Long-Awaited QTF Guidance for Exempt Organizations is Finally Here
By Frank Smith, National Leader, Nonprofit Tax
The Tax Cut and Jobs Act (TCJA), signed into law December 2017, provided sweeping changes affecting almost all businesses and individual taxpayers. One such change related to limitations on businesses deducting transportation fringe benefits related to employee transportation unless the employee recognizes income related to the fringe. An unexpected result of this rule could result in unintended taxable income to many exempt organizations.
While tax exempt businesses continue waiting to see if Congress will find a way to repeal this part of the Tax Cuts and Jobs Act, new guidance was issued in December 2018 related to qualified transportation fringes (QTFs). The two IRS notices answered many questions regarding the tax treatment of QTFs.
Notice 2018-99 provides interim guidance for taxpayers to determine the amount of parking expenses considered to be QTF. The notice states that taxpayers may rely on any reasonable method for determining nondeductible parking expenses related to employer-provided parking until further guidance is issued.
Notice 2018-100 provides certain tax-exempt organizations that are first-time Form 990-T filers, due to the imposition of the QTF rule, a waiver of penalties for underpayment of estimated income tax payments required to be made on or before December 17, 2018.
The interim guidance clarifies that, indeed, any amounts paid by tax exempt employers for nontaxable commuting costs of their employees, including parking, or elections by their employees to have part of their salary used on a pre-tax basis to cover such costs, does create unrelated business income to the exempt organization.
Some of the takeaways of the interim guidance include:
- If an exempt organization pays a third party for employee parking spots, the amount up to the $260 monthly limit can qualify as a QTF and be excluded from the employee’s income. However, this excess would create taxable income to the exempt organization. Any amount over the $260 would be taxable to the employee and would not be considered taxable income to the exempt organization.
- If an exempt organization owns or leases all or a portion of a parking facility, the amount of the cost of the parking may be calculated using any reasonable method. However, using the value of the employee parking is not considered a reasonable method to determine cost.
- The term “parking facility” includes indoor and outdoor garages, as well as parking lots and other areas where employees park on or near business premises or from which the employee commutes to work.
- “Total parking expenses” include repairs, maintenance, utilities, property taxes, interest, snow, ice and leaf removal, trash removal, cleaning, parking lot attendants, security, and rent and lease payments. It does not include depreciation.
- Reserved employee spots that are identified by signage or segregated by a barrier to entry is considered a disallowed parking cost and creates taxable income. Taxpayers that remove these identifications and eliminate the reserved spots prior to March 31, 2019, will be deemed to not have reserved employee spots retroactively to January 1, 2018.
- If more than 50% of parking spots are primarily used by the general public, none of the costs will be considered disallowed, and no taxable income will be created for tax exempt organizations. General public includes, but is not limited to, customers, clients, visitors, patients of a healthcare facility, students of an educational institution, and congregants of a religious organization. The general public does not include employees, partners, or independent contractors of the taxpayer.
In addition to the release of these federal notices, New York State Governor Andrew Cuomo signed legislation this week that decoupled the New York State tax code from the federal tax rules related to QTFs, thus eliminating the requirement to consider the amount incurred or paid related to QTFs as taxable income for such exempt organizations within the state of New York.
The federal interim guidance includes many examples, and each tax exempt organization will need to compare its facts and circumstances to determine the actual impact. Please contact your Marcum tax professional now to discuss the impact on your organization.