Client Alert: IRS Guidance Clarifies Scope of New Excise Tax on Parking Lots

Written by: Sharon C. Lincoln

By: Sharon C Lincoln

Among the many revenue raising measures imposed on the tax-exempt sector in the Tax Cuts and Jobs Act (TCJA), Internal Revenue Code § 512(a)(7), imposes an excise tax at the new corporate income tax rate (21%) under the unrelated business income tax (UBIT) rules on expenditures made to furnish certain employee benefits, included among which are qualified transportation fringes that are not deductible under IRC § 274(a)(4).  

As tax-exempt organizations complete their annual information returns for tax years beginning after December 31, 2017, they may find it helpful to consider IRS Notice 2018-99.  This Notice contains recent guidance from the Internal Revenue Service regarding this new excise tax and its applicability to tax-exempt employers that provide qualified transportation fringes, particularly those that furnish or subsidize parking for employees. 

Brief Overview of the New Excise Tax

Internal Revenue Code § 274 – which permits taxable employers to deduct certain employee-related expenses to offset taxable income – has historically been largely irrelevant to tax-exempt employers whose income is not subject to federal income tax.  However, in a two-part move, the TJCA made it immediately relevant to tax-exempt organizations that offer certain fringe benefits to their employees.

First, the TJCA amended IRC § 274 to provide that employers may no longer deduct certain employee-related fringe benefits, including the expense of any qualified transportation fringes (QTFs) provided to employees, effective for tax years beginning after December 31, 2017.   

QTFs include (1) transportation in a commuter highway vehicle between the employee’s residence and place of employment, (2) transit pass, and (3) 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.

Second, in a measure intended to put tax-exempt employers on par with their taxable counterparts, the TJCA added IRC § 512(a)(7), which provides:


Increase in unrelated business taxable income by disallowed fringe

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)). 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. (underline emphasis added)

Essentially, in a creative twist, IRC § 512(a)(7) establishes that certain expenses paid or incurred by tax-exempt organizations shall be treated as unrelated income and taxed under the UBIT rules. 

Although employees maintain their ability to exclude non-cash qualified transportation fringe benefits from their income under IRC § 132(f) – up to the annual established limit, which for 2018 was $260 per month – the fact that such benefits result in tax liability for the tax-exempt employer may cause such employers to re-examine their transportation-related employee benefits.  (Organizations in municipalities such as New York City, Washington, D.C., and San Francisco, where employers are required to offer certain QTFs, do not have this choice.)

There are two exceptions to the new tax on qualified QTFs.  If the fair market value of the QTF exceeds the limit in IRC § 132(f) ($260 in 2018), then any excess must be treated as compensation to the employee and is not taxable to the tax-exempt employer.  Also, expenses for parking that is made available to the general public are exempt from the new tax.

It is worth noting that while the fair market value of the parking benefit is used to determine whether the QTF exceeds the IRC § 132(f) limit, the tax on the tax-exempt employer is based on the expenses incurred in connection with providing that parking benefit.

IRS Notice 2018-99

This guidance, issued shortly before the government shutdown in December 2018, provides interim answers to several questions left open by the plain language of the new law:

  • What is a “parking facility”?  
    • A “parking facility” includes 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 near a location from which the employee commutes to work.  The facility can be owned by the employer, an affiliate of the employer, or by a third party, so long as employees park in some or all of the facility.
  • Can the value of employee parking be used to determine expenses allocable to employee parking in a parking facility owned or leased by the tax-exempt employer?
    • No.  The tax under IRC § 512(a)(7) must be calculated based on the total parking expenses incurred in connection with providing the parking.
  • What are “total parking expenses”?
    • Total parking expenses are expenses paid by the employer that include (but are not limited to) repairs, maintenance, utility costs, insurance, property taxes, interest, snow and ice removal, leaf removal, trash removal, cleaning, landscaping, parking lot attendant expenses, security, and rent or lease payments. 
  • Is an exempt organization liable for tax only to the extent of amounts excluded from an employee’s compensation as a QTF under section 132(f)?
    • Yes.  As described above, if the value of the QTF exceeds the IRC § 132(f) limit, then any excess must be treated as compensation to the employee and is not taxable to the tax-exempt employer.
  • Are parking facilities that are open free of charge to customers and/or the general public as well as to employees on an equal basis subject to this provision?
    • If the primary use of the parking facility is to provide parking to the general public, then the total parking expenses are exempt from the excise tax (except for expenses related to any spots specifically reserved for employees).  “Primary use” means greater than 50% of actual or estimated usage of the parking spots in the parking facility that are not specifically reserved for employees.
  • What is the method by which to allocate costs related to dual-use facilities (e.g., mixed customer (or patients), general public, and employee use)?
    • If the primary use is by employees, then the tax-exempt employer will need to allocate the costs related to employee use of the parking facility pursuant to any reasonable method.  A safe harbor method for making this determination is outlined in the Notice (described below).
  • Can parking expenses be aggregated among multiple parking facilities?
    • Yes, to a limited extent.  Parking expenses related to parking facilities located in a single geographic location may be aggregated; those that are in different geographic locations (e.g., different cities) may not be aggregated.


