Editor’s note: For churches that filed Form 990-T for any period prior to the repeal of this law, an amended return may be filed as long as the statute of limitations has not closed on the return. The statute of limitations will generally run for three years after the date a return is filed with the IRS. Since the statute of limitations for 2018 returns may be closing soon for most churches and other organizations, amended returns should be filed as soon as possible to claim a refund for taxes paid for that calendar year.
The controversial “parking lot tax” provision included with the Tax Cuts and Jobs Act of 2017 (TCJA) was officially repealed on December 20, 2019, after then-President Trump signed into law two bipartisan-supported spending packages worth a combined $1.4 trillion.
The potentially costly provision (Internal Revenue Code (IRC) Section 512(a)(7)) placed a tax on qualified transportation fringe benefits provided by nonprofit employers, including employer-provided parking meeting certain criteria. The tax was assessed utilizing the unrelated business income tax system. Churches and other tax-exempt nonprofits were affected by this change. Widespread criticism from across the nonprofit sector erupted almost immediately after the TCJA was passed in December of 2017.
Along with the criticism, the provision also created much confusion in the church community. To help weed through the confusion, the Internal Revenue Service (IRS) issued IRS Notice 2018-99, offering guidance for implementing the provision. If certain criteria were met, churches and nonprofits then needed to go through a four-step analysis to determine how much tax they owed on their employer-provided parking.
The repeal operated retroactively, “as if the tax was never in the original law,” noted national CPA firm Batts Morrison Wales & Lee (BMWL). After the repeal, churches and other tax-exempt organizations that paid this tax were able to file an amended Form 990-T and subsequently receive a full refund or credit for any tax paid.
When Congress developed the TCJA, the goal was to cut both individual and corporate tax rates. But such a tax cut meant a revenue shortfall. As part of its effort to make up for the revenue loss, Congress chose to disallow the tax deductions that for-profit employers could claim related to any transportation fringe benefits provided to employees.
Taxing for-profit employers, however, would not have accomplished the entire revenue goal Congress needed to replace the tax cuts. Almost one-third of American employees work for tax-exempt employers, either through nonprofit organizations or governmental entities. Since these employers do not pay federal income taxes, the disallowance of an expense deduction they would not claim anyway meant no additional revenue generation.
So, to apply the tax burden equally to all employers, and to capture as much tax revenue as possible from all transportation benefits provided to employees, Congress classified the costs of providing the targeted fringe benefits as “income” considered as unrelated business taxable income (UBTI) for tax-exempt employers.
As a result, exempt employers also were required to follow the formula determining if parking provided to their employees triggered the tax. If triggered, the exempt employers then had to calculate how much UBTI resulted on Form 990-T and pay tax on it at the corporate tax rate of 21 percent.
This planned revenue stream, however, ultimately failed, allowing affected churches and other nonprofits to seek refunds through amended Form 990-Ts. The IRS provided details on the refund process through these instructions.
Elaine L. Sommerville, a senior editorial advisor for Church Law & Tax, is licensed as a certified public accountant by the State of Texas. She has worked in public accounting since 1985.
Frank Sommerville, a senior editorial advisor for Church Law & Tax, is an attorney and shareholder in the law firm of Weycer, Kaplan, Pulaski & Zuber, P. C. in Houston and Dallas, Texas, and an Editorial Advisor for Church Law & Tax.