In a Notice and accompanying information release, IRS has provided interim guidance for taxpayers to determine the amount of parking expenses for qualified transportation fringes (QTFs) that is nondeductible under Code Sec. 274(a)(4) and for tax-exempt organizations to determine the corresponding increase in the amount of unrelated business taxable income (UBTI) under Code Sec. 512(a)(7) attributable to the nondeductible parking expenses. Code Sec. 274 and Code Sec. 512 were amended by the Tax Cuts and Jobs Act (TCJA, P.L. 115-97).
The Notice also announces that IRS intends to publish proposed regs under Code Sec. 274 and Code Sec. 512 (and under Code Sec. 6012 with regard to the exempt organization’s related filing requirement).
Background. Code Sec. 274(a)(4), as added by the TCJA, provides that no deduction is allowed for the expense of any QTF (as defined in Code Sec. 132(f)) provided by taxpayers to their employees.
QTFs are defined in Code Sec. 132(f)(1) to include:
1. Transportation in a commuter highway vehicle between the employee’s residence and place of employment,
2. Any transit pass, and
3. Qualified parking.
Qualified parking is defined in Code Sec. 132(f)(5)(C) as parking provided to an employee on or near the business premises of the employer or on or near a location from which the employee commutes to work.
Code Sec. 132(a)(5) generally provides that gross income does not include any fringe benefit that qualifies as a QTF. Code Sec. 132(f)(2) provides that the amount of QTFs provided by an employer to any employee that can be excluded from gross income under Code Sec. 132(a)(5) cannot exceed a maximum monthly dollar amount, adjusted for inflation. The adjusted maximum monthly excludable amount for 2018 is $260.
Generally, Code Sec. 274 is not applicable to tax-exempt organizations except with regard to determining their deductions connected with unrelated trades or businesses. However, under Code Sec. 512(a)(7), as added by the TCJA, the UBTI of organizations described in Code Sec. 511(a)(2) (“tax-exempt organizations”) is increased by any amount for which a deduction is not allowable by reason of Code Sec. 274 and which is paid or incurred by such organization for: a) any QTF as defined in Code Sec. 132(f); b) any parking facility used in connection with qualified parking as defined in Code Sec. 132(f)(5)(C); or c) any on-premises athletic facility as defined in Code Sec. 132(j)(4)(B).
Notice provides rules regarding exceptions to Section 274(a). Code Sec. 274(e) provides exceptions to Code Sec. 274(a).
Code Sec. 274(e)(2) provides an exception for expenses for goods, services, and facilities, to the extent that the expenses are treated by the taxpayer, with respect to the recipient of entertainment, amusement, or recreation, as compensation to its employees.
In the Notice, IRS notes that, although the language in Code Sec. 274(e)(2) refers to a recipient of entertainment, amusement, or recreation, it applies to the QTF expense disallowance in Code Sec. 274(a)(4). Thus, IRS has determined that QTF expenses are included in this exception to the extent that the fair market value of the QTF exceeds the Code Sec. 132(f)(2) limitation on exclusion and such excess amount is included in an employee’s compensation.
Code Sec. 274(e)(7) provides an exception for expenses for goods, services, and facilities made available by the taxpayer to the general public. In the Notice, IRS provides that expenses for parking made available to the general public are within this exception. However, like other goods, services, and facilities, parking is not made available to the general public if it is made available only to an exclusive list of guests.
How to determine the amount of parking expenses that is not deductible or is treated as an increase in UBTI. The Notice provides guidance to determine the nondeductible amount of parking expenses, as well as the amount treated as increasing UBTI. The method of determining the nondeductible amount depends on whether the taxpayer pays a third party to provide parking for its employees or the taxpayer owns or leases a parking facility where its employees park.
For example, If a taxpayer pays a third party an amount so that its employees may park at the third party’s parking lot or garage, the Code Sec. 274(a)(4) disallowance generally is calculated as the taxpayer’s total annual cost of employee parking paid to the third party. However, if the amount the taxpayer pays to a third party for an employee’s parking exceeds the Code Sec. 132(f)(2) monthly limitation on exclusion, which for 2018 is $260 per employee, that excess amount must be treated by the taxpayer as compensation and wages to the employee. As a result, the total of the monthly amount in excess of $260 that is treated as compensation and wages is excepted from the taxpayer’s Code Sec. 274(a) disallowance amount by Code Sec. 274(e)(2).
Guidance with respect to Section 512(a)(7) issues. The Notice also sets out various guidance with respect to the effect of the above-mentioned TCJA changes on the calculation of UBTI. For example:
• Code Sec. 512(a)(7) does not apply to the extent the amount paid or incurred is directly connected with an unrelated trade or business that is regularly carried on by the organization. In such case, the amount of the QTF expenses directly connected with the unrelated trade or business is subject to the disallowance under Code Sec. 274(a)(4) and, thus, is disallowed as a deduction in calculating the UBTI attributable to such unrelated trade or business under the general rule of Code Sec. 512(a)(1).
• Code Sec. 512(a)(7) mentions on-premises athletic facilities. However, the TCJA did not include a corresponding change to Code Sec. 274 disallowing deductions generally for on-premises athletic facilities. Accordingly, a deduction for expenses paid or incurred for on-premises athletic facilities is not disallowed under Code Sec. 274 if the athletic facility is primarily for the benefit of the tax-exempt organization’s employees and does not discriminate in favor of highly compensated employees.
Reliance and forthcoming regs. Until the proposed regs are issued, taxpayers and tax-exempt organizations that own or lease parking facilities where their employees park may use any reasonable method, as provided in the Notice, to determine the amount of nondeductible expenses under Code Sec. 274(a)(4) or the amount of the increase in UBTI under Code Sec. 512(a)(7). Furthermore, until further guidance is issued, taxpayers may rely on the guidance in the Notice to determine the amount of nondeductible parking expenses for QTFs under Code Sec. 274(a)(4), and tax-exempt organizations may rely on the guidance in the Notice to determine the amount of the increase in UBTI under Code Sec. 512(a)(7).
The proposed regs will include guidance on the determination of nondeductible parking expenses and other expenses for QTFs and the calculation of increased UBTI attributable to QTFs.
References: For qualified parking as a QTF, see FTC 2d/FIN ¶ H-2213; United States Tax Reporter ¶ 1324.08.
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Source: Checkpoint Newsstand 12/11/18