New Internal Revenue Code Section 512(a)(7) is causing quite an outcry, but might it be much ado about nothing?
Idaho Bible College and Seminary (IBCS) is a private college exempt under Internal Revenue Code section 501(c)(3) and 170(b)(1)(A)(i). They are not required to file Form 990 annually.
The Controller at IBCS has been working up some calculations in 2018 on potential UBIT on their parking. After reviewing “Tax Tips” over the past month, she relates that they have the following parking facts:
Parking lot with 60 spaces, 20 faculty and staff. For the most part, the lot is used equally by employees, students, and visitors. No one is charged for parking.
The lot was constructed 10 years ago at a cost of $30,000. It is being depreciated over 15 years. IBCS typically spends $6,000 on parking lot sweeping, $2,000 on lining/striping, and $2,000 on snow removal in a normal year.
She complains, “There are three ridiculous problems with this. One, it makes no sense that we should pay taxes on expenses. Two, it is a lot of work to try and come up with an allocation method – especially when there is no guidance in sight. Three, we’ve never had to file a Form 990-T before and that adds time and expense that this organization does not have.”
On the surface, for IBCS, costs total $12,000 and employees use the lot 1/3 of the time. So, according to the current, conventional tax wisdom, they’d have annual “imputed UBI” of $4,000.
However, let’s look at this from another angle. New Internal Revenue Code Section 512(a)(7) includes the following wording: “The Secretary shall issue such regulations or other guidance as may be necessary or appropriate to carry out the purposes of this paragraph, including regulations or other guidance providing for the appropriate allocation of depreciation and other costs with respect to facilities used for parking or for on-premises athletic facilities.”
Catch that phrase, “…guidance providing for the appropriate allocation of depreciation and other costs with respect to facilities used for parking.” Might this mean that the intent of Congress was to tax not-for-profit organizations on their “imputed” UBI from the costs of providing parking for employees (and maybe volunteers), but then allow allocations of expenses for items such as “depreciation and other costs?”
If so, then IBCS – and other institutions who own and maintain their own parking lots – may have a “wash” for UBIT Parking purposes. It may be that the same methodology used to impute the “qualified parking income” would be used to calculate/allocate expenses. Thus, no UBIT. Hmmm.
Or, do “other costs” not include sweeping or striping or snow removal? That would change things.
So, if the folks at Treasury/IRS (backed by the Secretary and Congress) issued guidance providing for imputing income and applying expenses that would net to zero for many organizations, the question becomes whether or not they would still need to file a Form 990-T. The Form 990-T instructions state that “Gross income is gross receipts minus the cost of goods sold.” Could the guidance stipulate that “depreciation and other costs” – for these purposes – be considered cost of goods?
Then, potentially, an institution who owns their own parking lot and has no other unrelated business activities, would likely not be required to file Form 990-T – it all nets to zero. And, importantly, this approach would alleviate the burden of hundreds of thousands of paper-filed Form 990-T’s hitting the desks of an already over-burdened IRS.
From I.R.C. Section 512(a)(7):
Unrelated business taxable income of an organization shall be increased by any amount for which a deduction is not allowable under this chapter by reason of section 274 and which is paid or incurred by such organization for any qualified transportation fringe (as defined in section 132(f)), any parking facility used in connection with qualified parking (as defined in section 132(f)(5)(C)), or any on-premises athletic facility (as defined in section 132(j)(4)(B)). The preceding sentence shall 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. The Secretary shall issue such regulations or other guidance as may be necessary or appropriate to carry out the purposes of this paragraph, including regulations or other guidance providing for the appropriate allocation of depreciation and other costs with respect to facilities used for parking or for on-premises athletic facilities. (Underline added.)
- The “Tax Cuts and Jobs Act” added new Section 512(a)(7) which purportedly “imputes” UBIT for exempt organizations who provide certain employee fringe benefits and we are patiently awaiting guidance from the IRS/Treasury on this important tax issue.
- Your school should be discussing and planning for a “reasonable method of allocation” in the event that you are required to “impute” UBI on employee parking that you provide.
- However, this could become a moot point if Treasury/IRS follows the apparent Congressional edict of 512(a)(7) with respect to allocations of expenses.
- It is shocking that we do not have more guidance on this issue almost seven months into implementation – THE BALL IS IN THE GOVERNMENT’S COURT.
Specific questions? Email Dave Moja
The information provided herein presents general information and should not be relied on as accounting, tax, or legal advice when analyzing and resolving a specific tax issue. If you have specific questions regarding a particular fact situation, please consult with competent accounting, tax, and/or legal counsel about the facts and laws that apply.
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