The Impact of Tax Reform on the Higher Education Industry
Michael Cosgrove Principal, CPA, MSM
13 June 2019
When the Tax Cuts and Jobs Act (“TCJA” or “New Tax Law”) was enacted, the last industries that thought they would be impacted significantly was the not-for-profit and higher education sectors. Unfortunately, these industries were heavily impacted; including both private and public higher education institutions. Previously, these industries were never considerably impacted by changes within
tax laws. However, the TCJA dramatically changed that landscape. The New Tax
Law was enacted as of January 1, 2018, so the second half of FY2018 was affected, and decisions were made, but now is the time to decide and plan for FY2019.
The two key Internal Revenue Code Sections are as follows:
– Section 274(a)(4) → This section states that expenses incurred for providing parking to employees that are qualified transportation fringes (“QTF”) are nondeductible by employers.
– Section 512(a)(7) → This section states that the disallowed deduction for taxable corporations is an increase in unrelated business taxable income (“UBTI”) for tax-exempt employers.
In terms of determining total parking expenses, the costs will include any of the following: rent or lease payments, insurance, property taxes, interest, utility costs, repairs and maintenance, cleaning, snow removal, trash removal, leaf clean-up, parking lot attendant costs, etc. It is important to note that costs associated with areas adjacent to the parking lot (i.e. curbs, sidewalks, etc.) are not included in the calculation of total costs. In addition, depreciation is not considered an expense for these purposes.
Every entity will have slightly different circumstances surrounding employee parking, but the relevant facts and considerations are below:
Identify if there is employee-only parking. The parking can be reserved by signage or access. If the employer pays a third party, then the calculation is straightforward. The cost the employer pays the third party for the use of the parking areas is compared to the monthly limit per employee ($265 for 2019). The lesser of those two values would be the increase in UBTI. If the monthly cost per employee exceeds that limit, then the excess amount would be deductible and therefore not an increase to the UBTI (although the excess would also be taxable to the employees).
However, if the employer owns or leases the parking areas, then the calculation gets more confusing. The IRS did state that until further notice that “any reasonable method” can be used to calculate the nondeductible employee parking expenses. Notice 2018-99 did include a 4-step safe harbor method, which the IRS states is reasonable while awaiting more detailed guidance.
Step 1. Calculate the disallowance for reserved employee spots.
The first step is identifying the number of spots that are reserved compared to the total parking spots available. For example, let’s say 100 spots are reserved for employees out of a possible 1,000 parking spots. The 10% is then multiplied by the total cost of maintaining the parking lots, which for this example is $20,000.
Step 2. Determine the Primary Use of the Remaining Spots.
The “primary use” test is based on the remaining spots. Are the remaining spots mostly (greater than 50%) used by the general public? Notice 2018-99 specifically stated that students at an educational institution are considered the general public for these purposes. If the primary use of the remaining spots is used by the general public, then they would remain deductible by a corporation, which means there is not an increase in UBTI for tax-exempt employers and steps 3 and 4 would no longer be applicable.
Step 3. Determine the reserved non-employee spots (if any). If you reserve parking spaces for non-employees, then you need to determine the percentage of the reserved non-employee spaces compared to the remaining total parking spots. This amount would be deductible by corporations and therefore is not an increase for UBTI purposes.
Step 4. If there are any remaining spaces, then you must determine the use and allocable expenses. For these purposes, then it should be the primary use during normal work hours on a typical business day. After performing the calculation above, it will be important to address the following questions for FY2019:
– What is the potential exposure for FY2019?
– Should the entity file an extension from the November 15th deadline in order to take a “wait and see” approach as to whether there is any repeal of current tax
– Should the entity make a payment when filing an extension?
– What are the possible interest and penalties on any amounts owed by November 15th, but not paid until May 15th?
– Should the entity begin making estimated tax payments?
– If payments are made and then a repeal of the current tax law occurs, what is the process for obtaining the funds paid?
While there cannot be a one size fits all approach as to a solution, we, at O’Connor & Drew are always here to help. If you have any questions or want to discuss, please contact me directly.
(617) 471-1120 x 278