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How to Calculate Taxable Parking Expenses

Wendy Thompson

“Taxable expenses” seems like an oxymoron. What we are talking about is really expenses that are nondeductible to for-profits, and Congress decided that to put nonprofits on a level playing field, those expenses would be taxable. There has been a large uproar from the nonprofit community about these “taxable expenses” and even more so since the temporary regulations came out. The hope is that this portion of the tax bill will be repealed, but until that happens, here is the current law.

The regulations apply to all nonprofits, regardless of whether it is paid or unpaid parking. All nonprofits need to evaluate taxable parking expenses.

This is most straightforward to determine when the taxpayer (nonprofit) pays a third party, such as a local parking garage, for employee parking spots. The payment from the taxpayer to the third party that is not included as taxable income on the employee’s W-2 is the amount of “taxable parking expenses.” Many people have tried to devise ways for the payments to be included in an employee’s W-2 as taxable wages to prevent the nonprofit from being taxed. In general, that is a very difficult task to accomplish as qualified parking is a qualified transportation fringe and therefore non-taxable, up to certain dollar amounts. Talk to your payroll professional before making any changes.

The difficultly comes into play when a taxpayer owns or leases all or a portion of a parking facility or lot. This is applicable anytime a lease also gives the lessee access to the parking facilities as part of the lease, whether listed separately or not. Some complexities and calculations are required under the regulations. The order listed below is not the order in the regulations, but is a more efficient order in which to do the steps.

  1. Determine if the nonprofit has any employee reserved spots. If the answer is yes, the rest of the calculations must be done. However, the regulations do allow an entity to change their reserved employee parking until March 31, 2019, and treat the change as if it was made on January 1, 2018. For every employee reserved parking spot, a proportionate amount of the parking lot expenses will be allocated to the spot and will be considered taxable expenses.

    For example, if there are 10 reserved employee spots and 100 total spots, if the reserved employee spots are unreserved by March 31, 2019, then 0% (0/100) of the parking lot expenses will be taxable under this step. If at March 31, 2019, 10 spots are still reserved, 10% (10/100) of the total parking lot expenses will be taxable. We’ll get to parking lot expenses shortly.

  2. Determine the primary use of the remaining parking lot spots. Primary use means greater than 50%. On any normal business day, this is what percentage of those remaining parking lot spots is used by the general public. Note that spots which are typically empty during business hours are considered used by the general public.

    For example, we have the same 100 spots from above. The nonprofit chose not to change the reserved employee spots, so there are 10 reserved employee spots. That means that there are 90 (100-10) remaining parking lot spots. If greater than 50% are for the general public (non-employees), the primary use test says the general public is the primary user. So if 46 ((90 spots x 50%) + 1) are used by the general public (i.e., non-employee spots), the primary purpose is the general public and none of those 90 spots will have taxable expenses.

  3. If you have no employee reserved spots (by March 31, 2019) and the primary use of the parking lot is for the general public, you are done. Otherwise you have to calculate what the parking expenses are. This includes costs for repairs and maintenance of the parking lot, utilities related to the parking lot (such as lights), insurance for the parking lot, property taxes related to the parking lot, interest related to the parking lot, snow and ice removal, leaf removal, trash removal, cleaning, landscape costs, parking lot attendant expenses, and security. It also includes rent or lease payments for the parking lot. If the parking lot is not separately listed in the rent or lease payment of a building, then the allocable portion of the building rent that relates to the parking lot – and anything else that might be a parking lot expense – is included. The one exception is that depreciation of the parking lot is not considered a parking expense. The IRS has not given any guidance as to a reasonable methodology to allocate these expenses between the parking lot and the non-parking lot, other than to say that reasonable allocation methods are allowable. This appears to be the most difficult portion of the entire calculation.
  4. Next, determine the non-taxable expenses that relate to reserved non-employee spots such as visitor or customer spots. Going back to our previous example, assume that there are 10 visitor reserved spots. We will also assume that the total parking expenses are $1,000. In the first step, we said 10% went to reserved employee parking, so $100 is taxable. We have 10 out of 90 remaining spots that are visitor reserved which is 11%. We have $900 to allocate amongst the remaining spots. 11% of $900 is $100 that is non-taxable.
  5. Finally, take all the remaining unreserved spots and allocate costs based on normal usage. So we have $800 and 80 spots remaining to be allocated. If 45 spots were typically used by employees, then 45/80 * $800 = $450 is taxable for unreserved spots. Add the taxable reserved spots of $100 plus the taxable unreserved spots of $450, to get total taxable expenditures of $550.

For a nonprofit, the taxable parking expenditures are then considered unrelated business income. Therefore, in our example, if the $550 was the only income that was taxable, no 990-T would be required because the 990-T has a $1,000 specific deduction which would reduce the taxable income to zero. If instead the nonprofit had $750 of unrelated business income from advertising, $750 plus $550 less the $1,000 standard deduction would result in $300 of taxable income at a 21% rate and $63 of tax.

As stated before, we do not know if Congress and the Senate will vote to repeal this tax provision. If the first two steps of the process indicate your nonprofit will have no taxable parking expenses, and there are no other taxable qualified transportation fringes, complete your tax filing as normal. If instead this would result in taxable expenses, you will need to determine how to proceed.

If you can extend the 990-T and wait to file, that may be the most efficient way to deal with this uncertainty. You could always file either with the tax or without the tax and amend the return at a later date if Congress does not resolve this in the manner filed. However, that results in additional preparation fees for amended returns and if no tax was originally paid, penalties and interest for the late filing.

Also consider whether changes to reserved employee parking should be made now or wait until closer to March 31, 2019, in case this tax law changes. This area of tax law may be a moving target, but this is the current regulations that exist. Talk to your tax return preparer for further information.

Wendy Thompson

Wendy Thompson

CPA

Wendy Thompson, CPA, is Yeo & Yeo’s Training Manager and a member of the firm’s Nonprofit Services Group, Audit Services Group, and the Compilation and Review Team. She conducts training seminars for the Michigan Association of Certified Public Accountants (MICPA) and serves on the MICPA’s Nonprofit Task Force. Contact Wendy via e-mail at wentho@yeoandyeo.com or call 989.793.9830.