IRS Guidance on Parking Expenses for Qualified Transportation Fringes Provides Opportunities for Exempt Organizations

The IRS has released Notice 2018-99, which provides interim guidance to tax-exempt organizations as to how unrelated business taxable income (UBTI) is increased by disallowed parking expenses.  Guidance provided within the Notice may be relied upon until the IRS issues proposed regulations on the issue.


Prior to the passage of the Tax Cuts and Jobs Act (TCJA), certain qualified transportation fringe benefits provided by an employer to an employee could be excluded from the employee’s gross income and still be deducted by the employer.  Such benefits include qualified parking, which is defined as parking provided to an employee on or near the business premises of the employer, or on or near a location from which the employee commutes to work.

The TCJA added IRC § 274(a)(4), which precludes employers from deducting expenses incurred in connection with certain qualified transportation fringe benefits, including parking.  Specifically, effective for expenses paid or incurred after December 31, 2017, qualified parking expenses are not deductible unless the benefit is treated as taxable wages to the employee.

Increase to UBTI

The TCJA also added IRC Section 512(a)(7), which requires an exempt organization to increase its UBTI by any amount for which a deduction for qualified parking is not allowed under IRC Section 274. 

Notice 2018-99

IRS Notice 2018-99 indicates that the method for calculating nondeductible parking expense depends on whether the employer pays a third party to provide parking for its employees or whether the employer owns or leases a parking facility where its employees park. For example, if an employer pays a third party to allow its employees to park at the third party’s parking garage or lot, the disallowed amount is generally the employer’s total annual expense for the employee parking less any amounts treated as compensation to the employee. 

On the other hand, if the employer owns or leases all or a portion of a parking facility where employees park, the disallowance may be calculated using any reasonable method.   However, the IRS does provide within the Notice a four-step method that may be used for calculating the disallowed parking, which the IRS will treat as a reasonable method. 

Tax Planning Opportunities

Although the interim guidance issued by the IRS is welcome, there are still unanswered questions.  However, IRS Notice 2018-99 does provide sufficient guidance to allow most exempt organizations to do tax planning with regard to UBTI from disallowed parking expense.

For example, if the employer pays a third party to allow employees to park in the third party’s parking lot, and the employees pay for the parking using a pre-tax wage reduction option, the employer’s UBTI is based upon the amount of employees’ income exclusion.   If the employer were to eliminate the pre-tax wage reduction program, the employer would also eliminate the parking expense disallowance and related UBTI.

Another opportunity is the special rule enabling many employers who own or lease the parking facility to retroactively reduce the amount of disallowed parking expenses.  Specifically, under this rule, employers have until March 31, 2019 to change their parking arrangements to reduce or eliminate the number of employee reserved spots, which in turn, may reduce the disallowed parking expense (and UBTI).

Perhaps the biggest opportunity involves the “primary use test”.   That is, after accounting for reserved employee spots, if more than 50% of the parking is used by the general public, then the total remaining expense associated with parking does not increase UBTI. 

Please contact your Schneider Downs representative with any questions or if you would like to discuss opportunities to minimize the increase to UBTI from this change.

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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

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