The 2017 tax reform act (the Act) enacted Section 512(a)(7), which provides that a tax-exempt organization’s unrelated business taxable income (UBTI) is increased by the amount of expenses incurred for providing qualified transportation fringe benefits (QTF) to employees, including qualified parking benefits, if the expenses would be nondeductible by a taxable employer under Section 274.
The IRS recently issued Notice 2018-99, which provides interim guidance to determine the amount of qualified parking expenses that are disallowed under Section 274 in the case of a taxable employer, or that must be included in a tax-exempt employer’s UBTI under Section 512(a)(7). Significantly, the Notice outlines the exceptions to the disallowance of a deduction for QTF expenses, such as expenses related to parking facilities made available primarily to the general public, that are not included in UBTI. The Notice also highlights a four-step method that organizations may use to allocate expenses to qualified parking as well as the type of expenses that could be included in UBTI.
The IRS also issued Notice 2018-100 which provides limited transitional penalty relief for tax-exempt organizations that did not file Form 990-T in the prior year and that fail to make required estimated tax payments to the extent the underpayment is due to the inclusion of QTF expenses in UBTI.
This Insights discusses the interim guidance relating to the UBTI inclusion. A separate Insights that discusses the deduction disallowance applicable to for-profit, taxable employers is available here.
The Act’s inclusion of QTF expense in the UBTI of tax exempt organizations has been a source of uncertainty. Notice 2018-99 provides welcome guidance in this area; however, it is likely that many organizations will need to adjust their UBTI calculations as a result. Significant unanswered questions remain, but organizations should review this guidance promptly, particularly given the limited scope of the penalty relief provided by Notice 2018-100. Organizations should also document the reasonableness of methodologies used for determining QTF expenses.
Health Services Tax Leader, PwC US