Transportation Fringe Benefits

PARKING TAX REPEALED!

On Friday, December 20, 2019, the President signed the ‘Further Consolidated Appropriations Act of 2020,” retroactively repealing the tax on transportation fringe benefits.

For the last two years, many nonprofits have been paying taxes on the commuter benefits provided to employees. Organizations may file an Amended Form 990-T and state returns to claim a refund for taxes paid on transportation fringe benefits provided after Dec. 31, 2017.

The IRS issued guidance on how to get a refund for organizations that paid UBIT on transportation fringe benefits (“parking tax”), which was recently repealed.

Unfortunately, the guidance does not expedite the refund procedures, but instead it requires organizations to file a complete and accurate amended 990-T. We are still hoping that some sort of expedited refund will be offered, including a way to adjust NOL carryforwards, obtain refunds of 2019 estimated taxes without having to file a 990-T, and some assurance that amending the 990-T won’t increase an organization’s chances getting an IRS audit. We will post on our website and on LinkedIn if such procedures are announced.

The following guidance has been superseded by the repeal of IRC Sec. 512(a)(7) and is presented for historical purposes only:

Previously, transportation fringe benefits were deductible by the employer and excludable by the employee. As a result, the U.S. taxpayer was subsidizing the commuting expenses for millions of Americans. Since commuter expenses, including public transportation and parking, are significantly more expensive in large cities, the result was that rural taxpayers were bearing the burden for the high transportation costs of the urban areas. Under the TCJA, the average taxpayer will no longer be forced to subsidize commuter expenses. Each worker will bear the cost of getting from home to work and back.

For tax-exempt organizations that continue to provide commuter benefits to their employees, they must either include the value of the benefit as taxable compensation to the employee or report the expenses as unrelated business income (UBI). It is rather unusual to pay tax on an expenditure; usually, tax is imposed on income, not expenses. However, since the TCJA makes commuter benefits expense nondeductible to a for-profit employer, the equivalent for a tax-exempt employer is to increase taxable income. The tax is imposed on transit passes, commuter reimbursements, flexible spending arrangements for commuter expenses, and parking.

Of these benefits, the most complicated to determine has been the parking benefit. Employers must consider several ways in which they may be providing parking benefits:

  1. Direct payment to a third-party provider,
  2. Reimbursements under an accountable plan,
  3. Flexible Spending accounts or other compensation reduction arrangements for parking and commuting, and
  4. Employer-provided parking on or near the business premises of the employer or on or near a location from which the employee commutes to work. For example, the employer may own or lease the parking facility, or it may pay a management company to maintain certain common areas (CAM charges).

The calculation of the amount to include in UBI is based on the cost of maintaining or providing the parking or parking facility, not the value to the recipient. Costs to include are repairs, maintenance, utilities, insurance, property taxes, interest, snow and ice removal, trash removal, cleaning, landscape costs, parking lot attendant expenses, security, rent, and similar expenses, but not depreciation. Expenses allocable to reserved parking spaces for employees are included as taxable transportation fringe benefits. Employers may stop including reserved spaces in the calculation as of the day the spaces were eliminated. In fact, employers who eliminated reserved parking spaces by March 31, 2019, can exclude the value of such benefits retroactively to January 1, 2018.

After removing any reserved parking spaces that are provided to the employees, if more than 50% of the actual or estimated use of the remaining spaces is to provide parking to the (non-employee) general public, then none of the costs of the unreserved spaces is UBI. The organization should base its calculation on its regular business hours.

Employees may still exclude certain benefits from taxable compensation. In 2019, the monthly exclusion for qualified parking expenses is $265. Parking benefits in excess of $265 per month in 2019 must be reported as taxable compensation to the employee. Therefore, the first $265 of commuter benefits each month is included in the employer’s UBI, and any amount over $265 is included in the employee’s taxable compensation.

Examples:

  1. A nonprofit organization with 400 employees owns a 500-space parking facility adjacent to its office. The organization spends $10,000 to maintain the facility for one year. None of the spaces are reserved for employees, but there are 25 parking spaces labeled for “Visitors.” In reality, there are 100 spaces available to the general public. Employees use 80% of the spaces, so 80% of the cost, or $8,000, is reported as UBI.
  2. A nonprofit organization owns a parking lot with 500 spaces used by congregants, volunteers, students, visitors, and employees. Ten spaces are reserved for specific employees. On weekdays, the organization has approximately 50 additional employees parking in the lot in non-reserved spots, while the other 440 spaces are empty. On weekends, the organization has approximately 400 non-employees parking in the lot in non-reserved spots and 20 employees parking in the lot in non-reserved spots. The organization spends $10,000 to maintain the facility for one year.

The ten reserved spaces represent 2% of the available 500 spaces, representing $200 of taxable transportation fringe benefits.

During the week, 440 of the remaining 490 spaces (90%) are available to the general public, and on the weekend, 470 of the available 490 spaces (96%) are available to the general public. More than 50% of the actual or estimated use of the remaining spaces is to provide parking to the (non-employee) general public, so none of the cost is reported as UBI.

Generally, an organization that owes federal income tax must make quarterly estimated payments. The IRS can impose interest and penalties on organizations that fail to estimate and pay their taxes quarterly. A nonprofit organization’s estimated payments should include the tax on transportation fringe benefits.

For more information, please reach out to us for a free initial consultation.