The latest tax on nonprofits has many churches and ministries wondering if it applies to them. Most nonprofit organizations have parking lots, and many churches have reserved parking spaces for the church pastor or first time visitors. Although it’s a small gesture, reserving parking for first time visitors can have a positive impact on a visitor’s experience. However, the latest tax on parking lots may have some churches rethinking its use.
Under the Tax Cuts and Job Act, nonprofit organizations like churches, colleges, hospitals, ministries and others may be responsible to pay an Unrelated Business Income Tax (UBIT) for on their parking lots. The current parking lot tax has confused many. In fact, many nonprofits (churches and ministries included) have created a petition to repeal this law.
By now, you’re probably wondering how this tax will affect your church or ministry. Let’s take a look at this latest tax and the determining factors.
IRS Notice 2018-99 will be referenced throughout this post. You can read the IRS Notice here.
The IRS defines a nonprofit as an organization that operates exclusively for exempt purposes set forth in section 501(c)(3). None of its earnings may inure to the benefit of any private shareholder or individual. Essentially, nonprofits exist to benefit the general public. Therefore, it’s the job of the IRS to make sure nonprofits are indeed acting in the best interest of the public.
By issuing this tax, the IRS can determine if the majority of a nonprofit’s parking lot spaces are for the general public, as opposed to reserved for its employees or another select group of individuals. The IRS Notice states that if the primary use of the remaining parking spots in the parking facility is to provide parking to the general public, then the remaining total parking expenses for the parking facility are exempted from the § 274(a) disallowance by the general public exception under § 274(e)(7). Please note that first time visitor parking does count toward the use of the general public.
In this notice, “primary use” means greater than 50 percent of actual or estimated usage of the parking spots in the parking facility. So, if more than 50 percent of a church’s parking spots are not reserved for a specific member or group of people, then its parking lot expenses will be exempt from the § 274(a) disallowance.
However, parking lot spaces reserved for employees will incur unrelated business income. For churches and other nonprofits looking to reduce taxable parking lot expenses, the IRS is allowing nonprofits to reduce or completely eliminate reserved parking spaces for employees. According to the IRS, nonprofits will need to make these changes by March 31, 2019 if they want to avoid the parking lot tax.
To determine if the parking lot tax applies to you, or if your church needs to calculate unrelated business income, ask yourself the following questions:
• What’s the total number of parking spaces in our parking lot?
• How many parking spaces are reserved for church employees, or specific individuals? (i.e. “Campus pastor reserved parking”)
• What’s the total number of employees who park in our lot during the week?
• And, what’s the total number of employees who park at the church on the weekend?
You may also want to have a rough calculation of the amount of parking lot expenses your organization has. According to the notice, this typically includes:
• Costs associated with repairs, general maintenance, and landscaping;
• Expenses involving insurance and property taxes;
• Possibly charges for removing snow, ice, leaves, and other debris;
• Any form of paid security services;
• Rent or lease payments.
Does This Apply to Me?
Ask yourself, “Can more than 50 percent of our parking spaces be used for the general public? Or can we completely do away with reserved employee parking?” This is necessary to know if you will need to pay an additional tax.
Here is an example.
ABC Church owns a surface parking lot adjacent to its buildings. ABC Church incurs $5,000 of total parking expenses. There are 200 spaces in the parking lot. These spaces are used by congregants, visitors, and employees. There are five spaces reserved for certain employees. During ABC Church’s weekday activities, ABC Church usually has approximately 10 employees parking in the lot in non-reserved spots and approximately 190 non-reserved parking spots that are empty.
During ABC Church’s weekend activities, the church usually has 180 congregants parking in the lot in non-reserved spots and five employees parking in the lot in non-reserved spots.
Note: Because ABC Church has five reserved spots for certain employees, $200 ((5/200) x $5,000 = $125) is the amount of total parking expenses that is nondeductible for reserved employee spots under § 274(a)(4). Thus, ABC Church must increase its UBIT by $125, the amount of the deduction disallowed under this section.
Also note: Because usage of the parking spots varies significantly between days of the week, ABC Church uses a reasonable method to determine that the primary use of the remainder of ABC’s parking lot is to provide parking to the general public because 90 percent (440/490 = 90 percent) of the spots are used by the public during the weekdays and 95 percent (470/490) of the spots are used by the public on the weekends.
Where UBIT comes in
The empty, non-reserved parking spots are treated as provided to the general public. Thus, only $125 of the $5,000 is subject to the § 274(a)(4) disallowance. Therefore, the church only has to pay $125 in UBIT. If ABC Church does not have gross income from any unrelated trades or businesses of $775 or more included in computing its UBIT (to reach the $1,000 filing threshold), ABC Church is not required to file a Form 990-T for that year. You can learn more about UBIT by reading one of our other blogs here.