The Tax Cuts and Jobs Act of 2017 imposes a new tax on certain employee fringe benefits paid by a nonprofit organization, including transportation and qualified parking. This law, codified in section 512(a)(7) of the Internal Revenue Code, imposes unrelated business income tax (“UBIT”) on many nonprofits that merely provide parking for their employees. A nonprofit that provides this benefit is now required to pay UBIT and file Form 990-T with the IRS, which many organizations have never done. Qualified parking is currently taxed at 21 percent.

Qualified parking includes employer-provided parking to employees on or near the employer’s premises, or parking on or near a location from which employees commute to work by using mass transit, commuter highway vehicles, or carpools. The following exclusions may reduce or eliminate UBIT: (1) de minimis transportation, and (2) a $260 per month exclusion for qualified parking.

De Minimis Transportation Exclusion. A de minimis transportation benefit is any local transportation benefit the nonprofit provides to an employee that has little value, so accounting for it would be unreasonable or administratively impracticable. (The infrequency of providing this benefit is also considered.) Example: A nonprofit provides occasional local transportation fare for an employee because he or she is working overtime or unexpected hours. As such, the nonprofit may exclude the value of this de minimis transportation benefit from the employee’s wages and from Form 990-T. However, local transportation fare provided on a regular or routine basis does not qualify for this exclusion.

$260 Per Month Exclusion. A nonprofit can also exclude the value of transportation (commuter highway vehicle transportation and transit passes) up to $260 per month per employee, and it can separately exclude another $260 per month per employee for qualified parking benefits. If the nonprofit provides transportation or parking benefits that exceed these respective limits, the nonprofit must include the excess in the employee’s income and report the value on Form 990-T.

Working Condition Fringe Benefits. The federal regulations state that qualified parking does not include reimbursement for parking that is otherwise excludable from gross income under an accountable reimbursement plan or parking provided in-kind to an employee as a working condition fringe benefit. A working condition fringe benefit applies to property and services the nonprofit provides to an employee so the employee can perform his or her job. This exclusion applies to the extent the benefit would be allowable as a business expense or depreciation expense deduction to the employee if he or she had paid for it. Of course, the employee must meet any substantiation requirements that apply to the deduction.

Determining the Value of Employer-Provided Parking. The value of employer-provided parking is generally based on the actual cost (including taxes or other fees) to obtain the parking space. If this cost is not ascertainable, then the value is based on the fair market value (“FMV”), which is the cost that an individual would incur in an arm’s length transaction for a parking space under the same or similar circumstances. An employee’s subjective perception of the value of the parking is not relevant to the determination of its FMV. However, there are some circumstances where tax practitioners have argued that that there is no FMV, such as where there is no commercial parking available in the nonprofit’s parking lot and it furnishes free parking for its customers and employees on its premises. Some tax practitioners have asserted that there is no FMV for the above scenario because an individual (other than the employee) would not pay to park there, so the parking provided is tax-free to its employees. The nonprofit community is awaiting IRS official guidance on this and similar scenarios.

The Council on Foundations, among other public charities, has submitted urgent requests to the U.S. Department of Treasury and the IRS to (1) delay the implementation of the new UBIT law codified in IRC § 512(a), and (2) provide official guidance and a transition period for nonprofits to establish the necessary procedures and systems to comply with these new laws. We will continue to monitor any IRS guidance and post any new information we receive. If you have questions, please contact us here.