Treasury Department Offers New Regulations on Nonprofit Parking Benefits, UBIT

The Treasury Department has issued new guidance on how tax-exempt organizations can compute unrelated business income tax (UBIT) resulting from parking benefits provided to their employees. The new rules also help taxable employers determine the amount of parking expenses that are no longer tax deductible.

The guidance allows tax-exempt and taxable employers to use any reasonable method for 2018 to determine the increase in UBIT or the amount of nondeductible expenses. The guidance also provides a safe harbor method that should minimize the burden on affected employers

Treasury also provides estimated tax penalty relief in 2018 to tax-exempt organizations that offer these benefits and were not required to report unrelated business income last filing season.  Additionally, many tax-exempt organizations do not exceed the $1,000 threshold for paying UBIT and will not be required to report unrelated business income or pay the applicable tax.

 “Treasury is sensitive to the concerns of the tax-exempt community and hopes this guidance can significantly limit the impact on non-profit groups,” said Secretary Steven T. Mnuchin. “Treasury is offering tax exempt organizations a roadmap for navigating their responsibilities. The guidance issued today aims to provide flexibility while minimizing the burden on non-profit groups that provide employee parking.”

How to Calculate UBIT

The new notice from the IRS provides guidance about how businesses can compute the amount of parking expenses they can’t deduct, and how nonprofits can compute the amount of expenses subject to unrelated business income tax.

If a taxpayer pays a third party an amount so that its employees may park at the third party’s parking lot or garage, the disallowance generally is calculated as the taxpayer’s total annual cost of employee parking paid to the third party. However, if the amount the taxpayer pays to a third party for an employee’s parking exceeds the monthly limitation on exclusion, which for 2018 is $260 per employee, that excess amount must be treated by the taxpayer as compensation and wages to the employee.

Until further guidance is issued, if a taxpayer owns or leases all or a portion of one or more parking facilities where its employees park, the disallowance may be calculated using any reasonable method.  One such method is:

1. Calculate the disallowance for reserved employee parking spaces;
2. Determine the primary use of remaining spaces (the “primary use test”);
3. Calculate the allowance for reserved non-employee spaces; and,
4. Determine remaining use and allocable expenses.

More information about the guidance can be found here, and charities are encouraged to consult a qualified attorney about these issues.

According to The Hill newspaper, a senior Treasury official said that the tax is part of the law and the department didn’t believe it could ignore the law, but that Treasury tried to come up with methodology for calculating the tax that would limit its impact.

Congress has already introduced a bill seeking to repeal the UBIT provision entirely—see the latest AFP article here about its progress.