The IRS issued Notice 2018-99 on December 10, 2018, clarifying some of the unanswered questions arising from the 2017 Tax Cuts and Jobs Act (TCJA) changes regarding the nontaxable qualified transportation benefits provided to employees.
Changes impact taxable and tax-exempt employers. Many of the questions were related to the costs of providing qualified transportation benefits. Of particular note:
- For-profit taxpayers lost the deduction for providing these benefits.
- The corresponding law for tax-exempt organizations created unrelated taxable income equal to the cost of providing excluded benefits.
The TCJA was passed mid-December 2017 and went into effect January 1, 2018, which gave little warning to businesses or tax-exempt organizations to allow for planning. The amount of qualified transportation benefits excluded from employee benefits is indexed annually. The excluded amount is based upon the fair value of benefits provided. The employer excluded deduction and unrelated business income addition are both based on the cost of providing the excluded employee benefits.
Some of the questions answered by Notice 2018-99 and the earlier Publication 15B, include:
- If the employer provides qualified transportation benefits to employees through a qualified salary reduction plan, is the salary deductible to the employer? Do benefits create UBI to the tax-exempt employer?
- What is the indexed amount employees may exclude from taxable income in 2019?
- What is the consequence of an employer providing qualified transportation benefits to employees where the cost exceeds the annual indexed amount allowed to be excluded from employee compensation?
- How should employers determine the cost of providing parking in lots owned by the employer when parking is free to customers, the public and employees?
- How should the employer determine the cost of providing parking in lots included in the lease of a building and which includes parking for customers, and employees?
- Given the uncertainty in implementing the new law, will the IRS provide relief of penalties for making estimated tax deposits?
Publication 15B, issued earlier in 2018, clarified it makes no difference if an employer provides qualified transportation benefits directly or by allowing employees to use a qualified salary reduction plan to pay for benefits. The benefit would be non-deductible to a taxpaying employer. Because these costs would be non-deductible to a taxable employer, the same costs create unrelated business income to a tax-exempt employer.
The question of determining the costs paid or incurred in providing qualifying transportation benefits is complicated and nuanced. IRS Notice 2018-99, although helpful, also specifically states Treasury will provide additional clarifying Regulations superseding the Notice.
Until Treasury issues such guidance, taxpayers may rely on this Notice.
- The 2018 indexed value of transportation benefits which may be excluded from employee income is $260. The amount increases to $265 in 2019. Notice 2018-99 confirms the qualified transportation benefits exceeding the indexed monthly amounts must be included in taxable income of the employee. The taxable amounts are deductible expenses for taxable employers and do not create unrelated business income for tax-exempt employers.
- The Notice provides examples of costs of providing parking benefits that create unrelated business income for tax-exempt employers owning or leasing all or a portion of a parking facility utilized by employees. Depreciation is specifically an excluded expense for this purpose.
- Notice 2018-99 also allows employers to use any reasonable method to allocate the costs associated with owning or leasing a parking lot used all or in part by employees. The Notice specifically states using the value of parking provided is not a reasonable method for determining cost. The cost is the amount paid or incurred by the employer and a separate calculation of the for determining tax on the employer, regardless of the value of benefits provided to employees.
- Some relief is provided to employers with public lots in which certain spaces are reserved for employees. They may remove the employee designation by March 31, 2019 and have the removal effective retroactively to December 31, 2017, the day before implementing the new law.
- A four-step process is laid out in the Notice for determining the shared lot spaces used by employers and the associated costs which should be allocated to qualified employee transportation benefits.
Two final notes to remember are:
- To the extent a tax-exempt employer has unrelated business income, the exempt employer must allocate a certain amount of its parking benefits which will be non-deductible in computing unrelated business taxable income. The expenses will be non-deductible, but they will not generate additional unrelated business income.
- Tax-exempt employers are allowed the $1,000 specific deduction against unrelated business income generated by qualified transportation benefits. Therefore, if the total taxable amount is less than $1,000, no Form 990-T must be filed.
The IRS also issued an additional penalty relief notice for exempt employers. Notice 2018-100 applies to exempt organizations required to file Form 990-T for the first time because of the new tax on transportation benefits. If this is an initial Form 990-T, the Form is timely filed, and tax due is paid with the return, there will be no penalties assessed for failure to make estimated tax payments during 2018.
If you have questions regarding the taxability of qualified transportation benefits or need assistance with calculating unrelated business income from qualified transportation benefits, please contact your tax team at Clark Nuber.
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This article should not be construed as tax advice. Before making any decision or taking any action that may affect you or your business/organization, you should consult a qualified professional advisor.