Photo by Ken Lund. CC BY-SA 2.0
In 1972, the church opened its new Church Office Building at 50 East North Temple Street. The 28-story building, built by Christiansen and Clyde Construction Company for $31.3 million, allowed scattered church employees to all work under one roof. Initially, about 1,500 employees, who had been at 16 different locations, moved into the building. It was originally slated to provide office space to over 2,000 employees. And so that those employees could make it, the Church Office Building had 1,250-spot underground parking garage.
And the existence of that 1,250-spot underground parking garage means that the church owes federal income taxes for 2018.
Because yes, the church owes taxes for last year. And, perhaps to church members’ surprise, those taxes aren’t the result of secular liberals who hate Mormons/religion/God. Those taxes are the result of the Tax Cuts and Jobs Act, the GOP’s late-2017 tax reform that was both conceived of and passed without any input or votes from Democrats.
To be fair, the taxes that the church will pay weren’t aimed at the Mormon church, or at churches in general. They were revenue-raising provisions aimed at tax-exempt organizations generally. But churches—including ours—are tax-exempt organizations, and these revenue-raising provision caught churches in their net.
There were several changes made to the tax laws governing tax-exempt organizations. For these purposes, I’m only interested in one, though: changes to the tax treatment of certain qualified transportation fringe benefits.
And what is a qualified transportation fringe benefit? For our purposes, it basically means employer-provided parking and employer-provided transit passes. Employees don’t have to include the value of parking or transit passes in their gross income (up to a ceiling amount), and therefore don’t have to pay taxes on those amounts.
Until 2018, while employees didn’t have to include the value of those things in their gross income, employers could nonetheless deduct the cost of providing parking or transit passes. That changed with the TCJA, though: while employers can still provide transportation benefits to their employees, and the employees still don’t have to include the value of those benefits in gross income, employers can no longer deduct the cost of providing the benefits.
Note that this change would be irrelevant for tax-exempt organizations. Because they don’t pay taxes, they also don’t take deductions. But, in its zeal to raise additional revenue, Congressional Republicans decided to remedy that, and added section 512(a)(7) to the Code.
Section 512 generally talks about unrelated business taxable income (UBTI). In short, when a tax-exempt organization does business-y stuff that doesn’t advance its charitable purpose, it pays taxes on that endeavor as if it were a for-profit organization. The UBTI rules were largely in reaction to the NYU School of Law. It acquired (I believe by donation) ownership of the Mueller Macaroni Company; as a wholly-owned part of a tax-exempt organization, its profits were exempt from tax. Other pasta makers worried that, if Mueller didn’t pay taxes, that it could undercut their prices or it could use its profits to expand, either way competing unfairly with for-profit companies. So Congress created the UBTI rules to tax that kind of unrelated business.
In December of 2017, it made an expansion of those rules: now a tax-exempt organization that provides qualified transportation fringe benefits to employees must include the value of the fringe benefits it provides as UBTI and pay taxes at ordinary corporate rates on those amounts. (Note how weird this is—this isn’t income that tax-exempt organizations are paying taxes on: it’s expenses.)
What does that mean for the church? Presumably it incurs some expense in maintaining the parking structure. According to the IRS, those expenses include, among other things, repairs, maintenance, utilities, insurance, cleaning, and parking lot attendants. The church has to include those costs as UBTI.
If it provides employees with transit passes, it also must include the cost of those transit passes in its UBTI. (Right now, it looks like a monthly local pass for an adult goes for $83.75. If that’s what it provides, it has $83.75 of income it includes for each employee.)
The church then takes the sum of those UBTI amounts and multiplies them by 21% (the current corporate tax rate). Now frankly, I have no idea what the costs of maintaining a parking garage are. But leaving that aside, there are 1,250 spots for 2,000 employees. Let’s pretend that the rest of the employees get a transit pass.[fn1]
750 employees times $83.75 = $62,812.50. So on those transit passes, the church would have to include almost $63,000 of income per month. At a 21% tax rate, that’s $13,190.63 a month, or $158287.50 a year in taxes that it owes. (And remember, that doesn’t include the cost of maintaining the parking garage, or of provide parking to other employees who park at different locations.)
