IRS Issues Guidance on Parking Tax
As a reminder, the Tax Cuts and Jobs Act (“the Act”) passed by Congress in late 2017 adds a new tax provision that applies to non-profit organizations like churches and other organizations otherwise exempt from income tax (“Exempt Organizations” or “EOs”): a new category of “unrelated business income tax.” Historically, EOs that engage in for-profit businesses unrelated to their core mission must pay income tax on these unrelated for-profit businesses. Income from such businesses is called “unrelated business taxable income” (UBTI). The tax is called “unrelated business income tax” (UBIT).
What the New Tax Covers
The new category of UBIT created for churches includes a tax on the amount a church (or a church-related organization like an annual conference office or general agency) spends to provide parking to its employees. The amount of this expense per year is deemed to be income – unrelated business income – so it can be subject to tax. This is a new category, since previously these taxes were based on income, as opposed to expenses.
This new tax is effective January 1, 2018, so spending by churches on employee parking began accumulating right after the Act was passed. The rules for taxation of unrelated businesses are similar in some ways to those for other kinds of taxpayers and require, for example, quarterly payment of estimated taxes. Some wondered if churches, particularly smaller churches without tax accountants and lawyers on retainer, would even be aware of the new tax in time to file and pay quarterly estimated taxes on their employee parking expenses.
How Churches Determine Tax Liability
On December 10, 2018, the IRS issued guidance on this and other topics related to the new tax. The guidance is provided in Notices 2018-99 and 2018-100. In an effort to be lenient to churches that may have never heard of the unrelated business income tax, or of the new tax on the amount they have been spending on parking for employees, the IRS provided a waiver of penalties that would normally apply to underreporting and underpayment of taxes for estimated returns and taxes that would be due on or prior to December 17, 2018, provided the correct tax is reported and paid on time after that. (For most EOs with a tax year ending December 31, 2018, that due date is May 15, 2019.)
The IRS guidance sets out an overall framework to help churches and other EOs calculate the amount of UBTI when they provide parking for employees in their parking lots. (For churches that pay a third party for employee parking spaces in a garage, for example, the calculation is simpler: all of the expense is UBTI, unless it exceeds $260 per month for any individuals; in that case, the amounts up to and including $260 are taxed to the church; amounts over $260 are taxed as wages to the employee.)
For a church or other EO that owns the parking lot or facility used by its employees, the guidance provides a four-step, safe-harbor approach to determining the amount of UBIT:
Count the spots reserved for employees (“reserved employee spots”) and calculate that percentage of the total number of spots.* That percentage of the total spent on parking for the year will be taxed as UBIT as if it were income from an unrelated business under the new taxing scheme.
Determine the primary use of the remaining spots. If the rest are primarily for the general public (e.g., churchgoers or “congregants of a religious organization,” visitors, vendors, etc.), then the cost of providing those spots will not create additional taxes for the church.
If the inquiry is not resolved within the first two steps, complete steps 3 and 4.
Exclude spots that are reserved exclusively for persons who are not employees (e.g., visitors, customers, etc.), if the remaining spots under step two are not for the primary use of the general public. The spots in this category will not trigger taxation, and this percentage of the total expense of the parking lot is excluded from the new tax.
Determine the number of spots used by employees on a typical day during normal business hours, if any remaining spots have not been categorized as taxable or not taxable. The guidance indicates various ways to estimate usage, including situations where usage may vary on certain days of the week or times of the year. Once the remaining spots typically used by employees is established, the church can calculate the tax due on those spaces in the same way (e.g., 60% of remaining spots are used by employees on a typical day, multiplied by the percentage of parking spots remaining after applying the first three steps, multiplied by total annual parking expenses).
Other Considerations for Determining Cost
While the basic theory of space categorization and expense allocation may be fairly simple, the actual determination of cost leaves some open questions. While the guidance establishes categories of cost that are included (but not exclusive)—such as 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 or a portion of rent or lease payments—the guidance does not suggest how categories that may, for example, apply to the church building(s) and parking lot together (e.g., interest on a mortgage) are to be broken out. Thus, while the guidance may be helpful to give the church treasurer ideas for categories to include in their calculation of the new tax that he or she may not have thought of, it does not provide ideas on how to separate out the portions of expenses that need apportioning, like the interest on an overall mortgage on church property.
One helpful option provided in the guidance is the option to retroactively take away some of the parking it may have provided exclusively to employees this year. Thus, for example, a church that had posted a sign saying “Employee Parking Only” for 10 spaces in its lot this year, can take the sign down and treat those spots as not reserved for employees any more, not only going forward, but also retroactively to January 1, 2018 (as long as they act before March 31, 2019 to take the sign down).
Indeed, for churches whose parking lots are mostly for congregants, eliminating all reserved parking for employees might be the best option. Then the result for step one would be $0, and step two would conclude that the primary use of the parking spots is for church congregants or customers of the religious organization. If there are no other reserved spots to consider, then the church has no expense for employee parking, and will not owe the new tax. This would also eliminate the need to calculate total annual parking expenses (which would otherwise need to be calculated before the four steps are applied). If a church organization has no other triggers of unrelated business income, it will not have to file a Form 990-T, and next year will be the same as this year.
* For instance, spots reserved for employee use with a sign stating “Employee Parking Only.”