As discussed in yesterday’s blog, in Notice 2018-99 (the “Notice”), the Internal Revenue Service (the “IRS”) provides interim guidance: (1) for taxpayers to determine the amount of parking expenses treated as qualified transportation fringes (“QTFs”) (under Code section 132(f) that is nondeductible under § 274(a)(4) of the Internal Revenue Code (the “Code”) and (2) for tax-exempt organizations to determine the corresponding increase in the amount of unrelated business taxable income (“UBTI”) under § 512(a)(7) of the Code attributable to the nondeductible parking expenses.
The Notice provides interim guidance how to calculate the amounts in (1) and (2) above. The IRS intends to issue regulations in the future to provide more permanent rules.
Yesterday’s blog discussed the Notice’s interim guidance pertaining to the determination by taxpayers of the amount of parking expenses treated as QTFs that is nondeductible under § 274(a)(4). Today’s blog summarizes the Notice’s interim guidance on the determination by tax-exempt organizations of the increase in the amount of UBTI under § 512(a)(7) of the Code attributable to the nondeductible parking expenses.
The Increase In UBTI. Sections 274 and 512 were amended by the Tax Cuts and Jobs Act (2017) (the “Act”), effective for amounts paid or incurred after December 31, 2017. Under the Act, a tax-exempt organization that has employees is required by § 512(a)(7) to increase it’s UBTI by any amount: (1) for which a deduction is not allowable by reason of section 274 and (2) which is paid or incurred by the organization for-(a) any QTF (again, as defined in section 132(f)), (b) any parking facility used in connection with qualified parking (as defined in section 132(f)(5)(C)), or (c) any on-premises athletic facility (as defined in section 132(j)(4)(B)). The foregoing rule does NOT apply to the extent the amount paid or incurred is directly connected with an unrelated trade or business which is regularly carried on by the organization. .
To explain the UBTI increase, under § 132(f)(5)(C) and Treas. Reg. § 1.132-9(b), Q/A-4, qualified parking means parking provided to an employee by an employer on or near the employer’s business premises or at a location from which the employee commutes to work (other than property used by the employee for residential purposes) and may be provided on property that the employer owns or leases. Expenses for parking facilities used in connection with qualified parking and as part of the provision of qualified parking are nondeductible under § 274(a)(4) as expenses for QTFs, and result in an increase in UBTI under § 512(a)(7).
Section 512(a)(7) mentions on-premises athletic facilities. However, the Act did not include a corresponding change to § 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 § 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. See § 274(e)(4); Treas. Reg. § 1.274-2(f)(2)(v).
The provision of QTFs that results in an increase in UBTI under § 512(a)(7) is not itself an unrelated trade or business. See Notice 2018-67, 2018-36 I.R.B. 409, which discusses and solicits comments regarding the calculation of UBTI under § 512(a)(6) for exempt organizations with more than one unrelated trade or business. Therefore, any increase in UBTI under § 512(a)(7) is not subject to § 512(a)(6), meaning that an exempt organization with only one unrelated trade or business and an increase in UBTI under § 512(a)(7) does not become an exempt organization with more than one unrelated trade or business subject to the special rules§ 512(a)(6) for determining UBTI.
For taxable years beginning after December 31, 2017, until further guidance is issued, a tax-exempt organization with only one unrelated trade or business can reduce the increase to UBTI under § 512(a)(7) to the extent that the deductions directly connected with the carrying on of that unrelated trade or business exceed the gross income derived from such unrelated trade or business. Section 512(b)(12) generally provides a specific deduction of $1,000 as a modification to the UBTI otherwise determined under § 512(a), which, after the Act, includes the increase in UBTI determined under § 512(a)(7). Furthermore, tax-exempt organizations are required to file a return on Form 990-T, Exempt Organization Business Income Tax Return, if they have gross income, included in computing UBTI, of $1,000 or more. See Treas. Reg. § 1.6012-2(e). This threshold amount for filing Form 990-T also applies to UBTI calculated with respect to § 512(a)(7). Therefore, organizations for which the sum of (1) gross income from unrelated trades or businesses and (2) the increase of UBTI under § 512(a)(7) is less than $1,000 need not file a Form 990-T. Organizations for which this amount is $1,000 or more must file a Form 990-T. The Treasury Department and the IRS intend to revise the regulations under § 6012 to clarify that amounts which increase UBTI under § 512(a)(7) are included in applying the §1,000 threshold for filing the Form 990-T.
Examples and Relief From Penalties. The Notice contains examples which illustrate the foregoing guidance. Also, see Notice 2018-100 for relief from penalties for underpayment of estimated tax, required to be made on or before December 17, 2018, when the underpayment is attributable to the changes to the tax treatment of QTFs.