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IRS Issues Interim Guidance, Special Rule Regarding 'Parking Lot Tax'

Agency says today’s action should provide relief for tax-exempt orgs, including churches.

IRS Issues Interim Guidance, Special Rule Regarding 'Parking Lot Tax'

Editor’s note: On December 20, 2019, the “parking lot tax” was officially repealed. Churches wanting to claim a refund for unrelated business income tax (UBIT) due to the repeal must file an amended Form 990-T for the applicable year or years. Go to the IRS website for specific guidance.

The Internal Revenue Service today issued interim guidance regarding the tax treatment of employer-provided parking to employees, a subject of contention this year after the passage of the Tax Cuts and Jobs Act of 2017. Today’s IRS action appears to provide temporary relief for many tax-exempt organizations, including many churches, until the agency can state a final, permanent position.

The issue in question involves “an obscure provision” from the tax legislation that appears to impose “a tax (the unrelated business income tax) of 21 percent on the value of free parking provided” by employers, including tax-exempt organizations like churches, to their employees through a newly added section 512(a)(7) of the tax code, reports attorney and CPA Richard Hammar in the forthcoming January/February 2019 issue of Church Law & Tax Report. The newly added section contained “no unequivocal exemption” for churches, meaning “unless and until the IRS provides relief, churches should prepare to comply with the new law by reporting the value of free employee parking to the IRS on Form 990-T and paying the unrelated business income tax (21 percent) on this income.”

However, as Hammar also notes, different law and tax experts have reached conflicting views on the actual application of the new section 512(a)(7), in light of the way other areas of the tax code get applied. Some individuals and groups have sounded the alarm, contending the uncertainty will result in a tax costing millions of dollars to tax-exempt organizations, and called upon Congress to provide a legislative fix. A recently introduced bill attempts to address those concerns. Others, though, have contended the IRS’s final interpretation of the Tax Cuts and Jobs Act of 2017—whenever it eventually comes—will render the issue moot, due to the way other tax code provisions work, and the guidance and practices the IRS uses with those provisions.

Today’s action at least appears to provide temporary relief. In a statement issued with today’s guidance the IRS said “(a) key part of this guidance is a special rule, enabling many employers to retroactively reduce the amount of their nondeductible parking expenses. Under this rule, employers will have until March 31, 2019, to change their parking arrangements to reduce or eliminate the number of parking spots they reserve for their employees.” Such a change made by a church or other employer will apply retroactively to Jan. 1, 2018, the agency said, possibly eliminating the need to file a Form 990-T.

The IRS continued: “By making this change, many churches, schools, hospitals and other tax-exempt organizations may be able to reduce their associated UBTI.”

The IRS also announced “it will provide estimated tax penalty relief in 2018 to tax-exempt organizations” that provide parking to employees and were not required to file a Form 990-T during the last filing season.

Under certain instances, such as situations in which churches operate in areas where free parking is not available—and the churches provide parking to their employees—the new section 512(a)(7) likely still will trigger a tax liability, despite today’s IRS announcement. To determine how that liability arises, and how to comply with it, this article by CPA Elaine Sommerville and CPA and attorney Frank Sommerville provides details.

The interim guidance provides additional specifics and details. The IRS and Treasury Department plan to seek comments from the public regarding the final guidance the agency will issue, but no timetable was provided regarding when comments will be solicited—or when final guidance ultimately will come.

Church Law & Tax will continue to monitor and update this story as further developments unfold.

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  • December 11, 2018