Does your church or other nonprofit provide parking at its facility to employees, at no cost? As a result of the 2017 Tax Cuts and Jobs Act, employer-provided parking fringe benefits are now – oddly enough – taxable to employers. In a strange twist for nonprofit employers, that means that they will now owe “unrelated business income tax” on the economic value of such parking benefit with the corresponding legal obligation to file IRS Form 990-T returns. Several federal legislators have heeded the alarm bells from tax practitioners and constituents to repeal this troubling new law – before any tax liability becomes owed for tax year 2018.
The Hue and Cry
The new tax law is contained in Section 512(a)(7) of the Internal Revenue Code, which now requires tax-exempt organizations to include the cost of employer-provided fringe benefits for which there is no deduction under federal law (e.g., transit benefits, on-premise athletic facilities, and employee parking) in their unrelated business taxable income. If the organization had no unrelated business taxable income prior to the enactment of this provision, it may now be required to report federal income tax liability. Even churches, which do not owe IRS Form 990s, must file the Form 990-T if they provide such parking or similar benefits to their employees!
The IRS has yet to provide any transitional guidance on this new tax requirement. Employers are thus left to scratch their heads about this liability out of apparent thin air, the proper method for calculating the economic cost for various parking facilities, and the scope of any allowable deductions. While calculation may make sense in an urban area with comparable values, it makes little to no sense for facilities in suburban or rural areas where parking is freely provided – even expected – on employers’ grounds.
Batts Morrison Wales & Lee, a CPA firm serving non-profit organizations, has led the charge for repealing Section 512(a)(7). As Michael Batts, President and Managing Partner at Batts Morrison Wales & Lee explains, “The idea that tax-exempt employers should be taxed on parking they provide to employees is completely out of line and must be stopped. There is no sound policy basis for taxing charitable, religious, and educational organizations on parking they provide to employees to carry out their important work. This terrible idea of a new tax must be stopped, either by legislation or regulation.” For more information including a petition, see Batts Morrison Wales & Lee’s resource page.
U.S. Senators James Lankford (R-OK) and Ted Cruz (R-TX) have each introduced corrective bills to repeal Section 512(a)(7), and leaders in the U.S. House of Representatives have done likewise, in response to this great consternation among tax practitioners and non-profit employers alike. According to Senator Lankford, “[The] glitch in last year’s tax reform bill would become a huge burden to churches, charities, and non-profit organizations. Most churches and non-profits in Oklahoma, especially in rural locations, are not equipped to handle major tax code changes.” His bill is known as the “Lessen Impediments from Taxes for Charities Act” or “LIFT for Charities Act.” U.S. Representative Mark Walker (R-NC), has likewise explained, “Another important player in the fight to break the generational cycle of poverty are the charities and churches who serve our community. We need to make sure their critical work is not restricted by unnecessary taxes and strenuous compliance processes.”
What If . . .
If left in place, Section 512(a)(7) may result in onerous tax liability for employer-provided parking. For example, if a non-profit employer provides parking to its employees (which many employers do), the cost of such parking is now to be reported as unrelated business taxable income, subject to tax at the corporate rate of 21% and regardless of the organization’s total revenues. In other words, something that was never taxed (at all!) is suddenly fair game for IRS revenues. Additional tax implications for non-parking transit benefits are described in our law firm’s prior blog.
Left unchanged, the new tax law will additionally impose unprecedented IRS Form 990-T filing Without IRS transitional guidance, and with more than half the calendar fiscal year already gone, employers will also continue fumbling around in the dark in terms of valuing the now-taxable parking benefit.
But if the proposed legislation passed (in whatever iteration), then we can breathe a sigh of relief and wake up from this strange tax nightmare. Let’s hope so!