Parking Costs as Benefits

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IRS Interim Guidance on UBI for Employer-Provided Parking

On December 10, 2018, the IRS issued Notice 2018-99 which provides interim guidance to assist tax-exempt organizations in calculating unrelated business income (“UBI”) from providing parking and other qualified transportation benefits to employees.

Executive Summary

 This 24-page Notice provides insight into the complicated calculation of taxable UBI for exempt organizations that provide certain transportation benefits to employees like parking.  For owned or leased parking lots and/or structures, the Notice proposes a 4-step cost allocation methodology that focuses on reserved spots and public usage.  One of the biggest surprises in the guidance is that depreciation expense is disregarded and does not become part of the taxable UBI.  Notice 2018-100 provides new filers of Form 990-T (defined as an organization that did not file Form 990-T for the year preceding its first taxable year ending after December 31, 2017) with a waiver of the penalty for the underpayment of estimated taxes that were due before December 17, 2018, but only for the tax that the organization owes on its qualified transportation benefits.


Public Law No. 115-97, commonly referred to as the Tax Cuts and Jobs Act (“TCJA”) created Internal Revenue Code (IRC) Section 512(a)(7), which provides that a tax-exempt organization must increase its UBI by the costs of providing certain qualified transportation benefits to employees.  Such transportation benefits include qualified parking, any parking facility used in connection with qualified parking, and certain mass transmit benefits provided to employees.  Section 512(a)(7) is effective January 1, 2018, regardless of the organization’s tax year.  Thus, for example, a tax-exempt organization with a tax year ending June 30, 2018, will have to consider the effect of Section 512(a)(7) for the period from January 1, 2018 to June 30, 2018.

Note that this provision affects every tax-exempt organization that provides qualified transportation benefits, even those organizations like churches that are not required to file Form 990.  The amount of revenue determined under Section 512(a)(7) is to be reported on Form 990-T if the revenue from all of the taxpayer’s UBI, including that of qualified transportation benefits, is at least $1,000.  Many organizations that have never filed Form 990-T will likely have to start doing so for Section 512(a)(7).

It is important to note that TCJA did not change the tax effect to the employee of receiving qualified parking and other transportation benefits from his/her employer.  These benefits remain nontaxable to the employee.  In the case of parking, up to $260 per month is the maximum amount that the employer may exclude from the employee’s taxable compensation; any amount in excess of $260 per month must be treated as taxable wages for the employee.

Congress directed the Treasury to issue regulations to assist taxpayers in calculating the amount of UBI for qualified transportation benefits.  In Notice 2018-99, the IRS states that it is drafting such regulations, but until those regulations are issued, taxpayers can follow the guidance provided in the Notice.

Definitions and Methodologies

  • Definition of employee: The Notice starts by reminding taxpayers that the term “employee” is defined in the Regulations under IRC Section 132 as any individual who is currently employed by the employer including common law employees and other statutory employees such as officers of corporations. Partners, certain S-corporation shareholders, sole proprietors, and independent contractors are not employees for this purpose.
  • “Total parking expenses” defined: The Notice states that “total parking expenses” include, but are not limited to, repairs, maintenance, utility costs, insurance, property taxes, interest, snow and ice removal, leaf removal, trash removal, cleaning, landscaping costs, parking lot attendant expenses, security, and rent or lease payments associated with the parking lot or structure. Conversely, depreciation is not a parking expense as the Notice argues that it is an allowance for exhaustion, wear and tear, and obsolescence of the property.  Thus, tax-exempt organizations do not have to search for costs from constructing or acquiring parking facilities in their records.  Finally, the Notice states that using the value of employee parking to determine expenses allocable to the parking facility owned or leased by the tax-exempt organization is not a reasonable method for determining UBI.
  • Calculation methodology: The Notice then divides the calculation of UBI for parking into 2 areas: (1) the taxpayer pays a third party for employee parking spots; and (2) the taxpayer owns or leases all or a portion of a parking facility. For payments to third parties for parking spots, the UBI is generally calculated as the total amount paid. Note that if the monthly cost per employee exceeds the maximum amount of $260 discussed above, only $260 per month is treated as UBI. Until further guidance is issued, the IRS will allow a tax-exempt organization to use any reasonable method to calculate the UBI when the taxpayer owns or leases a parking facility (parking lots, indoor and outdoor garages/structures, and other areas where employees may park on or near the business premises of the employer).  Taxpayers can aggregate more than one parking facility in a single geographic location but not facilities that are in different geographic locations.

