Four Steps to Evaluate Parking as a Qualified Fringe Benefit

The Treasury recently issued Notice 2018-99 (the Notice), providing much-awaited guidance on qualified fringes, which under the Tax Cuts and Jobs Act (TCJA) were determined to be no longer deductible for some taxpayers and considered unrelated income for non-profits. The most troublesome of these qualified fringes is parking.

For not-for-profits, Internal Revenue Code (IRC) Section 512(a)(7) states “that unrelated business income shall be increased by any amount for which a deduction is not allowed under IRC 274 and which is incurred by such organization for any qualified transportation fringe (as defined in section 132(f)”.) Section 132(f) of the Internal Revenue Code allows an employer to provide certain benefits on a tax-free basis to an employee. One of these benefits is parking up to a value of $260 per month indexed for inflation. Anything over this amount is considered taxable compensation. However, under the new law, the cost associated with parking is potentially taxable to non-profits, while still being tax-free to employees. While the Notice provides non-profits with some guidance on determining the amount subject to tax under IRC Section 512(a)(7), we are still awaiting proposed regulations to further clarify this topic.

There are a couple of exceptions to the new rules. For example, if the cost of parking, or other disallowed fringe, is included in employees’ compensation, it will not be considered unrelated business income. However, it will be subject to employer and employee payroll taxes, as well as individual income taxes. Additionally, if the parking lot provided for employee use is also available to the public, and is used predominantly by the public, no parking costs will be included in unrelated business income.

Determining the portion of parking that is taxable will depend on whether the non-profit entity pays a third party for employee parking, or if they own or lease their own facilities that include parking. If the non-profit pays a third-party for employee parking spaces, then the amount paid will be subject to tax to the extent it is not included in employee compensation. If the employee parking is provided on space owned or leased by the non-profit, a four-step process and reasonable allocations will need to be applied. The Notice specifically states that costs, not value, must be used in determining the unrelated income associated with parking benefits. Costs to be considered are rent, maintenance, snow removal, security, insurance, repairs, taxes, interest, utilities, leaf and trash removal, but not depreciation.

The first step in the process of allocation is to determine if any parking spots are reserved for employees. Reserved spots can be designated with signage, or located in a separate facility, not open to the public. The Notice states that taxpayers have until March 31, 2019 to remove any signage or other restrictions. Doing so will be considered retroactive to January 1, 2018.  If there are reserved employee spaces, the percentage of these spots to total parking spots should be multiplied by total parking costs. The result will be considered unrelated business income.

The second step in the process is to determine the primary use of the remaining parking spots. If it can be determined that the primary use (greater than 50%) of the remaining spots is for the general public, then no amount needs to be allocated to employee parking for this portion of the parking lot. Primary use must be tested during regular business hours on a typical business day. However, if usage varies significantly from day-to-day, an average, or other reasonable method can be used. For purposes of this calculation, the general public includes patrons, visitors, patients, students, congregants or delivery persons. The Notice specifically states that employees, partners or independent contractors are not to be considered part of the general public. The Notice does not address the classification of volunteers.

In the third step, the non-profit must determine the number of spots, if any, that are reserved for nonemployees. These spots would be designated in some manner as being visitor/customer parking areas. If there are reserved nonemployee spots, the non-profit should determine the percentage of its parking lot that is used for this purpose. It would then multiply this percentage by its total parking costs to determine the amount of parking that will not be considered unrelated business income.

Under step four, the non-profit would use a reasonable method to allocate costs to employee parking that is not deemed to be predominantly used by the public under step 2. The Notice requires that employee use be based on normal business hours on a typical day.

Based on this four-step process, it may be possible for some taxpayers to eliminate or reduce any unrelated business income by removing signage related to reserved employee parking by March 31, 2019. If the parking facilities are not used predominantly by the public, some amount of parking will still be taxed. Taxpayers will need to determine their parking costs, and a reasonable percentage of employee usage. If there are multiple lots in the same geographic area, they can be aggregated to determine costs and usage percentages. If there are multiple geographic areas, the parking facilities in different geographic areas cannot be combined for purposes of these calculations.

If you have any questions on the above, or need assistance with determining parking costs, or employee usage, please reach out to your CSH representative.

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