Unrelated Business Income Tax Internal Auditors Conference Brandon L. Harrison, Partner Vavrinek, Trine, Day & Co., LLP

New Tax Law Under Tax Cuts and Jobs Act For organizations that have employees, unrelated business taxable income (UBTI) is increased by new Internal Revenue Code section 512(a)(7). Under section 512(a)(7), UBTI is increased by any amount for which a deduction is not allowable because of section 274 and which is paid or incurred by the organization after December 31, 2017, for any qualified transportation fringe or any parking facility used in connection with qualified parking Section 274 as enacted under the Tax Cuts and Jobs Act (TCJA) related to the disallowance of entertainment, amusement, recreation and qualified transportation fringe expenses

Why Applicable to Community Colleges Automatically included Foundations, as all not- for-profits are subject to this new tax law Special provision was put in to make applicable to colleges (Sec 511(2)(b)) State colleges and universities. The tax imposed shall apply in the case of any college or university which is an agency or instrumentality of any government or any political subdivision thereof, or which is owned or operated by a government or any political subdivision thereof, or by any agency or instrumentality of one or more governments or political subdivisions. Such tax shall also apply in the case any corporation wholly owned by one or more such colleges or universities.

Key Filling/Payment Dates Fiscal Year 2018 Tax Payment was due November 15, 2018, too late to file extension, but waiver can be requested. Fiscal Year 2019 If determined the District has liability then estimated payments are due The 15th of October 2018, December 2018, March 2018, and June 30, 2018 Must pay through the Electronic Federal Tax Payment System (EFTPS) website http://www.eftps.gov/eftps Calculation needs to be completed for both years as soon as possible.

Key Questions Do District employees pay for parking? If they pay for parking, this tax may not be applicable (grey area, subject to interpretation) Does the District have reserved employee parking? This is probably a YES for all Districts, then tax is applicable Does the District foundation have employees or are they employees of the District and reimbursed by the Foundation? If no foundation employees, this is not applicable to to the foundation but only applicable to the District.

Key Questions Continued… Does the District provide any additional transportation fringe benefits? Commuter highway vehicle (vanpool) Transit Passes Qualified Bicycle Commuting Carpool expenses

Information Needed to Gather Number of Employees Number of total parking spaces Number of reserved spaces Reserved for employees Reserved for college use (maintenance, campus police) Aggregate total Costs related to parking facilities/structures

Costs included in UBIT Calculation Parking Attendants Security Parking management Repairs/Maintenance Cleaning Interest Property Taxes Utilities Lease Payments Trash Removal Rent Landscaping of Parking facilities

Unrelated Business Income Tax Calculation The Calculation is a two step process (for most) The first step is reserved parking spaces disallowance calculation Second step is the calculation of the employees usage of the remaining available parking spaces

Step 1: UBIT for Reserved Employee Spots

UBIT Calculation Reserved Parking Spaces Disallowance (Primary use test) Step 2: Identify the remaining parking spots in the parking facility and determine whether their primary use is to provide parking to the general public (greater than 50%) In other words, calculate the number of the employees usage of the remaining available parking spaces

Step 2: Primary Use Test

Steps 3 and 4 If the college did not meet the primary-use test, proceed to Step 3 Step 3: Calculate allowance for reserved non-employee spots The cost associated with reserved non-employee spots is exempted from UBIT, as these spots are considered reserved for the general public Step 4: Allocate expense based on remaining use Determine percentage of remaining spots used by employees and multiply by total parking costs. This amount is reported as UBIT

Final thoughts If the calculated monthly cost per employee exceeds $260 per month, the excess could be taxable income to the employee Don’t see this being applicable to Community Colleges

District Perspective District’s next steps Ways to alleviate the tax burden of the District Geographical locations of parking lots

QUESTIONS? Happy to answer any questions!