4 Step Process

The Notice sets forth a 4-step process for determining the amount of UBI when the taxpayer owns or leases one or more parking facilities, as follows:

Step 1: Calculate the amount for reserved employee spots

After identifying the total number of spots in the parking facility, the organization should identify the number of spots reserved for employees. Spots may be reserved for employees by a variety of methods, including (but not limited to) specific signage or a separate facility or portion of a facility segregated by a barrier to entry or limited by terms of access.

The taxpayer then determines the percentage of reserved spots to total spots and multiplies the total parking expenses (as defined previously) by that percentage.  The result is the amount of UBI to the taxpayer from reserved employee spots.

The Notice contains a special provision that will allow tax-exempt organizations until March 31, 2019, to change their parking arrangements to decrease or eliminate their reserved employee spots.  If the organization uses this provision, those spots will not be treated as employee-reserved spots retroactively to January 1, 2018.

Step 2: Determine the primary use of remaining spots (the “primary use test”)

If the primary use of the remaining parking spots is to provide parking to the general public, then the remaining total parking expenses are not UBI for the organization. “Primary use” means greater than 50% of the actual or estimated usage of the spots, tested during normal business hours on a typical business day.  The “general public” includes (but is not limited to) customers, clients, visitors, individuals delivering goods or services to the taxpayer, patients of a health care facility, students of an educational institution, and congregants of a religious organization.  The “general public” does not include employees, partners, or independent contractors of the taxpayer.  Additionally, non-reserved parking spaces that are available to the general public but empty during normal business hours on a typical business day are treated as provided to the general public.

It is critical to note that if an organization meets the primary use test (meaning, the percentage of spots remaining after Step 1 that are available to the general public is greater than 50%), it can stop its analysis.  Any remaining total parking costs are not UBI.  If the organization does not meet the primary use test, it must proceed to Step 3 of the calculation methodology.

Step 3: Calculate the amount for reserved nonemployee spots

The taxpayer must next identify the number of spots that are exclusively reserved for nonemployees. The number of nonemployee spots becomes the numerator of the fraction and the denominator is the number of remaining total parking spots after Step 1.  The taxpayer then multiplies the fraction by the remaining total parking costs to determine the portion of the costs that are associated with reserved nonemployee spots.  This amount is not treated as UBI since the parking spots are not for employees.

Step 4: Determine remaining use and allocable expenses

If there are any remaining total parking costs that have not already been designated as UBI or not UBI in Steps 1 through 3, the taxpayer must reasonably determine the employee use of the remaining parking spots during normal business hours on a typical business day. Methods to make this determination may include specifically identifying the number of employee spots based on actual or estimated usage.  The actual or estimated usage may be based on the number of spots, the number of employees, the hours of use, or other measures.


The following example, which is a revised version of Example 9 in Notice 2018-99, will help to illustrate the calculation of UBI.  For purposes of this example, assume that the organization utilizes a calendar year, that we are determining the amount of UBI for calendar year 2018, and that the organization has determined that it has $10,000 of total parking costs for 2018.

Tax-exempt elementary school, J, owns a surface parking lot adjacent to its building.  J’s parking lot has 100 spots that are used by its students, visitors, and employees.  10 spots are reserved for certain employees.  During the normal hours of J’s activities, J usually has approximately 50 employees parking in the lot in non-reserved spaces and the remaining 40 spots are empty.

  1. 10 reserved parking spots out of 100 total spots gives us a 10% allocation ratio, which we then multiply by total parking costs of $10,000. UBI from Step 1 = $1,000 ($10,000 x 10%).
  2. Only 40 of the remaining 90 parking spaces are available to the general public since 50 employees typically park in the lot. The primary use percentage is therefore 44.44%, which means J must continue its analysis by performing Steps 3 and 4.
  3. J has no reserved spots for nonemployees, so this Step does not take any of the remaining costs out as nontaxable.
  4. J has total parking costs remaining of $9,000 ($10,000 total less $1,000 allocated to reserved spots in Step 1). J uses a reasonable allocation method of comparing spots used by employees to the 90 remaining spots.  The percentage of employee spots is therefore 55.56% (50 / 90).  Multiplying that percentage by the total parking costs remaining yields $5,000 of UBI from Step 4.

