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Example 1Parking Owned or Leased by Nonprofit
Charity A based in a mid-sized metropolitan area, pays Parking Corp. for the right for its employees to park in a garage owned by Parking Corp., which is adjacent to Charity A's headquarters. Charity A has 15 employees, each of whom park in Parking Corp.'s garage. Under the terms of the agreement, Charity A pays $18,000 annually to Parking Corp. This fee amounts to $100 per employee per month. Because the per-employee amount is less than the 2018 cap of $260 per employee, Charity A will have UBTI of $18,000 for the year related to parking expenses. Charity A will be allowed to deduct $1,000 of the UBTI, leaving a total of $17,000 for the tax year. Because Charity A's UBTI for the year exceeds $1,000, it will be required to file Form 990-T.
Charity B, headquartered in a large city, pays Parking Corp. for the right for its employees to park in a garage owned by Parking Corp. adjacent to Charity B's headquarters. Charity B has 15 employees, each of whom park in Parking Corp.'s garage. Under the terms of their agreement, Charity B pays $49,500 annually to Parking Corp. This fee amounts to $275 per employee per month, exceeding the 20198 cap of $260 per employee. The amount in excess of $260 per employee is treated as compensation and wages to the employee and is thus not included in the UBTI calculation. Therefore, Charity B will report UBTI of $46,800 in 2018 related to parking expenses. Charity B will file a Form 990-T and claim a $1,000 deduction, lowering its UBTI for the year to $45,800.
Example 3It is important to note that although Notice 2018-99 provides 10 examples to illustrate the four-step process, none of the examples discuss how to calculate step four in situations where the taxpayer has parking spaces reserved for nonemployees. In these instances, the notice merely states that the step four determination must be reasonable. Determining the proper allocation of the remaining expenses to the remaining uncounted parking spaces may result in different answers from different professional advisors. The key is to use a method that can be defended as reasonable in the eyes of the IRS.
Organization operates in a building adjacent to a 50-space parking lot, both of which are owned by Organization. Organization has calculated $20,000 in expenses related to its parking lot for last year, much of which was attributed to repaving and painting.
Five of the lot's parking spaces near the entrance to the building are designated for Organization's executive leadership and another five spaces are marked with signs reserving the spaces for visitors. In addition to the five members of its executive leadership team, Organization has 25 employees. These individuals typically park in unmarked spaces near the building. The remaining 15 parking spaces are usually vacant during business hours.
Although Organization has never previously been subject to UBTI, its leadership is aware that a portion of its parking expenses from last year will be taxable. Organization's leaders decide that the most prudent course of action is to follow the four-step process for calculating parking-related UBTI outlined in Notice 2018-99.
The first step for Organization is to determine how many parking spaces are reserved for employees. Only five of the lot's 50 parking spaces are specifically designated "employees only." Therefore, Organization can confidently determine under step one that 10% of its spaces are reserved for employees. Therefore, $2,000 of parking expenses is attributable to reserved employee spaces.
Having completed the first step, Organization must next determine the primary use of the remaining parking spaces. Of the remaining 45 spaces, 25 are regularly used by employees, a total of 55.5%. Therefore, the primary use of the remaining spaces is for employee parking. Organization must then move to steps three and four of the process.
The third step is to identify how many of the remaining parking spaces are exclusively reserved for non-employees. Organization has five parking spaces designated for visitors. These five spaces represent 11% of the remaining 45 spaces. Following the examples set by the IRS in Notice 2018-99, Organization calculates that 11% of the $20,000 in parking expenses, or $2,200 is not included as UBTI.
The fourth and final step requires Organization to use a reasonable method to determine employee use of the remaining parking spaces. Ten of the lot's 50 parking spaces have already been accounted for. Organization has already determined that 25 of its employees regularly park in the remaining 40 spaces, which accounts for 62.5% of the remaining spaces. Also, $4,200 of the $20,000 in parking lot expenses has already been allocated to specific parking spaces. Therefore, Organization's accountant and attorney believe it is reasonable to determine that 62.5% of the remaining $15,800 in parking expenses is allocated to employee parking spaces. Therefore, the remaining parking spaces for employees amounts to $9,875 in UBTI. When the expenses allocated to the reserved spaces are added in, Organization reports $11,875 in UBTI on Form 990-T. After subtracting the $1,000 specific deduction allowed, Organization is taxed on $10,875 of UBTI for the year.
Hospital is a non-profit organization that has an on-site parking garage with 500 parking spaces. Maintenance, utilities, insurance and other costs for the parking garage cost Hospital $20,000 per year. The lower level of the parking garage contains 50 spaces reserved for hospital management and administrators. The second level contains 100 spaces reserved by signage for patients and hospital visitors. The parking spaces located on the remaining floors are unmarked. Hospital employees usually take up an additional 200 non-reserved spaces.
Choosing to follow the steps outlined in Notice 2018-99, Hospital first tallies the number of parking spaces reserved for employees at 50. Because 10% of the total spaces are reserved for employees, $2,000 of Hospital's parking expenses are treated as UBTI.
For the second step, Hospital calculates that 200 of the remaining 450 parking spaces are used by employees. Employee use of the remaining spaces totals 44.4% of the remaining spaces, which means that the primary purpose of the parking structure is to provide parking to the general public. Hospital, therefore, has $2,000 of UBTI, $1,000 of which will be reported as taxable on Hospital's Form 990-T.