Employee Parking and the Rumored Tax on Churches!

The Rumored Tax on Churched (and other non-profits) for employee parking!

I’m getting a large number of inquiries from churches and other Section 501(c)(3) organizations about the new tax on employee parking and other transportation fringe benefits.

The Tax on Employee Parking:

Yes; it’s true, there is an odd-duck new tax policy, lurking in the new tax law, that will cause many churches and other Section 501(c)(3) organizations to pay taxes on employer provided parking.

Not to Worry!

It is highly unlikely that this new tax law will have any appreciable impact on churches and other not-for-profit organization here, in the Deep South.

How does being in the Deep South change a tax law?

This new tax, on employer provided parking, will primarily impact high cost urban areas where parking is a difficult and expensive issue.  Here, in the Deep South, parking, especially parking at churches, is generally free (as in without a charge or parking fee).  Free is good!  Parking to get into my office is free.  I like free.

Fair Market Value

The tax on free parking provided to employees is based on the fair market value of the parking benefit.  The fair market value of parking is determined by ‘how much do you charge non-employees’ to park at the same or similar location.  In the Deep South, churches do not charge for parking.  It’s free! If it’s free, the value taxed to the employee for the same or similar parking is zero!

Background (background is important)

In the early 1990s, Congress wanted to provide incentives to use mass transit and limit the exclusion for employer-provided parking to a specified dollar amount, and enacted an exclusion for qualified transportation fringe benefits.  Ok; let me say that again in plain English: Congress wanted to use tax law to modify people’s behavior.  The congressional policy was to encourage them to use more mass transit and less automobiles for commuter traffic.

That rule changed for tax years beginning after 1997 when Congress provided that an employee could choose to reduce their compensation and then receive a nontaxable qualified transportation fringe benefit.  This policy shift lowered the income taxes on employees thereby saving them a tiny bit of money.

Nationwide, the use of employer-provided parking “exploded” as a tax-free fringe benefit.

This is an excellent example of how changes in tax policy can have a significant effect on personal and corporate behavior.

[One of my hobbies is reading ‘behavioral economics’; that is the economics of what causes the behavior of people to change.  It’s interesting. The “explosion” of employer provided parking as a tax-free fringe benefit is very much out of proportion to the actual economic value of the tax benefit.  The “explosion” of behavioral change is not a value based economic decisions; the decision is the perception of a “loop-hole” in the tax law.  I call it the “beat the system” economic response.]

By its nature, a benefit related to employer-provided parking, is enjoyed primarily by employees working in urban areas, where parking is expensive.  This change in tax policy will have minimal effect on churches and other Section 501(c) (3) organizations in the Deep South were parking is, generally speaking, cheap!

Politics or Economic?

The Trump tax law’s proposal to tax this benefit is the administrations belief that qualified transportation fringes (including employee parking) are primarily personal benefits and not directly related to a trade or business.  From a value based economic point of view, the administration is not wrong; but, tax law has never been, nor will it ever be, based on any coherent economic theory or policy.

The tax law is, and always will be, based on political policy with little, if any, lip service to value based economics.

Ok; its politics!

Notice the politics of this change in tax policy.  The policy is directed to employers and specifically a new target, non-for-profit employers such as churches and other Section 501(c) (3) organizations.  It is not targeted to individuals! Not wanting to eliminate an individual income tax exclusion, Congress decided to leave the exclusion in place and eliminate the employer’s expense deductions associated with this benefit. This, hypothetically, will not increase tax on individuals, who enjoy free employer parking, but, it will increase taxes on businesses who provide that parking.  I say “hypothetical” because no one expects free employer provided parking to survive for long if it is being taxed.

But; this is a tax on Churches!

Including churches, other tax-exempt and governmental organizations in this policy shift, where elimination of a tax deduction is not meaningful, Congress made the value of employer provided parking subject to unrelated business income tax.

A political faux pas

This is new policy; it is also invasive.  I suspect that there will be political push-back from the not-for-profit sector on this tax policy issue.  I do not expect this tax policy issue will remain in the law for long.  I suspect that no one in the Washington DC ivory tower realized that this was going to be a tax on the Church! Oops!

It’s complicated; the way tax law is structured, there is no neat way to simply exclude churches from this new tax policy. Churches, according to tax law, are Section 501(c)(3) entities. Churches have a few tax breaks that other, non-church, 501(c)(3) entities do not have, but, basically, churches and 501(c)(3) organization have the same set of laws with which they must comply. Because of churches are defined in tax law, carving out or otherwise excluding churches from the tax on employer provided parking will be difficult.

Limited Tax Planning

Basically, there is no easy way to mitigate the impact of this new tax on employer provided parking.

Some commentators suggest that the salary reduction provisions of qualified transportation fringes provide an opportunity to avoid the disallowed deduction rule, because it appears that the employee is funding the benefit. That will not work.

If an employee reduces future compensation on a pre-tax basis in exchange for the employer providing parking, the parking benefit is a provision of a qualified transportation fringe benefit, the costs of which would be disallowed.

Value of parking benefit

Because the employee exclusion amount is the fair market value (FMV) of the parking benefit provided, and the disallowed employer deduction is the cost of providing that parking benefit, questions arise regarding whether a value of $0 for qualified parking might eliminate the existence of the qualified transportation fringe benefit as the provision of the benefit by the employer is not a provision of anything of value.

IRS Notice 94-3 provides helpful info.  You can find it online is you want to study this issue in depth.  But why? This is boring stuff!!