Parking Lot Tax – Relief for most churches

Parking Lot Tax – Relief for most churches

The IRS has just released “interim guidance” when it comes to determining whether your church must pay “Unrelated Business Income Tax” on the parking spaces used by church employees, thanks to the Tax Cut and Jobs Act of 2017. A provision in that legislation forces certain nonprofit employers, including churches, to pay a tax when they provide parking spaces for employees who drive their own car to work. Sounds crazy, but it’s true.

Thanks to efforts by a variety of organizations that petitioned the IRS for relief on behalf of churches and other charities, the IRS has provided a four-part test to determine whether the tax applies to a particular employer or not. Most churches will find they are exempt from the UBIT at step two.

Reserved parking spaces

However, for those churches that like to designate specific parking places as “reserved” for their pastor and other specific employees, if you don’t remove those signs, you will be forced to file and pay UBI taxes because those reserved spaces are not “available for use” by “the general public” – a key determining factor in the IRS interpretation.

Simplified four-part test

  1. Determine the number of spaces specifically reserved for church employees. Expenses related to these spaces create unrelated business income. For example, if the church has 500 parking spaces and designates 50 exclusively for employees, 10 percent of the expenses associated with the parking lot will count as unrelated business income. (For churches desiring to avoid this automatic potential for taxable income, the IRS is allowing employers to remove the reserved space designation as late as March 31, 2019, and the IRS will consider it retroactive to January 1, 2018.)
  2. Determine the use of the remaining spaces. Utilizing the example in Step 1, analyze the use of the remaining 450 parking spaces—those spaces not exclusively designated for employee use. If at least 51 percent of the remaining spaces in the parking lot are available to the general public, then all the remaining spaces are considered as utilized for the general public, and the expenses related to those spaces do not create unrelated business income. For churches, the spaces available to attendees are classified as general public use, even if they are unoccupied most of the time. Therefore, if more than 225 of the 450 remaining spaces in our example are empty or used by members or visitors, all 450 spaces are considered as used for the general public, and none of the associated expenses is included in unrelated business income. However, if employees primarily use the spaces, their expenses do create unrelated business income.
  3. If it is determined in Step 2 that the parking spaces are not primarily used for the general public, determine the number of spaces reserved for non-employee use. For example, reserved non-employee spaces include spaces reserved for visitors and customers. Expenses related to these spaces do not create unrelated business income.
  4. If it is determined in Step 2 that the parking spaces are not primarily used for the general public, it must be determined what expenses will be allocated to the employee spaces. The nonprofit may use an actual number of spaces and number of days employees use the parking spaces, or adopt any reasonable method to determine this usage on a typical day. The employee usage is multiplied by the actual parking expenses to arrive at the unrelated business income amount. For example, if the nonprofit has 500 parking spaces and regularly has 300 employees utilizing parking spaces, the nonprofit will treat 60 percent of its total parking expenses as unrelated business income.

Relating the four-part test to your church

Now, how does this apply to your church?

  • Step 1 asks, “How many spaces are reserved for church employees?” If the answer is ZERO, you have won half the battle. If the answer is any other number, you will have to do some math, and you may have to pay the UBIT.
  • Step 2 requires some simple math. Count the total number of parking spaces. Subtract those which are “reserved” for employees. Divide the remainder by the total number of spaces. If the answer is at least 50%+1, then there is no tax due for any of those parking spaces.

The vast majority of churches should discover that, other than the reserved spaces, parking spaces do not cause a tax problem. But if the church falls below the 50% mark, some more math is required.

  • Step 3 requires that you determine the percentage of spaces available to the general public. Count all the spaces normally used by employees, subtract those from the total number of spaces, then divide the remainder by the total number of spaces. For example: the church has 10 parking spaces, and 6 are used by employees. 10 – 6 = 4 divided by 10 = 40%. Forty percent of your parking lot expense is not subject to the tax.
  • Step 4 is the hard part: What are the parking lot expenses?
    • Consider what you pay for lighting installation/maintenance and electricity, paving/slurry seal, painting/restriping, pothole repairs, sweeper service, landscaping and water, and any other fixed or variable expenses specifically attributed to the parking lot. Slurry seal may be a once-every-three-years expense, so you have to calculate the annual portion.
      • How much have you paid to replace burned out lights?
      • How much of your total landscape service fees are attributable to green space in the parking lot? And the cost of water needed to keep the plants alive? If you have 200 parking spaces, and your slurry seal and restriping bill every three years is $12,000, your cost per year per space is 12,000 divided by 3 divided by 200 = $20. If 60% of parking (120 spaces) is regularly used by employees, your taxable portion is 120 x 20 = $2,400, if there are no other parking lot expenses.

When net taxable unrelated business income exceeds $1,000, the church must file Form 990-T. Other unrelated business income losses can be used to reduce the parking lot UBIT due. The 2018 corporate tax rate is 21%. If you had no offsetting loss, the tax that must be paid on $2,400 would be $504.

Churches with limited parking are perhaps more likely to be exposed to the parking lot tax. But then again, a small number of spaces probably means little or no annual expense of maintaining the parking lot, and if the taxable income is less than $1,000, it is not reportable and no tax is due.

If you need help with the math, Max Herr, CSBC human resources and church compliance ministry specialist, is available at 559-256-0858 or hrcc@csbc.com.

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