Is Hope on the Horizon? Potential Transportation Benefits Relief for Nonprofits

House Democrats appear to have taken up the fight for exempt organizations by reintroducing a bill (H.R. 1223) that would repeal tax code Section 512(a)(7) brought on by the Tax Cuts and Jobs Act, which disallows deductions for employers who provide community fringe benefits for:

  • Parking – At or near employer’s place of business or near transit hubs
  • Transit, bus/train passes – For travel to/from work
  • Van pools – For travel to/from work

Prior to the TCJA, nonprofits and for-profit organizations could provide certain transportation benefits to employees that were excluded from tax, up to a stated monthly amount, and deductible by the organization.  Both the tax exclusion for these transportation benefits and the corresponding deduction have been eliminated by the TCJA, and the disallowed expenses must be added to any additional unrelated business income.  The tax on the benefits would be at 21% after the $1,000 specific exemption.

The initial interpretation was that the disallowance related to payments made to 3rd parties for parking or if the organization’s lease specifically separated a cost for employee parking.  In late December, the IRS came out with interim guidance and examples for computing the nondeductible portion of parking expenses.

This notice gave 10 examples, with the last 2 for exempt organizations, on how to apply a 4-step process when the organization owns or leases the parking facility.

Definitions

  • Parking Facility – includes indoor and outdoor garages and other structures, as well as parking lots and other areas, where employees may park on or near the business premises of the employer or on or near a location from which the employee commutes to work.
  • Total parking expenses – includes, but are not limited to, 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 a rent or lease payment. Depreciation is not an expense for these purposes.

Steps

  1. Calculate the disallowance for reserved employee spots
  2. Determine the primary use of remaining spots (the “primary use test”)
  3. Calculate the allowance for reserved nonemployee spots
  4. Determine remaining use and allocable expenses

The IRS implemented a special rule that will enable many employers to retroactively reduce the amount of their nondeductible parking expenses.  Employers now have until March 31, 2019 to change their parking arrangements to reduce or eliminate the number of parking spots they reserve for their employees.

If the new proposed legislation goes through, it would take away the additional reporting requirements on religious and other exempt organizations that never had to pay taxes in the past.  For many exempt organizations, having to accumulate additional information and incur additional accounting fees, along with a new income tax is becoming a hardship.

Sax’s Not-for-Profit Practice will continue to update you on industry news as it emerges.  If you have any questions relating to the disallowed fringe benefits, or how tax reform is impacting the nonprofit community overall, please reach out to a Sax Advisor at (973) 472-6250 or contact Marqus White, Tax Partner within Sax’s Not-for-Profit Practice at [email protected].