How much will the church ultimately pay on qualified transportation fringes? I don’t know, and will likely never know. But I do know that it will be lots more than it paid when it started using the Church Office Building in 1973 and than it paid while using it in 2017.
[fn1] Yes, I get that that’s a terrible assumption. Likely some employees live within walking distance, some carpool, and some park elsewhere. But I can’t do illustrative math if I don’t make some assumptions.
By Common Consent, a Mormon Blog 
Since you raise the specter of politics (which I might have avoided) I think it’s fair to add my opinion that the UBTI change was a pure revenue raiser, not principled and inserted with the hope that it would not be noticed or understood until the bill passed. Also, (not an opinion) it is being challenged now (in a “make it go away” sense) by churches and other tax-exempt organizations arguing “you can’t mean us! We are going to incur an out-of-pocket cost.” In effect this post can be seen as part of that lobbying effort.
Turning on _my_ political opinion hat, the 2017 Act is chock full of “lies” about what it will cost and who will benefit. (Scare quotes because I don’t know enough to name names–who knew enough to be lying, who was practicing avoidance behavior, and who was lied to.)
Also . . . I always enjoy your work, Sam.
Thanks, Christian. I completely agree—the putative policy underlying this change (to equalize treatment of tax-exempt and for-profit employers) is incoherent. It was entirely a revenue-maximizing, meant to allow the book to be passed through reconciliation.
How will this affect those tax-exempt organisations run out of residential property.
Example: Bob runs “Learn to read with Bob” from his home. Based on the PDF, Bob doesn’t need to pay this new tax for his own parking, because he lives there.
Jimmy works for Bob. Jimmy lives somewhere else, but each day, comes to work and parks in Bob’s driveway. As Jimmy doesn’t live there, how does Bob work out how much the “costs” for providing that parking are? Does he need to work out what fraction of his land area Jimmy’s car takes and work out a fraction of land tax? (2% of land, 70% of the days of the year, 33% of the day = 0.4% of annual land tax??)
So there are annual taxes on previously owned assets? Sounds like a wealth tax to me.
Well done, Sam. Now I have something to walk next door and chat about with my Exempt Orgs partner.
This is cool stuff, Sam. Thanks! A couple of questions, if you don’t mind, just so I’m understanding correctly. So, it’s the maintenance of the garage that would be taxable, and not the fringe benefit to the employee of not having to pay for parking, elsewhere? That would change things considerably. Also, this would seem to apply to maintenance to parking facilities (staying with your parking example, to which TJCA doesn’t apply, exclusively – there would be other UBTI implications) where other Church employees park (BYU, Institutes of Religion, Welfare Storehouses, etc.), but not to parking facilities for chapels or temples. Finally, would the Church be able to circumvent this tax on maintenance expenses by using “volunteers” to do the maintenance of these facilities (there would basically be no expenses)? As the Church takes advantage of volunteers to do many similar things, this wouldn’t be surprising. Just random questions/thoughts. Thanks for your continued willingness to lay this stuff out for everyone!
Church employees pay $24 per month for their passes, as I understand, so I would guess this would reduce the taxable amount owed by the Church.
The Church also gets a deep discount bulk rate from the retail transit pass rate as well, per public reports, so taxes paid will be lower.
I would guess BYU will incur the tax as well, given they pay $1mm year for transit passes for all faculty, students and dependents, per recent media reports. So $210,000 per year in tax?
Obviously this will discourage employers from encouraging transit usage through pass subsidies.
A lot of great questions! I have to run to teach class (and do a few other things), but I promise I’ll get back to them later today or tomorrow.
This is really fascinating. Thank you for your post.
Interesting, Sam. The Church provides a lot of benefits to its employees. What about the cost of insurance benefits—will that be taxable in the future? Not sure how that wouldn’t be “unrelated” if transportation is “unrelated.”
