Two recent Treasury Notices1 provide interim guidance to nonprofits trying to calculate (or seeking to avoid) the tax they may have to pay for the provision of certain parking and public transit benefits to their employees, even if the tax-exempt organization does not otherwise pay any unrelated business income tax (UBIT). In addition, the guidance waives penalties for certain nonprofits that failed to pay quarterly estimated taxes relating to such amounts.

Known as the "Church Tax" (with many praying for its repeal), under section 512(a)(7),2 an organization's unrelated business taxable income (UBTI) is increased by any amount for which a deduction is not allowed under section 274 and which is paid or incurred after December 31, 2017 for the provision to an employee of any qualified transportation fringe benefit (QTF). QTFs include transportation in a commuter highway vehicle between the employee's residence and place of employment, any transit pass, and "qualified parking." Qualified parking is 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 term does not include any parking on or near property used by the employee for residential purposes.

Section 512(a)(7) is intended to place tax-exempt organizations on par with taxable organizations for which such expenditures are now disallowed. So, the tax does not apply to the extent that the amount paid or incurred is directly connected with an unrelated trade or business regularly carried on by the organization. The amount is already non-deductible from such UBTI under section 274.

Also, as detailed below, expenses for parking made available to and primarily used by the general public will not give rise to UBTI under section 512(a)(7) (and it's not too late to take down those "employee parking only" signs, which can be deemed effective for all of 2018).

The provision of QTFs that results in an increase in UBTI is not itself an unrelated trade or business. Notice 2018-99 provides that an exempt organization with only one unrelated trade or business and an increase in UBTI under section 512(a)(7) still has only one unrelated trade or business. Pursuant to the Notice, until further guidance is issued, a tax-exempt organization with only one unrelated trade or business can use deductions and net operating losses therefrom to reduce the increase to UBTI under section 512(a)(7). While not covered in the Notice, organizations with two unrelated trades or businesses, for example, presumably could take the position that it is reasonable to use deductions and losses from either or both such operations to reduce the increase to UBTI under section 512(a)(7).

Note that Notice 2018-99 states that the threshold amount of $1,000 for filing a Form 990-T, Exempt Organization Business Income Return, applies to UBTI calculated with respect to section 512(a)(7). Separately, the $1,000 specific deduction as a modification to UBTI can be applied against an increase in UBTI determined under section 512(a)(7).

Interim Guidance - Calculating UBIT on Parking Benefits

Notice 2018-99 provides interim guidance for taxpayers to determine the amount of parking expenses for QTFs that is nondeductible under section 274(a)(4) and for tax-exempt organizations to determine the corresponding increase in the amount of UBTI under section 512(a)(7) attributable to the nondeductible parking expenses. Generally, nonprofits are advised that until proposed regulations are issued, tax-exempt organizations that own or lease parking facilities where their employees park may use any reasonable method (as provided in the Notice) to determine their increase in UBTI under section 512(a)(7).

Notice 2018-99 provides that the method used to determine parking expenses depends whether the organization pays a third party to provide parking for its employees or the organization owns or leases the parking facility or facilities where its employees park. This includes parking lots and other surface parking areas as well as indoor and outdoor garages and other structures, but it does not include parking on or near property used by employees for residential purposes. Parking in the same geographic location may be aggregated to determine the number of parking spots, but parking in different geographic locations may not be aggregated.

Also, for purposes of the notice, total parking expenses include repairs, maintenance, utility costs, insurance, property taxes, snow, ice, trash and leaf removal, cleaning, parking lot attendant expenses, and rent or lease expenses, but not depreciation. 

Tax-Exempt Organization Pays Third Party for Employee Parking Spots

If the organization pays a third party for employee parking in a parking lot or garage, the amount disallowed under section 274(a)(4) is the employer's total annual cost of employee parking paid to the third party. If the amount exceeds the section 132(f)(2) monthly limitation on exclusion from employee gross income ($260 per employee per month in 2018, $265 for 2019), the excess amount (1) must be treated as compensation paid to the employee and (2) does not give rise to UBTI.

Tax-Exempt Organization Owns or Leases Parking Facility

If the organization owns or leases all or a portion of one or more parking facilities where employees park, the QTF expenses may be calculated using any reasonable method (regardless of the value of the parking). Notice 2018-99 provides a four step method for determining parking expenses that, if followed, will be deemed reasonable, along with ten examples applying the four steps. (Using the value of the employee parking provided is not a reasonable method.)

