December 12, 2018

New Developments for Nonprofits Regarding the Tax on Qualified Parking and Other Transportation Fringe Benefits

6 min

Nonprofit organizations that have been struggling with complying with a new tax on parking and public transit benefits received two pieces of somewhat good news on December 10, 2018. First, the Treasury Department issued much-needed compliance guidance focused on complying with the parking side of the new tax and waived penalties for certain nonprofits that failed to pay quarterly estimated taxes. Second, the state of New York enacted a law making clear that there will not be a New York state tax on the provision of parking and transit benefits and that New York will not follow the federal rule.

The federal Tax Cuts and Jobs Act (the "Act"), which was enacted in December 2017, added section 512(a)(7) to the Internal Revenue Code (the "Code").* This new Code section requires tax-exempt organizations to increase their unrelated business taxable income (UBTI) by an amount paid or incurred for qualified transportation fringe benefits provided to employees. These include the provision of parking and public transit benefits, and the tax applies whether the employer pays for these benefits at its own expense or simply allows employees to deduct money from their compensation to pay for the benefits on a pre-tax basis.

The impact of this new tax burden for exempt organization employers has been immense. Made effective January 1, 2018, just days after the law was enacted, many nonprofit organizations face the obligation to calculate and pay unrelated business income tax for the first time because of their provision of these fringe benefits. Some employers have chosen to end their provision of these benefits, although that option is not available everywhere. In some large cities, including the District of Columbia, New York City, and San Francisco, employers of a certain size are required to provide pre-tax payment of commuter benefits for employees.

Treasury Guidance on Parking Provided by Tax-Exempt Organizations—Notices 2018-99 and 2018-100

Notice 2018-99, one of the two notices issued on December 10 by the Treasury Department, provides interim guidance for tax-exempt organizations that must calculate the UBTI generated by their provision of parking benefits as a qualified transportation fringe benefit. Similar to previous guidance interpreting other changes to the calculation of UBTI for separate unrelated trades or businesses stemming from the Act (Notice 2018-67), this guidance allows organizations to use any reasonable method to calculate their UBTI. It also provides a safe harbor '"reasonable method" that organizations can use until further guidance is issued. The reasonable method suggested by the Notice requires organizations to calculate the parking reserved for employees, whether it is on property the employer owns or leases, at or near an employer's business, or at a location from which the employee commutes to work, and the primary use of other spots not explicitly reserved for employees. "Primary use" means more than 50 percent of actual or estimated use of parking spots in the facility during typical business hours. Expenses allocable to parking spots that are primarily used by the general public, rather than employees, are not included in the calculation of UBTI.

Notably, the Notice states that, notwithstanding that UBTI is generated under section 512(a)(7), the provision of parking and transit benefits is not considered a separate unrelated trade or business for the purposes of section 512(a)(6). Therefore the income and deductions from parking and transit UBTI is calculated in the same 'silo' as the income and deductions from an existing unrelated trade or business. Organizations with revenue from one unrelated trade or business can offset their UBTI under section 512(a)(7) with deductions attributable to that unrelated trade or business. However, the guidance does not specify whether organizations with multiple unrelated trades or businesses can offset their UBTI under section 512(a)(7) with deductions directly connected to one of their unrelated trades or businesses, creating a new ambiguity for many in the sector. We hope forthcoming guidance will address whether organizations with more than one unrelated trade or business can choose which of their unrelated trades or businesses to combine with the section 512(a)(7) UBTI.

The Notice also allows nonprofit organizations to retroactively reduce their parking arrangements by reducing the number of reserved spots. These changes can be made until March 31, 2019, and will be considered retroactive to January 1, 2018. This change may permit some organizations to reduce their UBTI calculation under section 512(b)(7).

Section 512(b)(12) provides a specific deduction to unrelated business income tax of $1,000, which is extended to apply to UBTI generated for these fringe benefits under section 512(b)(7). Similarly, organizations are required to file a Form 990-T only if their UBTI is greater than $1,000, and the Notice is explicit that section 512(b)(7) UBTI is included in that calculation. Thus, for organizations that have UBTI in excess of $1,000, however generated, there will be an obligation to file a Form 990-T. The converse may be helpful to some organizations, though—organizations that do not have UBTI in excess of $1,000, however generated, will not be required to file a Form 990-T and, accordingly, will not be taxed on this UBTI.

Notice 2018-100 was published as companion guidance to Notice 2018-99, and provides relief for those tax-exempt organizations that did not pay estimated income tax in connection with their UBTI generated by qualified transportation fringes under section 512(b)(7). This relief is available only to organizations that were not required to file Form 990-T for the previous tax year, and requires timely compliance with their payment of the tax due for the current tax year.

 New York Law Eliminates New York Tax on Qualified Transportation Fringe Benefits

Until December 10, New York State law automatically imposed a state unrelated business income tax whenever the federal government did so. Thus, New York nonprofit organizations that pay federal tax on their UBTI are also required to pay a 9% New York state tax on the same income.

The inclusion of amounts paid or incurred for the provision of qualified transportation fringe benefits in the calculation of UBTI was added to the federal law by the Act and, because of New York law, had been automatically subject to the state's tax. However, Governor Cuomo signed legislation on December 10 that decouples the New York law from this portion of the Code, protecting New York–based organizations from an additional 9% tax on UBTI generated under section 512(b)(7). It remains to be seen whether other states will follow New York's lead.

These actions by the IRS and New York are helpful to nonprofits struggling to comply with this new tax. In the meantime, there continues to be a great deal of pressure on Congress to amend or repeal this tax. We will continue to monitor the situation as it develops.

* All citations are to the Code unless otherwise specified.