Thanks, Sam. Christian, when the TCJA was passed, I calculated my taxes for 2016 (the last year for which I had data) under the new guidelines. Although I am middle class, I ended up paying more, not less. This is the result of losing the personal exemptions and taking the new standard deduction. These changes more than offset the decrease in rates. So, anyone who really thinks this was not a tax cut aimed primarily at the wealthy simply can’t do math. It is the Republican way, though. Cut taxes on the wealthy, balloon the debt, and claim that growth will make up the difference. Right.
Aussie Mormon, great question. It’s not 100% clear—the IRS Notice is the only guidance we have so far—but it looks like the question is the cost to the employer of maintaining the parking or the cost of providing the parking (like if Bob rents a parking spot from a neighbor). So this may not affect Bob.
jader3rd, it’s not a wealth tax. It’s a tax that requires the taxpayer to include expenditures as income. It’s weird, but not unprecedented (US taxpayers that pay bribes to foreign governments have to include the bribe in gross income and pay taxes on it). I doubt it’s a direct tax, though it’s not exactly an income tax.
Turtle, it’s the expenses associated with providing parking (so maintenance, but also interest paid on money borrowed to buy the lot and people who take tickets, and clearing snow and leaves, and depreciation, etc.). It wouldn’t apply to church buildings, because providing parking for patrons (or customers, or other non-employees) isn’t deductible as compensation to those people. Finally, if the church used volunteers to clean and maintain, it could reduce the amount of UBTI it included.
Jb, BYU also incurs UBTI for transit passes it provides faculty and staff.
Bro. B, Congress didn’t change the treatment of insurance. So for-profit employers can still deduct it, and employees don’t have to include it in income; thus, there’s been no change for tax-exempt employers’ treatment of insurance. In theory, that could change, though in some ways, I think it would be politically infeasible.
Here’s a way to think about the “expenditures=income” concept. Suppose the Church had allowed a for-profit company to build a commercial garage in the same space and provided vouchers for its employees to use at the garage the same way they use transit passes on the bus. The garage company would pay tax on the difference between revenue (vouchers purchased by the church plus fees from other users) and expenses (maintenance, depreciation, rent to the Church, etc). Under such an arrangement, the revenues are transparent and easily taxable. TCJA would not have changed the taxation of the garage itself (other than lowering the rate to 21%), but it would have required the Church to pay UBIT on the value of the vouchers (again, analogous to how transit passes are being treated).
But the Church decided to operate the garage itself. Rather than charging fees and having employees offset them with Church-provided vouchers, they just don’t collect the fees in the first place, making the vouchers unnecessary. The implicit revenue and the value of the implicit vouchers is the same as if a for-profit entity were operating the garage, but the transactions are being conducted in a nontransparent way making the value of the vouchers difficult to tax. So the IRS use the expenses as a proxy for revenues (which is not a bad assumption when applied to a nonprofit organization), then use the imputed revenues as a proxy for the value of the vouchers that employees receive (also a reasonable assumption for a garage that services only church employees).
If the Church is already charging employees for their transit passes, one might expect them to start charging employees to park in the garage to cover the tax bill. That might encourage more carpooling or transit use, which would give the legislation a rationale beyond revenue raising. But extending the tax to transit passes discourages transit use, so I doubt that was the actual rationale.
This is fascinating. I’m thoroughly not thrilled with taxing transit passes.
Fascinating analysis. Ludicrous law. (It seems congress will tax anything that moves, breaths, just sits there, or has the potential to benefit anything that moves or breaths or just sits there. This has gotten out of control.)
How long do think it will be before this starts getting major pushback from a whole bunch of non-profits that are suddenly making a lot less non-profit?
Many of the employees are obliged to park in the Conference Center garage (I was one of them, alas). Does that mean both parking garages are taxable? And if some of the COB garage is set aside for pool cars, security, GAs, etc., does that mean they only have to pay for the percentage of spots that are available to employees? Are GAs employees for tax purposes? I have so many questions!