Step 1 - Reserved Parking Spots

Step 1 - calculate the disallowance for employee parking spots used exclusively for employee parking. These spots may be identified by signage (e.g., "Employee Parking Only") or barriers to entry (e.g., gates). The percentage of reserved spaces in relation to total parking spots must be determined and total parking expenses are then allocated to the reserved spots. 

Organizations have until March 31, 2019 to change their parking arrangements to decrease or eliminate reserved parking spots, which will be deemed to have occurred, retroactively, as of January 1, 2018. Importantly, however, for taxable years beginning on or after January 1, 2019, a method that fails to calculate expenses for reserved spots using this Step 1 will not be deemed reasonable.

Step 2 - Determining Primary Use

Step 2 - determine the primary use of the remaining, unreserved spots. Primary use means greater than 50% of actual or estimated use tested during the normal business hours on a typical business day. What a typical business day consists of depends on the nature of an organization's exempt activities. A normal business day for a grant-making foundation might be Monday through Friday, between the hours of 9 A.M. to 5 P.M. A tax-exempt hospital's normal business hours may be 365 days a year on a 24/7 basis. Also, normal business hours will likely differ from parking lot to parking lot for organizations that conduct different activities on the same campus, such as a hospital with 24/7 acute care operations and outpatient programs operated Monday through Friday and during daytime hours only.

If the remaining, non-reserved parking spots are used primarily by the general public, then all of the remaining parking expenses will not be treated as UBTI. Unused spaces available for use by the general public but empty are treated as provided to the general public. Further, if use varies from day to day the organization may use any reasonable method to determine average actual or estimated use.

The notice defines "general public" to include "customers, clients, visitors, individuals delivering goods or services to the [organization], 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 [organization]."

Ambiguity exists with respect to faculty of a college or university or medical staff members of a hospital who are neither employees nor independent contractors with respect to the university or hospital. It is common for these classes of individuals to have reserved parking.

Step 3 - Allowance for Reserved Nonemployee Spots

Step 3 - if the primary use of the remaining, unreserved spaces is not by the general public, identify the number of spots in the parking facility (or the organization's portion thereof) exclusively reserved for nonemployee visitors and customers. As with reserved spots, spots in a parking lot or facility can be reserved by signage (e.g., "Customer" or "Patient" or "Student" "Parking Only"). 

If the organization has reserved nonemployee spots, it may determine the percentage of nonreserved spots in relation to the total remaining spots and apply that percentage against the expenses for the nonreserved employee spots. Such non-employee parking expenses will not be UBTI.

Step 4 - Remaining Use and Allocable Expenses

Step 4 - allocate between employee and nonemployee use any remaining parking expenses not specifically characterized as UBTI or not.

Estimated Taxes

Section 512(a)(7) may result in tax-exempt organizations owing UBIT and having to pay estimated income tax for the first time.

"In the interest of sound tax administration," Notice 2018-100 provides certain tax-exempt organizations with a waiver of the addition to tax under section 6655 for underpayment of estimated income tax payments required to be made on or before December 17, 2018, to the extent the underpayment of estimated income tax results from the changes to the tax treatment of QTFs. The relief applies to tax-exempt organizations that (1) provide QTFs to an employee for which estimated income tax payments, affected the changes to sections 274 and 512, would otherwise be required to be made on or before December 17, 2018, and (2) were not required to file a Form 990-T for the taxable year preceding the organization's first taxable year ending after December 31, 2017. The relief is further limited to tax-exempt organizations that timely (1) file Form 990-T and (2) pay the amount reported for the taxable year for which relief is granted.

To claim the waiver, the tax-exempt organization must write "Notice 2018-100" on the top of its Form 990-T.


Treasury Notices 2018-99 and 2018-100 provide interim guidance, planning opportunities, and a sturdy reminder about estimated tax requirements, while leaving a host of open questions. For example, nonprofits may wish to remove unnecessary "employee parking only" signage if doing so would reduce or even eliminate their tax liability under section 512(a)(7). Others might consider what deductions and losses from one (or more?) unrelated trades or businesses could be used to offset UBIT arising from section 512(a)(7). In all cases, tax-exempt organizations should be aware of their quarterly estimated income tax payment obligations, if any.


1 Notice 2018-99 and Notice 2018-100, both issued on December 10, 2018.

2 All section references are to the Internal Revenue Code of 1986, as amended.

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