Since January 1, 2018, and by reason of The Tax Cuts and Jobs Act, (the Act), taxable employers have been denied deductions for their expenses for Qualified Transportation Fringe (QTFs) benefits provided to their employees and tax-exempt employers have been required to recognize unrelated business taxable income (UBTI) for their expenses in providing QTF benefits to their employees. Additionally, the Act mandates that the amounts of denied deductions and additions to UBTI be based on the “expenses” of the employer in providing the QTFs as opposed to the “value” of such QTFs. (QTFs include transportation in a commuter highway vehicle in connection with travel between the employee’s residence and place of employment, transit passes, and qualified parking). This new tax treatment (of no deduction for taxable employers and additions to UBTI for tax-exempt employers) applies whether the QTF benefits are provided by the employer inkind, through a bona fide cash reimbursement arrangement or on a pretax or after-tax basis. This means for example employers can no longer deduct their expenses in providing QTF benefits to their employees on a pre-tax basis. The principle behind this change is that certain nontaxable fringe benefits (QTFs) should not be deductible by employers if those fringe benefits are not included in employees’ income and further that aligning the tax treatment of taxable employers and tax-exempt employers makes the tax system simpler and fairer for all employers. However, tax-exempt employers will not be required to add to UBTI for expenses paid or incurred for QTFs directly connected with an unrelated trade or business which is regularly carried on by the tax-exempt employer. In such case, the amount of such QTF expenses will be subject to disallowance in calculating the UBTI attributable to such unrelated trade or business.
In December 2018, the IRS issued interim guidance (IRS Notice 2018-99) on how employers are to determine their nondeductible QTF expenses or additions to UBTI. Among other things, this interim IRS guidance targets employers that have “reserved employee parking spots.” Effective for taxable years beginning on or after January 1, 2019, employers must calculate nondeductible QTF expenses/additions to UBTI by a method that allocates expenses to “reserved employee parking spots.” Until further guidance is issued, employers may rely on this interim guidance. The IRS and Treasury Department intend to issue proposed regulations on the determination of nondeductible QTF expenses and the calculation of additions to UBTI.
March 31, 2019 Deadline to Reduce Taxes
Employers with “reserved employee parking spots” in their parking facilities have until March 31, 2019, to decrease or eliminate their “reserved employee parking spots.” Such decrease or elimination will be given retroactive effect to January 1, 2018. Note, however, that if such spots continue to be used primarily for employees, the employers’ expenses allocable to such spots will be nondeductible/added to UBTI as stated in Step 2 below.
Calculating Nondeductible QTF Expenses or Additions to UBTI
The determination of the nondeductible/UBTI amounts is based on whether the employer:
— pays a third party to provide parking for its employees; or
— owns or leases a parking facility where its employees park.
Employer Pays Third-Party to Provide Employee Parking
When the employer pays a third party to provide parking for its employees, the nondeductible/UBTI amounts are the lesser of:
1) the employer’s total annual cost of employee parking paid to the third party; and
2) the annualized monthly statutory dollar limit ($265 in 2019) on QTF exclusions from income times the number of employees.
Employer Owns or Leases Employee Parking Facility
When the employer owns or leases a parking facility where its employees’ park, the IRS’ interim guidance includes a method of calculating the employer’s nondeductible/UBTI amounts that the IRS deems to be a reasonable method. Such method penalizes employers with “reserved employee parking spaces” and is explained in the four steps set forth in detail in IRS Notice 2018-99. A brief description of those steps is as follows:
Step 1. Calculate the portion of the employer’s parking expenses that are allocable to “reserved employee parking spots” which will be nondeductible/UBTI.
Step 2. Calculate the primary use of unreserved parking spaces which, if for the general public, are deductible/not UBTI and if for employees, are nondeductible/UBTI.
Step 3. Calculate any “reserved nonemployee spots” and allocable employer parking expenses which are deductible/not added to UBTI.
Step 4. Calculate any employee use of any remaining parking spots and allocable employer parking expenses which are nondeductible/UBTI.
Transitional Relief for Underpayment of Estimated Income Tax by Certain Tax-Exempt Employers (IRS Notice 2018-100)
Tax-exempt employers that will have additions to UBTI by reason of their providing QTF benefits to their employees beginning January 1, 2018, will not be penalized for failing to make estimated income tax payments required to be made in 2018 if such tax-exempt employers:
1) were not required to file a Form 990-T for the taxable year immediately preceding the employer’s first taxable year ending after December 31, 2017 (because they had less than $1,000. in annual gross income from a regularly conducted trade or business);
2) file a timely Form 990-T and timely pay the amount reported for the taxable year for which this transitional relief is granted; and
3) write “Notice 2018-100” on the top of their Form 990-T.
In your evaluation of this IRS guidance, please note the March 31, 2019, deadline to take action regarding any “reserved employee parking spaces” in your parking facilities.
The tax filing season is fast approaching for many employers. Those who have been paying or incurring expenses for employee parking should review this recent IRS guidance to determine their proper tax reporting and liability.
Given the loss of deductions and the additions to UBTI for federal (and possibly state) income taxes, employers will want to evaluate the advantages and disadvantages of:
- providing QTF benefits to their employees (either on a pre-tax or after-tax basis);
- ceasing to provide QTF benefits and providing a corresponding increase to employees’ taxable pay (for the loss of QTF benefits); or
- ceasing to provide any pay or benefits for employee transportation and parking.
For more information about anything discussed in this Client Alert, please contact a member of Maynard Cooper’s Employee Benefits and Executive Compensation Practice Group.