Something new that the federal government is going to tax -- parking reimbursement for your employees. This is a nice perk for your staff.
However, things are changing.
Under the Tax Cuts and Jobs Act, the federal laws are placing a tax on parking costs for employees. The following nonprofit entities will feel the pinch:
Churches
Colleges
Hospitals
Synagogues
Other nonprofits
This new tax has been swimming around in the minds of legislators for a while. Now it will be official. New changes to the system usually mean changes in the way your organization does things.
Congress passed the tax reform act at the end of last year. This is the Tax Cuts and Jobs Act. This change addresses certain perks and benefits that nonprofits offer employees. One new section is IRS Section 512(a)(7). This new provision states that nonprofit entities must treat the cost of providing parking to employees as an unrelated business taxable income as defined by the IRS.
Rethinking Policies and Procedures
Having to adjust to the parking tax ruling, nonprofit organizations have to re-write and modify their policies and procedures to accommodate this change in perks.
All parking benefits your organization offers its employees are now taxable.
The concept of “parking” encompasses a broad scope. It is not just a plot of land on which to park the car. It involves the cost of the land, fees for paving the property, upkeep of the facility each employee uses. Your accountant will become the expert on interpreting this new law. He or she will have to figure out the value of each element, including what percent of space each employee uses.
Help from the IRS
Always interested in obtaining their taxes, the IRS has thoughtfully produced a guidance Notice, IRS form Notice 2018-99 on this topic. This Notice declares that the IRS will issue Regulation regarding income tax on employee parking. The IRS intends for the Notice to provide guidance and understanding until they issue the finalized Regulations.
Key Points of the Notice
Leaders and governing representatives from numerous nonprofits took issue with the new directives. Many representatives requested that the Treasury Department provide deferred acceptance of the new law. They wanted time to incorporate the ruling into their policies and procedures and institute the updates.
However, the Notice does not defer the effective date of the tax. This means that the parking tax includes all instances of applicable tax incurred since January 1,2018. The organization’s fiscal year does not impact this date.
The IRS did agree to grant slight relief. This regards organizations the IRS did not require to file a Form 990-T in the previous year -- as long as they pay the tax by the original due date for the return for the current year.
The IRS bases the tax on the costs of providing employee parking. The IRS does not determine the tax based on whether the parking lot has value. If the parking is in the city, where other parking facilities charge parking fees, or if the area is in a rural location, the new law stands as stated and there is no differentiator between the value of the parking property and its use.
The IRS does not include depreciation expenses in the total being taxed.
Counting Empty Parking Spaces
According to the IRS, the organization shall count parking spaces as empty spaces if employees are not using them. This approach reduces the percentage you compute for employee use.
Measuring the Use of the Lot
To determine the use of the parking lot, the IRS wishes for you to base the totals on usual days and times that the organization is using the parking facilities.
Determining if Parking Space is Reserved for Employees
Parking spaces reserved for employees are now taxed by the IRS. The organization needs to designate these spaces and identify them with placards, signs, gates, attendants, notices, or posters. These notices will indicate the spaces are limited to your organization’s employees.
Reducing Reserved Spaces
The IRS Notice expresses that if an organization decreases its number of employee parking spaces, or if it eliminates some parking spaces, the organization has until March 31, 2019 to amend its use of employee parking spaces. The IRS will consider the removal of these employee parking spaces to be retroactive to January 1, 2018.
More Than One Location
If your organization has more than one geographic location, you must base your parking tax on each separate location. The understanding of this provision is that the locations are in different cities. If your organization has many offices or campuses within the same city but are separate locations, the IRS probably will consider these sites as distinct geographic locations.
Application of the Tax
When your organization calculates its tax, treat is as unrelated business income. Note this on your IRS Form 990-T. The tax is due if the total amount of the tax is more than $1,000.
For a nonprofit entity, the organization can use the flat corporate tax rate of 21%.
Several states demand that you file a state corporate income tax return when your nonprofit has unrelated business income and files an IRS Form 990-T.
Computing the Tax
Your task of calculating the parking lot tax is easier if your organization has a single location. Your organization is not subject to the parking tax if you meet both of the following criteria:
Organization has no parking spaces reserved exclusively for employees.
The general public uses most of the parking facility.
If your organization does not meet both these requirements, you can further investigate whether you are responsible for the parking tax. You need to gather cost information to substantiate your position and decide the amount subject to the tax.
An example of substantiated details is if your organization pays a third-party for employee parking spaces. The taxable total is the amount paid to the third-party for the tax year from January 1 forward. Subtract from this total any portion of this amount that is reported wages to the employees on Form W-2.
Owning or Leasing Parking Facilities
When your nonprofit organization owns or leases part of a parking facility where employees park, the organization first identifies its total parking expenses.
The IRS defines total parking expenses as the portion of the following expenses allocated in your parking facility incurred or paid during the tax year from January 1, 2018 forward:
Cleaning
Insurance
Interest
Landscape costs
Maintenance
Parking lot attendant expenses
Property taxes
Rent or lease payments
Repairs
Security
Trash removal
Utility costs
The IRS Notice permits your organization to use any reasonable method to ascertain the expenses. Calculating the expenses will undoubtedly involve many estimations.
Calculating the Tax
Step one in determining your tax is identifying the total number of parking spaces reserved for your employees. Armed with the cost information described above, the organization is ready to calculate the amount subject to tax . . . and the tax itself.
The organization should determine the total number of all parking spaces, including those reserved for employee use.
The organization should determine the number of parking spaces reserved for employee use.
A portion of your organization’s total parking expenses is subject to the tax if your organization has reserved parking spaces for employees. The IRS requires that your organization complete and submit a Form 990-T if the total of the following is less than $1,000:
Parking expenses set-aside reserved employee parking
Taxable amount from unreserved parking spaces
Gross revenues from any actual unrelated business activities
Subsequently, the organization must calculate the taxable portion of total parking expenses allotted to both employee use of reserved parking spaces and employee use of spaces other than those reserved for employee.
One simple calculation for computing employee parking expenses is to set aside some of the total parking expenses for employee parking, and analyze whether a remaining part of the parking area is used to provide 50 percent of parking for the general public. As mentioned above, when parking spaces not reserved for employees are empty, the organization can identify them as used by the general public and not employees. When this is the case, parking expenses related to the general public section are not taxable to the nonprofit organization.
On the other hand, if employees are the major users of the area of the parking facility not reserved for employees, consider this section used by the general public. In this instance, the parking area is not subject to the nonprofit parking tax.
The government has its eye on your organization and how much you pay to reimburse staff for parking. Now, it is all taxable under IRS code Section 512(a)(7).
When you have questions about preparing taxes related to the parking lot tax, contact TBFoster Accounting to get your answers. We have ideas to share and solutions to management and organizational questions. Keep in touch with our blog. If you have questions about reporting your organization’s tax on parking lots, let us help. Contact our not-for-profit team leader at trent@tbfosteraccounting.com.
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