Presenter: carin Hutchins, houston community college Seriously, the Irs is Taxing parking lot/garage expenses as unrelated business income (Ubi)! Presenter: carin Hutchins, houston community college

Goals of presentation Provide information on this new IRS rule Share how HCC approached calculating the amount due Note: late breaking news…….the effort to repeal the law is back on! Do your text or tweet now! #parktheparkingtax Text UBIT to 52886

IRS Section 512(a)(7), The Tax Cut Jobs Act To create parity between taxable and tax-exempt organizations, The Tax Cut Jobs Acts (TCJA) created Section 512(a)(7), which requires tax-exempt organizations to increase their UBI by the amounts of employee parking expenses that would be non-deductible if they were subject to the same deduction disallowance rules as taxable entities. Tax-exempt entities must now pay taxes on the amount of any disallowed parking expenses. Employee parking includes parking provided to an employee on or near the business premises of the employer or on or near a location from which the employee commutes. This also applies to employer paid transit costs such as metro passes. The increase in UBI is attributed to the expense of providing benefits to the employee rather than the value of the parking provided to the employee.

IRS Section 512(a)(7), The Tax Cut Jobs Act (cont.) Methods employers use to provide tax-free parking: Employees park free or at a reduced rate in an employee-owned or leased parking facility such as a garage or parking lot. Employer pays a third party so employees can park at the third party’s garage or lot. Employer may reimburse the employee for the cost of parking. Employer may allow employees to pay for parking on a pre-tax basis via salary reduction. These pre-tax payments are considered UBI. If made post-tax they are not considered UBI.

Calculating qualified parking ubi Employer Owned or Leased Parking Must use reasonable method based on cost, not value Utilize the 4 Step process for allocating parking expense Depreciation is not considered a parking expense Payments to a Third Party for Employee Parking Spots Disallowed deductions up to IRS limits ($260 in 2018 and $265 in 2019) Payments above IRS limits and included in employee income is not UBI

need info about parking expenses and spaces by lot/garage Total number of parking spaces Tenant spaces, if any, as these come off the top Employee reserved spots (unpaid) Employee paid spots Non-reserved parking spaces for employees, the public, etc. Parking Expenses Expenses may consist of, but not be limited to, repairs, maintenance, utilities, insurance, property tax, interest, snow removal, leaf or trash removal, cleaning, landscaping, parking attendant expenses, security and rent or lease payments. Depreciation is not included as an expense.

4 step Calculation process by Lot/Garage Identify any reserved non-employee spaces such as tenants These are not considered UBI You can actually take these spaces out of the calculation

4 step Calculation process by lot/garage Identify the expense associated with each parking facility. Identify the number of spaces that are reserved employee spots (not paid). Calculate the #Reserved Employee Spaces/ Total Spaces X Parking Expenses for that particular parking location Employers had until March 19, 2019 to change their parking arrangements to reduce or eliminate the number of reserved employee parking spots, applied retroactively to January 1, 2018. Identify if there are spaces assigned to employees for which there is a fee charged pre-tax (this amount is UBI). #Spaces X Fee Charged X # of Months = UBI Employers may also enforce post-tax payment for parking which will eliminate the institution from UBI on these payments. The employer had until March 19, 2019 to take advantage of this.

4 step Calculation process by lot/garage Identify the primary use of the remaining spots (primary use test). If the primary use (greater than 50%) of the remaining parking spots is to provide parking to the general public, then the remaining total parking expenses for the parking facility are excluded from UBI under the general public exception rule. If not, expenses are subject to UBI. The general public includes, but is not limited to customers, clients, visitors and students of an educational institution.

4 step Calculation process by lot/garage Total up the results for each lot/garage and that is your total taxable amount Apply the blended rate for FY18 and that is your tax due

Net Operating Losses Changes to Net Operating Loss Rules: Effective with tax years beginning after December 31, 2017 Infinite carryforward, but no carryback Can only utilize up to 80% of taxable income Post-tax reform NOLs follow the revenue stream from which they are created Pre-2018 NOLS can be used to offset income from all buckets and at 100% until exhausted HCC had no NOLS

