A college owns and operates a parking garage that it built 10 years ago.  The structure has three levels with 100 parking spaces on each level.  The garage is debt-financed.  The first and second floors are used by faculty, staff, volunteers, students, and visitors of the college.  Floor three is rented to the public on a monthly or daily rental basis. The college has historically considered the operation of 1/3 of the garage to be an unrelated business activity and accounts for revenues and expenditures in order to complete and file Form 990-T each year.  All spaces are filled each business day.


Now, they face the potential for being required to “impute income” on the costs of employee parking.  Here are the vital statistics:


Cost of facility:                                   $1,350,000

Depreciable life:                                      15 years

Depreciation:                                       $     90,000

Interest expense for current year:       $     36,000

Compensation for attendants:              $   120,000

Security:                                              $     24,000

Utilities:                                               $     12,000

Maintenance and other:                       $     12.000

TOTAL ANNUAL COSTS             $   294,000



Average employees parking/day                     40



I.R.C. Section 512(a)(7) can be broken down into three semi-logical parts – okay, okay, there is nothing logical nor rational about this code section, I get it.


First: Unrelated business taxable income of an organization shall be increased by any

amount for which a deduction is not allowable under this chapter by reason of

section 274 and which is paid or incurred by such organization for any qualified

transportation fringe (as defined in section 132(f)), any parking facility used in

connection with qualified parking (as defined in section 132(f)(5)(C)), or any on-premises

athletic facility (as defined in section 132(j)(4)(B)).


Standing alone, this sentence (let’s call it Part 1 – Income) would tell us that the “imputed income” for tax-exempt organizations would be equal to the amounts that are not allowed as deductions for for-profit taxpayers – in these three areas (qualified transportation fringe, qualified parking, and/or on-premises athletic facilities).  So, we will await guidance under I.R.C. Section 274 to discern what income might be.


Given this sentence (Part 1 – Income) alone, the example College would have $294,000 in costs times 40/300 (employee parking spaces over total parking spaces) which equals $39,200 in UBI times a federal tax rate of 21%. This equals UBIT of $8,232.  Then, what about state taxes?  Hmmm.  But, keep reading!


Second, The preceding sentence shall not apply to the extent the amount paid or incurred is directly connected with an unrelated trade or business which is regularly carried on by the organization.


Okay, let’s call this “Part 2 – Exclusion.”  Because one-third of the parking garage activity is directly connected with an unrelated trade or business, we back out 1/3 of the income – and have an effect on the employee parking percentage.


Given this sentence (Part 2 – Exclusion), the example College would have $196,000 in costs times 40/200 which still equals $39,200 in UBI times a federal tax rate of 21%.  This also results in UBIT of $8,232 for “parking” (plus whatever the UBIT for the unrelated activity amounts to and we’ll ignore that for now).  But, keep reading!


The third part of new I.R.C. Section 512(a)(7): The Secretary shall issue such regulations or other guidance as may be necessary or appropriate to carry out the purposes of this paragraph, including regulations or other guidance providing for the appropriate allocation of depreciation and other costs with respect to facilities used for parking or for on-premises athletic facilities.


Let’s call this Part 3 – Expenses.  Okay, now we’re cooking.  If we consider the code section from this three-part approach, it does appear that the door may be open for “depreciation and other costs” (as proscribed by “the Secretary”) to be deductible from the imputed income of “Part 1 – Income.”  Certainly the language here is of the type that has historically been used for “expenses” – think dual-use property, etc.


At this point, we have to wait and see what our “Imputed Income” will be.  It appears that this will be determined by Treasury when it defines what items/amounts are “non-deductible” by for-profit taxpayers under I.R.C. Section 274. Then, we need guidance on “other costs” (from our “Part 3 – Expenses”) so we can nail down our deductions from the “Section 274 imputed income.”


Given this sentence (Part 3 – Expenses) – in concert with Parts 1 and 2 above – the example College would have $196,000 in costs times 40/200 which equals $39,200 in UBI.  Their deductions will be at least $60,000 (depreciation) times 40/200 times which equals $12,000.  And, if “the Secretary” has any modicum of tax sense, all of the above expenses would be allocable/deductible netting to a UBTI amount of ZERO for “parking.” Multiplied by a federal tax rate of 21%, this equals UBIT of ZERO.


Then, we still need help to keep hundreds of thousands of exempt organizations from being required to paper-file Form 990-T’s that have ZERO tax.


This approach may simply end up being an option for an “elegant solution” for Congress – but sometimes, that’s exactly the solution that is needed.


More on UBIT and Parking…