New Guidance on Tax Reform’s Impact on Parking: A Summary for Tax-Exempt Employers


The Tax Cuts and Jobs Act of 2017 (the Act) made very significant changes to the taxation of employers on qualified transportation fringes (QTFs) that they offer to their employees. QTFs, which are not taxable to the employee, include “qualified parking,” which is defined as parking on or near the business premises of the employer or on or near a location from which the employee commutes to work. Qualified parking does not include any parking on or near the employee’s residence.

As amended by the Act, Internal Revenue Code Section 274(f) generally disallows an employer’s deduction for expenses with respect to the cost of QTFs provided to employees, effective January 1, 2018. In a companion provision directed at tax-exempt employers, new Code Section 512(a)(7) indicates that the cost of employer-provided parking must be added to the employer’s unrelated business taxable income (UBTI). However, the Act doesn’t address how to determine the amount of the cost of employer-provided parking, and this question had been unanswered for almost a year until the IRS recently issued Notice 2018-99. In addition, Notice 2018-100 provides some relief from underpayment of estimated income tax with respect to UBTI resulting from employer-provided parking.

This article is intended to provide a practical guide for determining the amount of UBTI resulting from employer-provided parking, according to the provisions of this Notice. It is divided based on two categories of employer-provided parking: (a) when the employer pays a third party for employee parking spots and (b) when the taxpayer owns or leases all or a portion of a parking facility that is available for employee parking.

Parking that is Taxable to the Employee Does Not Give Rise to UBTI

Before we delve into the rules that apply to these two situations, it is important to note that the cost of parking that is taxable to the employee is not added to UBTI. However, this exception does not apply to parking provided on a pre-tax basis to employees under a salary reduction agreement.

What is the Cost of Parking When the Employer Pays a Third Party for Employee Parking Spots?

In this case, the amount subject to UBTI is the amount paid to the third party, except to the extent that the payment exceeds the Section 132(f)(2) monthly limitation, and therefore is taxable to the employee. For 2018, the amount of this limitation is $260 per month. For 2019, it is $265 per month.

What is the Cost of Parking Provided to Employees When Employer Owns or Leases a Parking Facility?

Notice 2018-99 allows employers to use “any reasonable method” to calculate the cost of parking provided to employees when the employer owns or leases all or part of a parking facility, although it states that the value of the parking is not a reasonable method for determining the cost. The Notice then sets forth a four-step method that is deemed to be reasonable. Notice 2018-99 contains some very helpful examples that illustrate the application of these rules.

“Parking facilities” are defined as “indoor and outdoor garages and other structures, as well as parking lots and other areas, where employees may park on or near the business premises of the employer or on or near a location from which the employee commutes to work.”

The cost of the parking includes, but is not limited to, repairs, maintenance, utility costs, insurance, property taxes, interest, snow and ice removal, leaf removal, trash removal, cleaning, landscape costs, parking lot attendant expenses, security, and rent or lease payments. However, the Notice specifies that the following are not considered part of the cost of parking:

  • Depreciation; and
  • Expenses paid for items not located on or in the parking facility, including items related to property next to the parking facility, such as landscaping or lighting

We recommend that, before calculating the cost of parking, the employer take the first two steps below to see if all of the parking can be excluded from UBTI. If so, it will not be necessary to perform the calculation.

Step 1: Calculate the cost of reserved employee spots

The cost of spots reserved for employees is treated as UBTI. The employer should determine the percentage of reserved employee spots in relation to total parking spots, and multiply this percentage by the total cost of parking.

The Notice provides some potentially very important relief with respect to this step. Until March 31, 2019, an employer that has reserved employee spots may change the parking arrangements (removing signage, etc.) to decrease or eliminate the reserved employee spots. These spots can be treated as unreserved spots retroactively to January 1, 2018.

Step 2: Determine the primary use of the remaining spots

If more than 50 percent of the remaining spots are provided to the general public, then the cost of the remaining parking expenses is excluded from UBTI.

Primary use of the parking spots is tested during the normal hours of the tax-exempt organization’s activities on a typical day. Non-reserved parking spots that are available to the general public but empty during the normal hours of the organization’s activities on a typical day are treated as provided to the general public.

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.

Step 3: Calculate the cost of reserved nonemployee spots

The cost of spots reserved for nonemployees is not treated as UBTI. The employer should determine the percentage of reserved nonemployee spots in relation to total parking spots, and multiply this percentage by the total cost of parking.

Step 4: Determine the remaining use and allocate the cost

If the employer completes Steps 1-3 above and has any remaining parking expenses not specifically categorized as UBTI or non-UBTI, the employer should reasonably determine the employee use of the remaining parking spots during normal business hours on a typical business day. Methods to determine employee use of the remaining parking spots may include specifically identifying the number of employee spots based on actual or estimated usage. Actual or estimated usage may be based on the number of spots, the number of employees, the hours of use, or other measures.

Other Provisions

Providing parking to employees is not considered a separate trade or business for purposes of new Code Section 512(a)(6), which limits the ability of a tax-exempt organization to use a UBTI net loss from one trade or business to offset UBTI net income from a second trade or business. Therefore, if a tax-exempt organization has just one unrelated trade or business that has a net UBTI loss, that loss can be netted against the UBTI that results from qualified parking.

There is a specific deduction of $1,000 that can be taken against UBTI, and it is not necessary to file a Form 990-T if gross unrelated income is less than $1,000. Therefore, if an organization has no unrelated business activity, and the value of its employer-provided parking is less than $1,000, there is no tax and it is not necessary to file Form 990-T. This de minimis exception will be beneficial to some small tax-exempt organizations.

Notice 2018-100 contains relief from the penalty for underpayment of estimated tax for organizations that (a) are subject to tax as a result of treating employee parking as UBTI but (b) did not need to file a Form 990-T for the immediately preceding taxable year. As long as the organization timely files Form 990-T and timely pays the tax, the organization is exempt from the penalty with respect to payments otherwise required to be made on or before December 17, 2018. To claim this waiver, the organization must write “Notice 2018-100” on the top of its Form 990-T.

Finally, it should be noted that the guidance provided by Notice 2018-99 is interim, not final. The Notice states that the IRS intends to publish proposed regulations that will address the determination of employee parking expenses, as well as other issues related to QTFs. However, until then, tax-exempt organizations may rely on the rules set forth in this Notice.

If you have any questions, please contact your regular BNN tax advisor or Drew Cheney at 1.800.244.7444.

Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, investment, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.

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