Points to remember If the institution owns the garage or lot and leases spaces to tenants, subtract those spaces from your total spaces. Identify if there are reserved employee spaces (unpaid) and calculate UBI #Reserved Employee Spaces/ Total Spaces X Parking Expense Identify if the remaining spaces are 50% greater use by employees or the general public. If remaining spaces utilized by the general public are greater than 50%, the public exception applies and there is no UBI. If the remaining spaces used by the institution’s employees (non-reserved) are greater than 50%, there is UBI and the calculation is: #Non-reserved Employee/(Total Spaces-Reserved Spaces) X Parking Expense Identify if there are spaces assigned to employees for which there is a fee charged-pre-tax; this amount is UBI. #Spaces X Fee Charged X # of Months = UBI If the garage or lot is owned by a third party and the institution leases the parking location for employees, #Employee Spaces/Total Number of Spaces X $ Paid to Lessor is UBI. If the amount paid is greater than the FY 2018 statutory exclusion limit of $260 per month per person, the excess amount (amount greater than $260) is added to the employee’s W2. The FY2019 statutory exclusion limit for each employee is $265 per month.

HCC’s Approach We worked with Facilities and each HCC location to obtain a listing of all parking lots and garages with the following details: #Spaces, #Reserved/Designated Spaces, #Paid Spaces, Amount Paid per Space, etc. A UBI calculation was done for each parking location. The calculations were combined to determine the taxable amount for FY18. The blended tax rate was used to determine tax due for FY18. We used the estimated taxable amount for FY18 as the basis for the estimated tax payments for FY19 using the rate for FY19 of 21%. We filed an extension and paid the estimated tax due for FY18 and the first two quarters of FY19 (one lump sum amount). We are working with Grant Thornton who is reviewing our calculations and assisting us with completing the 990T which is due 7/15/2019.

HCC’s Estimated Tax Due We paid $143K when we filed the extension which covered FY18 and the estimated tax payments for the first two quarters of FY19 Subsequently we also paid the FY19 third quarter estimate of $48K Below are our current estimates of UBI that Grant Thornton is reviewing Houston Community College Estimated Tax Due Estimated Tax Due for FY2018 Estimated Tax Due for FY2019 Q1 32,649 Q2 22,843 Q3 27,746 Q4 Total $108,412 $83,237

Challenges encountered Reading and understanding the rule Obtaining the parking expense by location Lack of guidance from the IRS in the beginning; Grant Thornton was really helpful in providing guidance with the calculations

Example 1 Institution A owns a building and leases to various vendors. There are 1,500 parking spaces of which 500 are used by the vendors. 250 spaces are reserved for employees and 300 are non- reserved, but designated for employee parking. The remaining spaces (450) are used for public parking. Total expenses for this location are $350,000. What is your tax expense? Number of spaces to be used in the calculations 1,500 Total Spaces-500 Vendor spaces= 1,000 Calculation for reserved employee spaces who pay $100/month (pre-tax) 250X$100X12=$300,000 Calculation for non-reserved, but designated employee spaces 300/750=.40 Calculation for public spaces 450/750=.60 Since the remaining 750 spaces consist of 60% parking for the public, the remaining 750 spaces are excluded utilizing the public exception. Total taxable amount is $300,000, derived from employee pre-tax payments.

Example 1.a If the non-reserved employee spaces consisted of 450 for employees and 300 for the public, the calculation is: 450/750 X $350,000=$210,000 Under this scenario, the total taxable amount is $210,000+$300,000=$510,000

Example 2 Tax-exempt organization K is a hospital and owns a surface parking lot adjacent to its building. K incurs $10,000 of total parking expenses. K’s parking lot has 500 spots that are used by its patients, visitors, and employees. K has 50 spots reserved for management and has approximately 100 employees parking in the lot in non-reserved spots during the normal operating hours of the hospital. Step 1. Because K has 50 reserved spots for employees, $1,000 (50/500) x $10,000 = $1,000) is the amount of total parking expenses that is nondeductible for reserved employee spots under § 274(a)(4). Thus, under § 512(a)(7), K must increase its UBI by $1,000, the amount of the deduction disallowed under § 274(a)(4). Step 2. The primary use of the remainder of K’s parking lot is to provide parking to the general public because 78% (350/450 = 78%) of the remaining spots in the lot are open to the public. Thus, expenses allocable to these spots are excepted from the § 274(a) disallowance under § 274(e)(7), the primary use test, and only $1,000 is subject to the § 274(a)(4) disallowance. Therefore, only $1,000 of the expenses will result in an increase in UBI under § 512(a)(7). K is required to file a Form 990T because the $1,000 increase to UBI meets the filing threshold of reporting which is $1,000.

Thank you! Carin Hutchins AVC, Finance & Accounting Carin.hutchins@hccs.edu 713-718-8430