Important Info for Nonprofits: QTF and the Tax Cuts and Jobs Act

Businesses and nonprofits should expect changes when it comes to parking benefits.

The Tax Cuts and Jobs Act (TCJA) has amended Section 274 to limit or remove tax deductions for employers who provide qualified transportation fringe (QTF) benefits. Such benefits can include public transit passes, commuter transportation in a highway vehicle… and even use of a parking lot.

Under the new tax law, effective January 1, 2018, QTF benefits that involve on-site parking are no longer tax deductible. If your organization owns or leases a parking lot which your employees can use, you must calculate the expense associated with maintaining that lot. You can use what the IRS calls “any reasonable method” to determine the cost of providing employee parking.

If an employer pays a third party for employee parking spots, the cost of parking is the amount paid to the third party. Additionally, in determining the cost of parking, several expenses are taken into account such as repairs, maintenance, insurance, property taxes, security, and rent or lease payments or a portion of a rent or lease payment (if not broken out separately). However, depreciation expenses and expenses related to property located next to the parking facility, such as landscaping or lighting, do not need to be considered.

While for-profit organizations lose the tax deduction on QTFs, nonprofit organizations must increase their unrelated business taxable income (UBTI) attributable to the nondeductible parking expenses.

In addition, if your organization’s UBTI is more than $1,000 (either as a result of the nondeductible parking expenses or other unrelated business activities), the organization may need to file Form 990-T, “Exempt Organization Business Income Tax Return.” Since this provision of the TCJA was effective January 1, 2018, the calculation for calendar year organizations would apply for all of 2018, while for fiscal year organizations it would only apply to the portion of the tax year after January 1, 2018. For example, an organization with a fiscal year ending June 30, 2018, the provision would only apply for the period January 1, 2018 through June 30, 2018.

In essence, under the new tax law, nonprofit organizations will end up paying tax at the corporate rate of 21% for any parking expenses determined to be a QTF in excess of $1,000.

There is, however, a safe harbor provision outlined in IRS Notice 2018-99 to help employers identify and allocate expenses related to employee parking:

1) Determine the number of reserved employee spots as a percentage of total parking spaces. That percentage is counted as a QTF and either nondeductible (for-profit) or UBTI (non-profit).

2) Count the remaining parking spots. If more than 50% of the spots can be used by the public, none of the expenses attributable to the rest of the parking facility are considered QTF.

3) Determine how many spots are reserved for customers and other non-employees. This percentage of total parking expenses is not considered QTF.

4) If there are spots left over after the first three steps, the employer must use a reasonable method to determine employee use during normal business hours on a normal day.

Employers with reserved employee parking spots have until March 31, 2019, to remove the reserved designation. The removal is then effective retroactively to January 1, 2018.

If you have questions, it’s critical that you get an expert in your corner. Your nonprofit tax CPAs can help you make sense of these requirements and take advantage of the safe harbor provision for parking.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.