You Can Pave Paradise, Just Don’t Put Up a Parking Lot

By: Pete Kennedy, CPA, Director

Unfortunately, the Tax Cuts and Jobs Act (TJCA) of 2017 wasn’t all tax cuts and jobs.  There were some mean little nuggets included meant to help offset the cost of the tax breaks.  Nearly a year since its passing, the IRS has finally issued (on December 11; IRS Notice #2018-99) preliminary implementation guidance to assist taxpayers in complying with a law that has been in effect now for 11 months.

And it’s not pretty.  Of particular concern are the new preliminary tax rules on employee parking.  Previously, employers could provide “qualified transportation fringe” benefits or QTFs to employees tax-free within certain limits.  Employers were free to build parking garages, rent parking spaces, provide mass-transit passes, etc.  Costs were deductible by the employer, benefits were not taxable to the employee.  The TCJA has done away with that practice.  If the benefits are not taxable to the employee, the costs can no longer be deducted by for-profit employers.

This reaches absurd lengths with attempts to “level the playing field” between nonprofit and for-profit organizations.  The pretzel logic goes something like this; since for-profit organizations can no longer deduct the expenses, nonprofits (who could never deduct the costs in the first place) must now declare these costs as “Unrelated Business Taxable Income” and pay a 21% tax.  The implementation guidance attempts to expand the definition of parking costs to include such things as utilities, insurance, property taxes, snow/ice/trash/leaf removal, landscaping, interest, cleaning, parking lot attendants and security.  Mercifully, depreciation was specifically excluded from the cost by the Notice, but; the Notice is ominously silent on the treatment of the cost of a newly constructed facility.

Comedians have been waiting for this moment, the apex of absurdity.  We never knew where or when it would occur, but it’s finally happened; with the inclusion of property taxes as a parking expense – nonprofits will now be paying taxes on paid taxes.

So here are the basic rules as set forth in the implementation guidance:

• If there are specific parking spots set aside for employees, a nonprofit is automatically on the hook for the cost of those spots. If you are paying a third party, that cost is now UBI.  If the spot is part of a lot or garage owned by the nonprofit, you must allocate the costs of the lot or garage to that spot and those costs become UBI.
• If there is a parking facility available to employees and the public at large (after considering reserved spots), you must determine the primary use of the parking facility – employee or public. If 51% of the lot is used by employees on average, then 51% of the costs of the lot are UBI.  If 49% of the lot is used by employees, the lot will be considered primarily for public use and none of the costs are UBI (unless there are reserved spots as discussed above).
• Organizations that own multiple parking facilities on the same geographic location can choose to aggregate those facilities for the purpose of applying the methodology in the Notice. My interpretation of this is that if there is one lot used exclusively by employees (although available to the public), and two others of equal size used exclusively by visitors (although available to employees), you are off the hook entirely since in aggregate less than 50% of the spots are used by employees and hence, the lots in total are considered primarily for public use.
• If an organization wishes to re-configure or re-label its parking facilities to reduce its tax profile, they have until March 31, 2019 to do so and the treatment will be retroactive to January 1, 2018.

The TCJA is currently the law of the land.  The only way for it to be changed would be for Congress to act.  They got us into this mess and there is some legislative action underway to try to get us out by removing this specific provision of the TCJA.

The information in Notice #2018-99 is still preliminary.  Letters to comment on it will be accepted until February 22, 2019.

(Apologies to Joni Mitchell…..many, many apologies)

You can pave paradise, just don’t put up a parking lot

Now the IRS gets 21% thanks a lot

Don’t it always seem to go

You don’t know what you’ve got ‘til it’s gone 

You can pave paradise, just don’t put up a parking lot 

If the general public wants to go to a neat museum

They’ll have to pay a dollar and a half just to see ‘em

Don’t it always seem to go

You don’t know what you’ve got ‘til it’s gone

They have to collect to pay the tax on the parking lot 

Hey agent agent, here’s my 990-T

I’ll pay your UBIT, just leave me my 501(c)(3)

Don’t it always seem to go

You don’t know what you’ve got ‘til it’s gone

Don’t revoke my status, I’ll pay your tax on the parking lot 

On April 1^st, employees thought it was a scam

Their reserved sign was gone and in their spot was a minivan

Don’t it always seem to go

You don’t know what you’ve got ‘til it’s gone 

They had to reassign to avoid the tax on the parking lot 

Late at night, I dreamed I heard a gavel slam

And instead of being yellow, Congress took away this scam

Don’t it always seem to go

You don’t know what you’ve got ‘til it’s gone 

Write to Congress, tell them “No tax on the parking lot!”