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New Taxes for Exempt Organizations – Interim Guidance Received from the IRS

The Tax Cuts and Jobs Act (TCJA) added a new tax for exempt organizations that provide qualified transportation fringe benefits paid or incurred after December 31, 2017.

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Qualified transportation fringe benefits provided to employees include the cost of commuter transportation vehicles (six or more seats), transit passes (bus, train, etc.) and parking. For-profit businesses are no longer allowed a tax deduction for providing qualified transportation fringe benefits, and tax-exempt organizations are now taxed for providing these benefits.

It’s taken a year, but the IRS finally released Notice 2018-99, to provide interim guidance for determining the amount of unrelated business taxable income (UBTI) for qualified parking fringe benefits provided by tax-exempt organizations. The interim guidelines are to be used until proposed and final regulations are released.

Under the interim guidance, the method of determining the UBTI depends on whether the organization pays a third party to provide parking for its employees, or if the organization owns or leases a parking facility where its employees park.  

Third-Party Parking Facility

If the organization pays a third party (i.e., spaces reserved at a parking lot or garage), the UBTI is based on the total annual cost paid to the third party and is reportable on IRS Form 990-T. In addition, if the monthly benefit amount per individual employee exceeds $260 per employee (monthly exclusion from wages for 2018), the excess amount is treated as compensation to the employee and is reportable on the employee’s Form W-2.

Organization Owns or Leases Facility

If the organization owns or leases all or a portion of one or more parking facilities where its employees park, UBTI may be calculated using any reasonable method, including a four-step safe harbor method detailed in the Notice. The guidance includes several examples of the calculation under this safe harbor calculation method.

In the event the organization has reserved parking spots in excess of what the organization actually needs, a special rule was announced. Organizations may be able to reduce their UBTI if they reduce the number of reserved parking spots by March 31, 2019. The resulting change can be applied retroactively to January 1, 2018.

Estimated Tax Penalty Relief

Separate from Notice 2018-99, relief from the estimated tax penalty was announced by the IRS for exempt organizations that offer qualified transportation fringe benefits and were not required to file Form 990-T or pay unrelated business income tax for the last filing season.

Contact Partner Michelle McCann with any questions at (925) 277-9100 or mmccann@lindquistcpa.com. 

 

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