There’s No Free Lunch and Now No Free Employee Parking – New Taxes for Exempt Employers
For those of you who attended the Baird Holm Health Law Forum in November 2018, you may remember reference to an unusual provision in the Tax Cuts and Jobs Act that makes tax–exempt employers liable for unrelated business income tax on the cost of the parking provided to employees. It’s unusual because unrelated business income tax applies to income and this is a tax that ostensibly covers only expenses. At that time, there was as yet no guidance from the IRS on how such a provision would be implemented and some legislative efforts to overturn this new tax on tax-exempt entities. But the law became effective January 1, 2018.
On December 10, 2018, the IRS issued Notice 2018-99 to provide interim guidance. The IRS intends to develop proposed regulations in the future but determined that taxpayers may rely on this interim guidance until further guidance is issued.
1. Where does this new tax come from?
Answer: Simply put, Congress needed some tax gains to offset its tax cuts. One of the gains was to no longer allow taxable entities to deduct the cost of employee parking. By the time the bill was finalized, Congress was convinced this might give an unfair advantage to tax-exempt employers in recruiting/retaining employees. So, this tax was enacted to level the playing field between taxable entities and tax-exempt entities.
2. Who will be taxed?
Answer: All organizations that are tax-exempt under Section 501 are subject to this tax. Governmental entities (including governmental hospitals) that are exempt from income tax as governmental bodies are not subject to this or other UBTI provisions.
3. What will we be taxed on?
Answer: Tax-exempt entities will be taxed on the expenses incurred for employee parking (not the value of such parking).
4. What types of expenses are included?
Answer: Parking expenses include repairs, maintenance, utility costs, insurance, property taxes, interest, snow and ice removal, leaf removal, trash removal, cleaning, landscape costs, parking lot attendant expenses, security, and rent or lease payments to others for parking. Depreciation is not a parking expense.
5. We don’t have designated employee parking. How do we determine employee parking costs?
Answer: Here’s where the challenge/opportunity exists. The Notice breaks parking down into three categories as follows:
- Employee Parking Only areas. These are clearly employee parking and all of the expenses associated with such areas will be UBTI.
- Patient/Visitor Only areas. These are clearly not employee parking and none of the expenses associated with these areas will be UBTI.
- Mixed Use/Unrestricted Parking areas. The IRS focuses on the statutory language for “primary use”. Thus, the IRS states that the primary use of such unrestricted spots must be determined. The IRS adopts a test looking at 50% or more of actual or estimated use of the parking spots during the normal hours of the exempt organization’s activities on a typical day. If use varies, the organization can use any reasonable method to determine the average actual or estimated usage. If unrestricted areas have 50% or more employee parking, then the percentage of employee parking costs associated with the areas will be UBTI; if unrestricted areas have less than 50% employee parking, then no UBTI exists as to such areas.
6. We have more parking than we need on a typical day. How is excess parking treated?
Answer: Unused parking is not employee parking.
7. How about an Example?
Answer: Hospital has $10,000 of total parking expenses and has a lot with 500 stalls. 25 stalls are reserved for executives and other employees who travel between campuses. 75 stalls are reserved for patients (e.g. pregnant mothers, cardiac rehab, elderly). The other 400 stalls are unrestricted. On an average day, 175 of these stalls are used by employees, 150 are used by patients, volunteers, and visitors, and the remaining 75 of the 400 sit idle. What does the hospital have to include in UBTI?
- The hospital includes 25/500 of the $10,000 (i.e. $500) as employee parking costs for the reserved employee stalls.
- The hospital includes none of the cost associated with the patient reserved parking in UBTI.
- The hospital includes none of the cost associated with the unrestricted parking area since the primary purpose of this space is not employee parking—the percentage is 175/400, which is less than 50%. Note that idle stalls don’t count as employee parking.
The result is that the hospital must include $500 in UBTI.
8. Is there any de minimis test for UBTI? Do we need to file and pay UBTI if we end up with small amounts of UBTI from employee parking?
Answer. Current law requires filing a Form 990-T and paying UBTI if the total UBTI is $1,000 or more. The UBTI from employee parking is added to any other UBTI to see if this threshold is met. If not, then the organization need not file a Form 990-T.
9. Can I do anything now to change my employee parking allocation and thus reduce or eliminate this new tax?
The IRS grants a special period until March 31, 2019 during which organizations with reserved employee spots can change their parking arrangements retroactively to January 1, 2018 so that they’re no longer employee-only spots. This would be done by changing signage, access, etc. Thus, in the example above, the hospital could reduce or eliminate the executive employee stalls.
10. Are there still efforts to repeal this tax?
Yes, efforts continue.
11. Seems simple enough—right?
Not really. There’s several nuances about how this correlates with other UBTI and how to go about calculating expenses and allocating costs. It won’t be all that easy.