Many nonprofit corporations were surprised to learn about a new provision in the federal tax code. This new provision, found in the 2017 Tax Cuts and Jobs Act (TCJA), will impute unrelated business taxable income (UBTI) to any tax exempt organization that provides "qualified transportation fringe" benefits (QTFs) to its employees. QTFs include employee reimbursements for parking expenses, as well as employee-dedicated parking space near the regular workplace. It also includes public parking spaces if used for employee parking over 50 percent of the time. The law requires a nonprofit corporation to determine the cost allocated to providing that benefit (e.g., maintenance, snow removal, insurance, taxes, etc.). That cost must then be reported as UBTI on IRS Form 990-T and taxed on that UBTI at the ordinary corporate income tax rate of 21 percent. In addition, the tax obligation may require the remittance of quarterly estimated tax payments. While the tax burden itself may be relatively modest, it can represent a significant administrative and accounting burden on nonprofit organizations.

Exceptions to UBTI

There are at least three potential exceptions to the requirement that QTFs be reported as UBTI. These include:

1. If the parking is made available to and shared with the general public, and employee usage represents less than half of total usage, then the provision of parking to employees does not constitute a QTF or UBTI to the employer.

2. If the QTF is reported as income to the employee, subject to payroll tax, then the QTF does not constitute UBTI to the organization.

3. If an exempt organization has less than $1,000 in annual UBTI (including UBTI from any other sources), the organization is not required to file a Form 990-T or report the UBTI.

Unfortunately, the second option described is, for obvious reasons, not a particularly attractive one. The third exception may or may not be available, depending upon the amount of QTF involved and whether the organization already has other sources of UBTI. In most cases, the real test will be whether the parking is made available to the general public more than half of the time. If parking is reserved exclusively for employees, it will constitute a QTF in all cases.

In addition to these general rules, the IRS has announced a very limited special exception. In IR‑2018-247, the IRS has stated that if an organization has any signage or other indications that parking is reserved exclusively for employees, and if it removes that signage by March 31, 2019, the IRS will deem the organization to have made the parking available to members of the general public effective retroactively to January 1, 2018. The effect is to remove the parking benefit as a QTF, unless the property remains used primarily (over 50 percent of the time) for employee parking. In short, if an exempt organization takes prompt and appropriate action, it may be able to avoid at least some of the more negative implications of this recent amendment to the tax code.