As 2019 gets closer, businesses and nonprofits across the country are struggling to understand how to calculate how new parking expense rules will impact their tax liability. The changes to parking expense deductibility and the unrelated business income tax for nonprofits are part of the changes under the Tax Cuts and Jobs Act (TCJA).
While these changes took effect on January 1, 2018 for the 2018 tax year, the IRS didn’t release additional interim guidance on how organizations can calculate the impact until December 10, 2018.
If your business pays a third party for employee parking or transportation expenses it’s pretty simple. The employee still has a tax-free fringe benefit up to a certain amount, but the business can no longer take a deduction for these payments.
To have parity with commercial businesses, nonprofits, which generally don’t pay income taxes, still have a tax-free fringe benefit for nonprofit employees. However, nonprofits would have to pay an unrelated business income tax on these amounts to obtain a similar impact as a commercial business paying more tax, since they now have nondeductible expenses.
It gets more complicated if your business or nonprofit owns its parking lot or parking is part of the property lease. This impacts for-profit businesses as well as nonprofit entities.
The interim guidance goes through a variety of examples involving reserved parking, non-reserved parking, allocation formulas based on the number of spaces for employees versus customers, etc. The guidance is almost a tax code in itself. The bottom line is that unless the legislation is repealed or changed, all businesses and nonprofits that have free parking for employees may still have nondeductible expenses or unrelated business income tax to pay. You may have to come up with a “reasonable allocation method” under the IRS regulations to calculate the amounts subject to tax or non-deductibility.
If you have any questions after reviewing the IRS’ guidance, contact our tax department here or call 800.899.4623 for help.