapted from an article that first appeared on Christianity Today’s ChurchLawAndTax.com. Used with permission. Frank and Elaine Sommerville both serve as editorial advisors for ChurchLawAndTax.com. Elaine is also the author of Church Compensation: From Strategic Plan to Compliance (2018, Christianity Today).