When the Tax Cuts and Jobs Act originally added the nonprofit transportation (primarily parking) tax, most entities were worried that they would be subject to additional taxes. However, new guidance was issued in December of 2018 clarifying the tax and how to determine the amount that would be included in unrelated business taxable income. As a result, fewer nonprofits may be subject to the tax than originally thought.
Under the new tax law, tax-exempt organizations are required to increase their unrelated business taxable income (UBTI) by the amount they pay for qualified transportation fringe benefits, or QTFs, provided to employees. Organizations with UBTI greater than $1,000 are required to pay taxes on that amount by filing Form 990-T. The current federal tax rate on UBTI is 21%. The California rate is 8.84%. It should be noted that nonprofits that keep their UBTI under the $1,000 threshold do not have to pay any tax on QTFs, so it may be in the organization’s best interest to adjust their parking arrangements.
What is a Qualified Transportation Fringe Benefit?
QTFs aren’t just employer-provided parking benefits; they also include the provision of any mass transit pass or bicycle commuting reimbursements by the employer to an employee. UBTI is increased when the nonprofit pays for any QTF benefits directly, through a third-party, or if the organization allows employees to pay for the benefits themselves on a pre-tax basis. The good news, though, is that QTFs aren’t considered a separate trade or business. Nonprofits are able to combine their increase in UBTI due to parking expenses with an existing unrelated trade or business, meaning organizations with a net loss from their one unrelated trade or business can offset their UBTI from QTFs.
Calculating Parking Expenses Subject to UBTI
When nonprofits pay a third party for employee parking, the total annual cost is automatically considered a parking expense subject to tax. Due to monthly limitations on employer-provided benefits, parking expenditures greater than $265 per employee during 2019 (versus $260 in 2018) are not included in UBTI because those excess amounts should be included in employee wages. For example, if the organization pays $275 per month for employee parking, $265 is excluded from employee wages, and the remaining $10 is recognized by the employee as compensation income each month. UBTI would be increased by the $265 monthly expense only; there is no increase to UBTI for the remaining $10.
Nonprofits that own or lease their own parking facility must calculate their parking expenses that are subject to UBTI using a different method. The December 2018 Notice has provided a four-step process for determining parking expenses for nonprofits that own or lease their own parking facility. Although the calculation can be complicated, in general, organizations should be tracking the number of reserved employee spots in relation to total parking spots. The percentage of parking expenses related to reserved employee spots is included in the UBTI calculation, and the remaining parking expenses are not included in UBTI.
Moving forward, tax-exempt organizations should reevaluate their parking arrangements to avoid or reduce the increase to UBTI related to reserved employee parking spots. If you have any questions regarding the above, or would like some guidance on how best to reduce your nonprofit’s unrelated business taxable income, please do not hesitate to contact our office at (858) 558-9200.