Discussion of UBI on Qualified Employee Parking
As a result of the passage of the Tax Cuts and Jobs Act, certain fringe benefits provided to employees generate Unrelated Business Income if provided after December 31, 2017. The amount of UBI is equal to the costs associated with providing these benefits that would be disallowed under section 274 of the Internal Revenue Code if the organization were a taxable entity. Last week, the IRS released interim guidance related to calculating disallowed costs under section 274 of the Internal Revenue Code attributable to qualified employee parking. The Notice also applies to tax-exempt organizations. The Notice applies both a reserved use and a primary use test to determine whether a parking facility is an employee fringe benefit subject to UBI inclusion (or to disallowance by a taxable entity).
Under the Tax Cuts and Jobs Act, the total operating, maintenance and similar expenses associated with a parking lot used by employees must be identified. Specifically, the Notice indicates that total parking expenses include, but are not limited to, repairs, maintenance, utility costs, insurance, property taxes, interest, snow/ice removal, trash removal, cleaning, landscape costs, attendant expenses, security and rent or lease payments must be considered. The Notice indicates capital costs (such as depreciation) do not need to be considered, nor are expenses paid for items not located on or in the lot or parking facility (such as lighting located outside a parking lot). The total costs associated with a parking lot then are allocated to employee use versus use by the public.
Costs associated with reserved employee parking spots are subject to UBI inclusion. In addition, costs associated with a lot used primarily for employee parking also are subject to UBI inclusion.
In situations where the employer owns or leases a lot that is used for employee parking, IRS Notice 2018-99 provides a 4-step approach to determine UBI –
- Calculate the amount of costs that would be disallowed for reserved employee parking spots. An organization that owns or leases one or more parking facilities must identify the number of parking spots in the facility exclusively reserved (whether by signage, separate entrance or gate, or a separate facility) for employee parking. All costs allocated to these reserved spots are subject to UBI.
- For all other remaining parking spots, the organization must determine the primary usage (i.e., use by employees or use by the public). If the primary use (more than 50%) is by the public, there is no further UBI. If the primary use is by the organization’s employees, additional steps must be made to calculate UBI. Note, under the Notice, primary use should be tested during the normal hours of the exempt organization’s activities. If usage varies significantly at different times, the organization may use any reasonable method to determine the average use for purposes of the primary use test. The general public includes customers, patients, visitors, students and others, but would not include any independent contractors.
- Calculate the costs allocable to parking spaces reserved for nonemployees. The costs associated with such parking spots are excluded from UBI.
- Determine the remaining use and allocate the remaining costs. If the taxpayer completes Steps 1-3 in the methodology above and has any remaining parking expenses not specifically categorized as deductible or nondeductible, the taxpayer must reasonably determine the employee use of the remaining parking spots during the normal hours of the exempt organization’s activities on a typical day and the related expenses allocable to employee parking spots. Methods to determine employee use of the remaining parking spots may include specifically identifying the number of employee spots based on actual or estimated usage. Actual or estimated usage may be based on the number of spots, the number of employees, the hours of use, or other measures.
In one of the examples in the Notice, the employer owns multiple parking facilities. The Notice permits the taxpayer in the example to aggregate the facilities located in the same city (which are associated with more than one location of business).
The Notice contains 2 examples specific to tax-exempt organizations –
Example 1. Tax-Exempt Organization J, a religious organization that operates a church and a school, owns a surface parking lot adjacent to its buildings. J incurs $10,000 of total parking expenses. J’s parking lot has 500 spots that are used by its congregants, students, visitors, and employees, and 10 spots that are reserved for certain employees. During the normal hours of J’s activities on weekdays, J usually has approximately 50 employees parking in the lot in non-reserved spots and approximately 440 non-reserved parking spots that are empty. During the normal hours of J’s activities on weekends, J usually has approximately 400 congregants parking in the lot in non-reserved spots and 20 employees parking in the lot in non-reserved spots.
Step 1. Because J has 10 reserved spots for certain employees, $200 ((10/500) x $10,000 = $200) is the amount of total parking expenses that is nondeductible for reserved employee spots under § 274(a)(4). Thus, under § 512(a)(7), J must increase its UBTI by $200, the amount of the deduction disallowed under § 274(a)(4).
Step 2. Because usage of the parking spots varies significantly between days of the week, J uses a reasonable method to determine that the primary use of the remainder of J’s parking lot is to provide parking to the general public because 90%(440/490 = 90%) of the spots are used by the public during the weekdays and 95%(470/490) of the spots are used by the public on the weekends. The empty, non-reserved parking spots are treated as provided to the general public. Thus, expenses allocable to these spots are excepted from the § 274(a) disallowance by § 274(e)(7) under the primary use test, and only $200 of the $10,000 is subject to the § 274(a)(4) disallowance. Therefore, only $200 of the expenses for the provision of the QTF will result in an increase to UBTI under § 512(a)(7).
If J does not have gross income from any unrelated trades or businesses of $800 or more included in computing its UBTI (to reach the $1,000 filing threshold), J is not required to file a Form 990-T for that year.
Example 2. Tax-Exempt Organization K is a hospital and owns a surface parking lot adjacent to its building. K incurs $10,000 of total parking expenses. K’s parking lot has 500 spots that are used by its patients, visitors, and employees. K has 50 spots reserved for management and has approximately 100 employees parking in the lot in non-reserved spots during the normal operating hours of the hospital.
Step 1. Because K has 50 reserved spots for employees, $1,000 ((50/500) x$10,000 = $1,000) is the amount of total parking expenses that is nondeductible for reserved employee spots under § 274(a)(4). Thus, under § 512(a)(7), K must increase its UBTI by $1,000, the amount of the deduction disallowed under § 274(a)(4).
Step 2. The primary use of the remainder of K’s parking lot is to provide parking to the general public because 78% (350/450 = 78%) of the remaining spots in the lot are open to the public. Thus, expenses allocable to these spots are excepted from the § 274(a) disallowance by § 274(e)(7) under the primary use test, and only $1,000 is subject to the § 274(a)(4) disallowance. Therefore, only $1,000 of the expenses for the provision of the QTF will result in an increase in UBTI under § 512(a)(7).
K will need to add the $1,000 increase of UBTI under § 512(a)(7) to its gross income from unrelated trades or businesses. K is required to file a Form 990-T because the $1,000 increase to UBTI under § 512(a)(7) meets the filing threshold.
Other examples provided in the Notice, while specific to taxable organization may also provide helpful guidance. One example that related to a big box retail organization indicates empty non-reserved parking spaces again should treated as provided to the general public. In another example, a manufacturing company provides surface parking of 500 parking spots, 25 of which are reserved for customers and visitors. Of the remaining parking spaces, the organization’s employees generally use 400. Using the 4-step approach:
- No spots are reserved for employees, so there is no disallowance under step 1.
- The primary use of the lot is for employees since 80% of the use is by employees. Thus, expenses allocable to these spots are not excepted from disallowance.
- Because 5% of the parking lot spots are reserved for non-employees, 5% of the cost of the lot are not subject to disallowance.
- The organization must reasonably determine employee use, if any, of the remaining parking spots.
In this example, up to 95% of the costs are subject to disallowance. In addition, at least 80% of the costs would be disallowed.