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IRS Issues Interim Guidance on Employee Parking and Unrelated Business Income Tax

12.13.18

On December 10, 2018, the IRS issued interim guidance that may allow your organization to reduce or avoid its unrelated business income tax (UBIT) related to qualified transportation fringe benefit expenses incurred on or after January 1, 2018.

Unrelated Business Income Related to Qualified Transportation Fringe Benefits

The Tax Act passed in December 2017 requires exempt organizations to include in unrelated business income (UBI) the cost of certain qualified transportation fringe benefits offered to employees under IRC §132(f) beginning January 1, 2018. Many exempt organizations that have not previously paid UBIT may be required to report UBI on Form 990-T for tax years ending after December 31, 2017. Your organization may have a filing obligation if it offers parking, transit passes, or other transportation benefits to its employees. IRC §132(f) qualified transportation fringe benefits that may generate UBI include the following:​

Transit pass expense: Amounts paid for transit passes provided directly to employees, amounts paid for transit pass reimbursement, and pre-tax wages set aside by employees for transit passes are excluded from employee taxable income (up to $260 per month per participating employee in 2018). Any such transit benefit incurred on or after January 1, 2018 must be included in UBI. Any transit benefit paid in excess of $260 per month per participating employee must be included in the employees' taxable income and is not included in UBI.

Commuter highway vehicle expenses: The fair market value of transportation in a commuter highway vehicle (a vehicle with at least 6 passenger seats) is excluded from employee taxable income (up to $260 per month per participating employee in 2018). The cost of providing any such transit benefit on or after January 1, 2018 must be included in UBI. The fair market value of such transit benefits provided in excess of $260 per month per participating employee must be included in the employees' taxable income. The associated costs of providing this excess benefit are not included in UBI.

Exception: In the unusual circumstance that the transportation is necessary for the safety of the employee, the cost of the transportation is not included in UBI.

Qualified parking expenses: The cost of providing parking directly to employees, amounts paid for parking reimbursement, and pre-tax wages set aside by employees for parking expenses are excluded from employee taxable income (up to $260 per month per participating employee in 2018). The cost of providing any such parking benefit incurred on or after January 1, 2018 must be included in UBI. The fair market value of any parking benefit incurred in excess of $260 per month per participating employee is included in the employee's taxable income. The associated costs of providing this excess benefit are not included in UBI.

Qualified bicycle commuting reimbursement expenses incurred after December 31, 2025: Reimbursed bicycle expenses paid to employees who regularly bike to work (up to $20 a month per participating employee) must be included in employees' taxable income beginning January 1, 2018. However, these benefits are not included in UBI if incurred before January 1, 2026. Beginning in 2026, qualified bicycle commuting reimbursement benefits must be included in UBI.

UBI Related to Employee Parking

This week, the IRS issued interim guidance clarifying which parking costs must be included in UBI. If your organization offers parking spaces to employees and the general public, you may be able to reduce or eliminate parking expenses that must be included in UBI by eliminating or reducing signage or physical barriers that specifically identify spaces as reserved for employees before March 31, 2019. Any such changes made by March 31, 2019 will be considered to apply retroactively to expenses incurred on or after January 1, 2018.

If your organization owns or leases part of or an entire parking structure or lot, if no spaces are reserved for employees, and if, on a typical day at each geographic location, more than 50% of owned or leased parking spaces are empty or used by the general public--which includes customers, clients, visitors, service providers, delivery services, patients, students, and congregants--your organization does not need to include any parking expenses in UBI. Note that the general public does not include employees, independent contractors, or partners. If some spaces are currently reserved for employees, consider changing signage by March 31, 2019 to reduce potential exposure for expenses incurred on or after January 1, 2018.

Calculating UBI Related to Employee Parking

According to the interim guidance, the amount of parking expenses that must be included in UBI is calculated differently depending on whether parking spaces are provided by a third party or are owned or leased by the exempt organization.

Amounts paid to a third party for employee parking spaces: So long as the total fees paid to a third party for employee parking spaces do not exceed $260 per month per employee, the entire amount paid to the third-party parking provider for employee parking spaces must be included in UBI. If these costs exceed $260 per month per employee, the excess must be included in the employees' wages and is excluded from UBI.

Parking facilities owned or leased by exempt organizations: Expenses related to employee parking may be calculated using a reasonable method. The reasonable method must calculate expenses associated with qualified parking benefits using the cost of providing these parking benefits, not the fair market value of the benefits provided. Reasonable methods should consider all costs associated with the provision of parking to employees, including the following:

  • Repairs and maintenance
  • Utility costs
  • Insurance
  • Property taxes
  • Interest
  • Snow, ice, leaf, and trash removal
  • Cleaning
  • Landscape costs
  • Parking lot attendant expenses
  • Security
  • Rent or lease payments (or a portion of rent or lease payments if parking is included in building rent)
  • Other expenses

​​Exception: Depreciation of parking structures or lots is not a parking expense for purposes of this calculation and is not included in UBI.

Additionally, beginning January 1, 2019, a reasonable method must specifically allocate expenses to parking spaces reserved for employees. 

The interim guidance provides the following as an example of a reasonable method. This calculation must be performed separately for parking provided at each geographical location:

  1. Identify parking expenses associated with parking spaces reserved for employees.
  • Identify (A) the number of parking spaces reserved by signage or other means for employees.
  • Identify (B) the total number of parking spaces owned or leased.
  • Calculate the percentage of parking spaces reserved for employees as A divided by B.
  • Multiply total parking expenses by the percentage of parking spaces reserved for employees. This amount must be included in UBI.
  1. Determine the primary use of the remaining parking spaces. On a typical day, during normal operating hours, assess the number of parking spaces not specifically reserved by signage or by other means for employees that are available to the general public. Spaces available to the general public include all empty spaces and spaces used by customers, clients, visitors, service providers, delivery services, patients, students, or congregants. Spaces used by employees, partners, or independent contractors of the taxpayer are not considered spaces made available to the general public.
  • The 50% Test: If more than 50% of spaces not reserved for employees are made available to the general public, stop here. The remaining parking expenses are not included in UBI.
  • If 50% or fewer of the spaces not reserved for employees are made available to the general public, proceed to 3. 
  1. Identify parking expenses associated with parking spaces reserved for non-employees.
  • Identify (C) the number of total of parking spaces reserved by signage or other means for non-employees. 
  • Calculate the percentage of parking spaces reserved for employees as C divided by B, the total number of parking spaces owned or leased.
  • Multiply total parking expenses by the percentage of parking spaces reserved for non-employees. This amount is not included in UBI.
  1. Allocate the remaining parking expenses. If there are any parking spaces not reserved for employees, not reserved for non-employees, and not considered made available to the general public under the 50% test, calculate estimated or actual percentage usage of these spaces by employees and allocate the remaining parking expenses based on this percentage.

Note: Exempt organizations that are required to file a form 990-T for the tax year ending in 2018 only to report unrelated business income related to qualified transportation fringe benefits may be eligible for a waiver of penalties for underpayment of estimated tax payments due on or before December 17, 2018. In order to qualify for the waiver, the organization must not have been required to file a Form 990-T for the tax year that ended in 2017. To claim this waiver, qualifying organizations must write "Notice 2018-100" on the top of the timely filed Form 990-T for the tax year ending in 2018.