IRS gives tax guidance on parking expenses to nonprofits

The Internal Revenue Service has issued interim guidance to help tax-exempt organizations deal with changes in the Tax Cuts and Jobs Act that impose new taxes on groups like churches and charities that offer free parking to clergy and employees.

The interim guidance comes in response to an outcry from some religious and nonprofit organizations such as the National Association of Evangelicals, the National Council of Nonprofits, the Jewish Federation of America and the Evangelical Council for Financial Accountability.

The interim guidance involves the treatment of qualified transportation fringe benefit expenses paid or incurred after Dec. 31, 2017. The new rules aim to help taxpayers calculate the amount of parking expenses that aren’t tax deductible anymore since the passage of the TCJA. The guidance also is supposed to help tax-exempt organizations and their accountants figure out how the now nondeductible parking expenses can either create or increase unrelated business taxable income, or UBTI for short.

The IRS admitted that the guidance comes rather late in the year, and that taxpayers that own or lease parking facilities may have already adopted their own methods this past year to determine the amount of their nondeductible parking expenses. The IRS said taxpayers can rely on the new guidance or, until further guidance is issued, use any reasonable method for determining nondeductible parking expenses related to employer-provided parking.

One of the main parts of the guidance is a special rule that allows many employers to retroactively reduce the amount of their nondeductible parking expenses. Under this rule, employers will have until March 31, 2019, to change their parking arrangements to reduce or eliminate the number of parking spots they reserve for their employees. By making this change, many churches, schools, hospitals and other tax-exempt organizations may be able to reduce their associated UBTI.

In some cases, an organization can avoid having to file a Form 990-T, "Exempt Organization Business Income Tax Return," altogether. Any change made in parking arrangements will apply retroactively to Jan. 1, 2018. The Treasury Department and the IRS are looking for comments on any future guidance they might issue to clarify the treatment of these qualified transportation fringe expenses.

“Treasury is sensitive to the concerns of the tax-exempt community, and hopes this guidance can significantly limit the impact on non-profit groups,” said Treasury Secretary Steven Mnuchin in a statement Monday. “The Treasury is offering tax-exempt organizations a roadmap for navigating their responsibilities. The guidance issued today aims to provide flexibility while minimizing the burden on nonprofit groups that provide employee parking.”

Treasury Secretary Steven Mnuchin
Treasury Secretary Steven Mnuchin

The guidance allows tax-exempt and taxable employers to use any reasonable method for 2018 to determine the increase in UBTI or the amount of nondeductible expenses. The guidance also provides a safe harbor method that should minimize the burden on affected employers

The IRS also issued a related notice providing estimated tax penalty relief in 2018 to tax-exempt organizations that provide these benefits and weren’t required to file a Form 990-T last filing season. In addition, many tax-exempt organizations don’t exceed the $1,000 threshold for paying UBTI and won’t be required to report unrelated business income or pay the applicable tax.

Nonprofits were not overly impressed with the new guidance and are hoping for a full repeal of the provision in the Tax Cuts and Jobs Act. The outgoing House Ways and Means Committee Chairman Kevin Brady, R-Texas, included a repeal of the tax on fringe benefits of tax-exempt organizations as part of a revised package of end-of-year tax measures, including tax extenders and IRS reforms, for Congress’s lame-duck session.

“Anyone who thought repeal of Section 512(a)(7) was the right solution has absolute proof with the publication of the IRS Notice today,” said David Thompson, vice president of public policy at the National Council of Nonprofits. “In a law intended to create tax simplification, this notice explains how to apply the section by requiring nonprofits of all sizes to follow a four-step calculus that will vary for each organization, and can vary from month to month. The notice provides minimal instruction, relieves some organizations of penalties that result from the IRS’s own delay, and completely ignores the imposition of the new taxes on transit benefits, benefits that are mandated for some employers in various cities. Repeal of the section is the only reasonable response. Even the chairman of the House Ways and Means Committee is calling for its repeal, showing that there is no support in Congress for taxing the transportation benefits provided by nonprofits.”

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