In IRS Notice 2018-99, the IRS provides guidance for implementing the new unrelated business income tax on qualified transportation fringe benefits, including employer-provided parking, provided by nonprofit organizations, including churches. The analysis remains straightforward for nonprofit organizations that provide a qualified transportation fringe benefit by paying a third party. The nonprofit organizations will pay unrelated business income taxes on the expense associated with providing the benefits excluded from the employee’s taxable income. Therefore, churches providing mass transit passes or parking fees paid to third party vendors will report these expenses as unrelated business income on Form 990-T.
Since the enactment of the law, great confusion has surrounded its application when a church owns its general parking lot that is a part of or adjacent to the church’s worship facilities. The Notice provides a potential 4-step analysis for owned (or leased) parking lots. But before starting the analysis, a church should determine:
- the total number of parking spaces that it has in its parking facilities;
- the total number, if any, of the parking spaces that are specifically reserved for the church’s employees with an indication that these spaces are not available for the general public (e.g., “reserved for the senior pastor”); and
- both the total number of employees at the church during the week and the total number of employees at the church on the weekend.
The basic premise of the IRS analysis is to determine if most of the parking spaces are utilized for employees or for the “general public.” Spaces at a church that are not used during the week may be considered as for the “general public” unless they are designated for employee use only. If the majority of the spaces are utilized or available for the general public, then the church does not have unrelated business income.
On the other hand, if more than 50 percent of the parking spaces are used for employee parking, then the church must pay unrelated business tax in qualifying expenses. The qualifying expenses that create unrelated business income are expenses associated with the parking lot, including repairs, maintenance, utility costs, insurance, property taxes, interest, snow and ice removal, leaf removal, trash removal, cleaning, landscaping costs, parking lot attendant expenses, security, and rent or lease payments or a portion of a rent or lease payment (if not broken out separately). (Qualifying expenses do not include depreciation or cost recovery.)
If the church has parking spaces reserved for employees, the expenses related to those spaces always create unrelated business income.
The analysis has the potential to be a 4-step analysis, but many churches will be able to stop the analysis after the 2nd step in the analysis. The steps are:
- Determine the number of spaces specifically reserved for the church’s employees. The expenses related to these spaces create unrelated business income. For example, if the church has 500 parking spaces and designates 50 parking spaces exclusively for employees, then 10 percent of the expenses associated with the parking lot will count as unrelated business income. (For churches desiring to avoid this automatic potential for taxable income, the IRS is allowing employers to remove the reserved space designation as late as March 31, 2019, and the IRS will consider it retroactive to January 1, 2018.)
- Determine the use of the remaining spaces. Utilizing the example in Step 1, analyze the use of the remaining 450 parking spaces—those parking spaces not exclusively designated for employee use. If at least 51 percent of the remaining spaces in the parking lot are available to the general public, then all the remaining spaces are considered as utilized for the general public, and the expenses related to those spaces do not create unrelated business income. For churches, the spaces available to their attendees are classified as general public use, even if they are unoccupied most of the time. Therefore, if more than 225 of the 450 remaining spaces in our example are empty or used by members or visitors, then all the spaces are considered as used for the general public, and none of the associated expenses are included in unrelated business income. However, if employees primarily use the spaces, then the expenses related to these spaces do create unrelated business income.
- If it is determined in Step 2 that the parking spaces are not primarily used for the general public, then determine the number of spaces reserved for non-employee use. For example, reserved non-employee spaces include spaces reserved for visitors and customers. The expenses related to these spaces do not create unrelated business income.
- If it is determined in Step 2 that the parking spaces are not primarily used for the general public, then it must be determined what expenses will be allocated to the employee spaces. The nonprofit may use an actual number of spaces and number of days the employees use the parking spaces, or it may adopt any reasonable method to determine this usage on a typical day. The employee usage is multiplied by the actual parking expenses to arrive at the unrelated business income amount. For example, if the nonprofit has 500 parking spaces and regularly has 300 employees utilizing parking spaces, then the nonprofit will treat 60 percent of its total parking expenses as unrelated business income.
Most nonprofits may avoid filing Form 990-T if their unrelated business income amount is less than $1,000 during the year. For example, if the nonprofit has 500 parking spaces and 100 spaces are specifically reserved for employees (Step 1 of the above analysis) and the nonprofit had parking lot expenses of $4,000, the expenses subject to reporting as UBI would be one-fifth of that amount—or $800. If there were no other unrelated business income, no Form 990-T is required because the $800 is below the $1,000 filing requirement. Additionally, if a church has another source of unrelated business income, a loss from the other source may be netted against the income created through this provision and reduce the amount of tax due.
For more on the announcement of the IRS’s special rule providing tax relief for some tax-exempt organizations, see “IRS Issues Interim Guidance, Special Rule Regarding ‘Parking Lot Tax.’”
Elaine Sommerville is a CPA and Frank Sommerville is a CPA and attorney. Both serve as editorial advisors for Church Law & Tax.
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