Thus, the total UBI from this example is $6,000.

Penalty relief

The IRS also released Notice 2018-100 on December 10, 2018.  This Notice provides certain tax-exempt organizations a waiver of the underpayment of estimated tax penalties associated with the tax treatment of qualified transportation benefits.  This penalty relief is only for estimated payments that were required to have been made by December 17, 2018 for the qualified transportation income.  More importantly, penalty relief is only available to those organizations that were not required to file Form 990-T for the taxable year immediately preceding the organization’s first taxable year ending after December 31, 2017 (e.g., no Form 990-T filing requirement for the year ended June 30, 2017 for an organization that is filing Form 990-T for the year ended June 30, 2018).  The IRS instructs taxpayers covered by these relief provisions to write “Notice 2018-100” across the top of page 1 of Form 990-T when it is filed.

M+N Observations

While this guidance is only temporary until the IRS issues Regulations, there are some tax planning opportunities that clients should consider, as follows:

  • When feasible, organizations should consider removing signage and other barriers associated with reserved spaces. This recommendation is especially applicable to smaller organizations that can easily make it known to all employees that they should not park in certain spots that will be occupied by higher-level employees like the President without putting up a sign.  In the proposed calculation methodology, Step 1 (calculating costs associated with reserved employee spots and making that allocation taxable) would be eliminated if an organization has no reserved spots.  Of course, some larger institutions may have separate lots for certain groups of employees, such as a faculty lot at a college or a physicians’ parking lot at a hospital.  Clearly, it is not pragmatic to change those designated areas.
  • Removing depreciation from the total parking costs is clearly beneficial for all exempt organizations. This removal will also allow smaller organizations with few employees to likely be under $1,000 of revenue from Section 512(a)(7).  Note that an organization only has to file Form 990-T if gross unrelated revenue (including that from qualified transportation benefits) is $1,000 or more.
  • Organizations have to be cognizant of the accounting and tax treatment of major repairs to their parking lots and structures. If the accounting and tax rules allow for major repairs which extend the original useful life of the asset to be capitalized, the expenditure will escape the UBI treatment under Section 512(a)(7).  Alternatively, repairs that are expensed will become part of the total parking costs for that year that have to be analyzed for UBI.
  • For organizations that lease their buildings and/or offices, the leases will have to be analyzed to determine if the documents contain a stated amount for parking spaces provided to the lessee. If there is no separate amount stated in the lease, an organization will have to make a good faith estimate of the portion of the lease payments that is attributable to the parking spots.  Such allocated payments will then become part of the “total parking costs” in determining the organization’s UBI from qualified transportation benefits.
  • There has been a considerable amount of discussion since TCJA passed about charging employees for parking in the hope that Section 512(a)(7) would then not be applicable. It is still unclear if this strategy relieves the organization from recognizing and reporting UBI on Form 990-T.  However, Notice 2018-99 states that, for a for-profit organization for which expenses associated with qualified transportation benefits are no longer deductible under IRC Section 274, the deduction disallowance occurs whether the transportation benefit is provided by the employer in-kind, through a bona fide cash reimbursement arrangement, or through a compensation reduction agreement.  It appears reasonable that asking employees to pay for parking would, by extension, still not help the deduction disallowance issue.  The Notice asks the public for comments on any issues associated with transportation benefits for both for-profit and not-for-profit organizations, and we expect that one or more questions about charging employees for parking will be posed to the IRS.  We will keep you informed of any developments.

Final thoughts

The issue of qualified transportation benefits and UBI is still very difficult, even with the new guidance contained in Notice 2018-99.  M+N will be developing a user-friendly spreadsheet to assist clients with gathering parking expenses and doing the UBI calculations.  As always, an M+N team member will be happy to assist you with these issues.  You may also contact Chris Anderson, the author of this article, directly at 216-344-5268 or via e-mail at

The information contained in this article is general in nature and should not be relied upon by anyone for any purpose without consultation with a competent tax professional that is aware of all your specific facts and circumstances.