On Dec. 10, 2018, the IRS published two notices (2018-99 and 2018-100) and a news release relating to tax-exempt organizations, nondeductible parking expenses and limited unrelated business taxable income (UBTI) relief. As background, the Tax Cuts and Jobs Act of 2017, enacted in December 2017, makes qualified transportation benefit expenses nondeductible (for 2018 and beyond). If such expenses are incurred by a tax-exempt organization, those expenses are treated as UBTI. The two 2018 notices provide guidance on nondeductible parking expenses and UBTI.
On nondeductible parking expenses (under Notice 2018-99), the amount of parking expenses that will be treated as nondeductible business expenses (and therefore UBTI for a tax-exempt organization) depends on how those parking expenses are provided — as payments to a third party or through employer-owned or leased parking facilities. On payments to a third party, the process is straightforward: the nondeductible expense is the amount paid to the third party (up to the monthly limit for qualified parking benefits (which was $260 for 2018). Since payments above the monthly limit are not excludable from an employee’s income, those payments are unaffected by the rule that disallows deductions for qualified transportation fringe benefits. Instead, they are treated as employee compensation (subject to employment and income tax withholding, the same as any other taxable compensation).
On employer-owned or leased facilities, the process is less clear: the employer should use any reasonable method to determine the nondeductible expense. The notice outlines a four-step process that would be deemed reasonable; the process looks at several factors relating to the employee’s use of the employer-owned parking facility, and whether that use is a primary use for employees versus the general public.
Notice 2018-99 also addresses UBTI. Specifically, the notice confirms the general notion that rules for determining UBTI attributable to qualified transportation fringe benefits provided by a tax-exempt organization mirror the rules for other taxpayers. In addition, though, the notice clarifies that tax-exempt organizations that have only one unrelated business or trade may reduce UBTI by the amount of any unused deductions that exceed the gross income of that trade or business. The notice also explains that tax-exempt organizations with less than $1,000 in UBTI do not need to file Form 990-T (Exempt Organization Business Income Tax Return) or pay UBTI tax.
Lastly, Notice 2018-100 provides a waiver for certain tax-exempt organizations. As background, tax-exempt organizations that underpay their estimated taxes are normally assessed a penalty. The notice provides a waiver from that penalty if the underpayment results from changes to the tax treatment of qualified transportation fringe benefits. In other words, if the employer otherwise reported and paid UBTI for all unrelated business income except that relating to qualified transportation fringe benefits, the underpayment penalty will be waived. The notice provides details on how tax-exempt organizations would claim that waiver.
Overall, because tax-exempt organizations face many challenges with regard to federal taxation and filings, and because UBTI is really outside the scope of employee benefits, employers should work with their accountant or tax counsel in understanding and applying the above IRS guidance.