Understanding nonprofit parking and UBI
How tax reform affects it
By Elizabeth Barchenger, CPA
What? My nonprofit organization must pay unrelated business income tax (UBIT) on allowing our employees to park in our lot?!
In short, yes.
Beginning Jan. 1, 2018, the Tax Cuts and Jobs Act (TCJA) requires that qualified transportation fringe benefits (QTFs) be considered unrelated business income (UBI) by a nonprofit. A nonprofit is required to pay taxes on UBI more than $1,000.
Most QTFs can be calculated based on how much the nonprofit pays for the service, but the qualified parking fringe benefits can be complicated for many nonprofits. Many of the variables in this calculation are not obvious and require judgement and estimates. The IRS states that you can use any ‘reasonable method’ to determine the amount of parking expenses added to UBI, which leaves some wiggle room for the calculation.
Determining cost of UBI
Qualified parking fringe benefits are typically provided under one of three scenarios:
- Renting parking directly. If the nonprofit pays a third party for parking spaces, the cost of those spaces is the potential UBI.
- Owning a parking lot. Costs spent to maintain the parking lot (snow removal, line striping, resurfacing, etc.) should be included in the cost to be allocated. The IRS allows depreciation to be excluded, therefore review any parking lot upgrades for possible capitalization.
- Renting as part of a larger contract. An example is an office lease including access to the building’s restricted parking lot, or an office lease including spots specifically reserved for the nonprofit’s use. In these circumstances, the nonprofit needs to determine what portion of the larger contract’s cost is for the parking benefit versus the office space.
If the value of the parking is stated in the lease, that is the value. If not, the nonprofit must estimate the portion of the larger contract they feel is for the parking using a “reasonable method.” Things to consider: What does similar parking in the area cost? How important is the parking to the nonprofit? How available is an alternative source of parking?
For example, is the nonprofit downtown where parking is limited and expensive? Or does the nonprofit lease space in the suburbs where there is abundant street parking available? Nonprofits in these two different situations are likely to allocate very different portions of their lease to the parking benefit.
Allocate QTF versus public use
Once the costs have been determined, the nonprofit must identify the number of spots reserved for employees (by signs, access barriers, etc.) as opposed to spots primarily for the use of the general public (including customers, visitors, vendors, patients, students, congregants, etc.) or spots reserved for persons other than employees. Reserved employee spots are subject to the tax. Spots primarily for the use of the general public or reserved for persons other than employees are not subject to the tax.
Here's how to look at them:
- Spots reserved for employees. The nonprofit must identify the number of spots reserved for employees and then determine the proportion of its total parking expenses spent on these reserved spots.
- Spots primarily for the use of the general public. The nonprofit needs to determine if the “primary use” of the remainder of the parking lot is to provide parking for the general public. Primary use means greater than 50 percent of the actual or estimated usage of the parking spots during business hours on a typical day. So, even if the parking is not specifically restricted for use by employees, if every weekday 90 percent of the spots are used by employees, the primary use is not to provide parking to the general public. However, if on a normal business day 55 percent of the parking lot is used by non-employees, the primary use of the parking lot is to provide parking to the general public, and all the remaining costs can be excluded from UBI.
- Reserved nonemployee spots. Even if the primary use of the parking lot is for employee parking, the costs related to the spots reserved for persons other than employees can be deducted from the total costs included in UBI. These nonemployee spots should be identified and allocated a portion of the total parking expenses if the primary use of the parking lot in not for the general public.
- Allocate expenses to any remaining spots. If the organization has spots that do not fit in the three aforementioned categories (renting, owning, larger contract), the organization must reasonably determine employee usage of those spots and the expenses allocable to them. Those expenses are subject to the tax. Back to the example where 90 percent of the spots are used by employees. The nonprofit can exclude from UBI the costs related to the other 10 percent.
Nonprofits that lease or own parking facilities may reduce the impact of this tax by removing signs or barriers reserving parking spots for employees before March 31, 2019. This change can be retrospectively applied to the determination of the 2018 use of the parking facility.
Document your reasoning
Ultimately, I cannot emphasize enough, DOCUMENT
your reasoning. As an auditor, I live by the mantra, “not documented, not done.” With all the judgments used in these calculations, documenting your reasoning is crucial.
Elizabeth Barchenger is an officer at Mahoney Ulbrich Christiansen Russ P.A. She has more than 10 years of experience working with nonprofit clients. You may reach her at email@example.com or 651-281-1871.