The Notice states that “any reasonable method” may be used to calculate the IRC § 274(a)(4) disallowance (which corresponds to the amount of parking expenses taxable under IRC § 512(a)(7)). 

The Notice also provides that the provision of QTFs that results in an increase in unrelated business taxable income (UBTI) under IRC § 512(a)(7) is not an unrelated trade or business and therefore a tax-exempt organization with one unrelated trade or business and an increase in UBTI under IRC § 512(a)(7) does not have more than one unrelated trade or business for purposes of the “siloing rule” of IRC § 512(a)(6).  In addition, if a tax-exempt organization’s gross UBTI (including expenses calculated under IRC § 512(a)(7)) is less than $1,000, it does not need to file IRS Form 990-T and no UBIT is due.

Safe Harbor

The Notice provides a safe harbor in the form of a four-step method by which an organization may calculate the expenses related to the use of the parking facility by the organization’s employees:

First, calculate the parking expenses for reserved employee spots.  This involves identifying the number of spots in the parking facility (or the employer’s portion thereof) exclusively reserved for the organization’s employees (“reserved employee spots”).  This includes, but is not limited to, spots identified by specific signage or located in a portion of a parking facility clearly designated as reserved for employees.  The tax-exempt employer must then determine the percentage of reserved employee spots in relation to total parking spots and multiply that percentage by the taxpayer’s total parking expenses for the parking facility.  The product is the amount of the total parking expenses related to reserved employee spots that is subject to the excise tax.

For taxable years beginning on or after January 1, 2019, any method that fails to allocate expenses to reserved employee spots is not a “reasonable method” under the Notice.  However, if a tax-exempt employer currently has reserved employee spots, it has until March 31, 2019 to remove any signage or other demarcation related to those spots in order to apply that change retroactively.

Second, determine the primary use of the remaining spots (the “primary use test”).  The purpose of this is to determine whether the primary use (defined as “greater than 50% of actual or estimated usage”) of the parking spots in the parking facility is to provide parking to the general public.  This is tested “during normal business hours on a typical business day” or, if the actual or estimated usage of the parking spots varies “significantly between days of the week or times of the year” then any reasonable method may be used to determine the average actual or estimated usage.  If the primary use of the parking spots in the parking facility is greater than 50%, then the excise tax does not apply to the parking expenses related to the remaining spots.

For the purpose of the Notice, the “general public” includes but is not limited to the following:  customers, clients, visitors, vendors, patients of a healthcare facility, students of an educational institution, and congregants of a religious organization.  The general public does not include employees or independent contractors.

Third, calculate the allowance for reserved nonemployee spots.  If the primary use is of an organization’s remaining parking spots is not to provide parking to the general public, then the organization may identify the number of spots exclusively reserved for nonemployees (“reserved nonemployee spots”).  The Notice states that these include spots reserved for visitors and customers.  These spots may be reserved by a variety of methods, including, but not limited to, specific signage, a separate parking facility or a portion of a facility segregated by a barrier to entry or otherwise with limited access.

The organization may then determine the percentage of reserved nonemployee spots in relation to the remaining total parking spots and multiply that percentage by the organization’s remaining total parking expenses.  The product is not disallowed under IRC § 274(a)(4) and therefore is not taxable to the tax-exempt organization.

Fourth, determine the remaining use and allocable expenses.  If there are any remaining parking expenses after completing steps 1-3  of the safe harbor, the organization must reasonably determine employee use of the remaining parking spots during the normal hours of the tax-exempt organization’s activities on a typical day and the related expenses allocable to such employee spots. 


The premise of this new excise tax is that there should be parity between commercial enterprises and tax-exempt organizations.  The Notice quotes the House Committee’s report, which states “The Committee believes that aligning the tax treatment between for-profit and tax-exempt employers with respect to nontaxable transportation and gym benefits provided to employees will make the tax system simpler and fairer for all businesses.”  H.R. Rep. No. 115-409, at 266 (2017).  However, it is unclear how these new rules – which add significant complexity to the tax-exempt sector – add simplicity and fairness to the commercial sector. 

Unless engaged in commercial activities, tax-exempt organizations generally are not intended to be on par with commercial enterprises, since they are very different types of organizations.  Tax-exempt organizations are limited as to the types of activities in which they may engage and the sources of earned revenue that they may pursue, which explains why they are subject to close oversight by the Internal Revenue Service.  Further, unlike commercial corporate enterprises that saw their tax rate plummet to 21% due to the TJCA, tax-exempt organizations became subject to a host of new excise taxes under the TJCA. 

A measure was introduced in the House of Representatives in December 2018 to repeal IRC § 512(a)(7) but it did not pass the Senate.  More recently, Independent Sector submitted comments to the IRS and Treasury regarding the guidance contained in the Notice and urged a delayed implementation of the new excise tax, highlighting several open issues related to the new law.  These comments reported that a recent study by the Urban Institute and Georgetown University that surveyed over 700 nonprofit organizations noted that the new tax on QTFs will “divert an average of about $12,000 away from each nonprofit’s mission per year.”  Many religious organizations have expressed dismay over the new parking excise tax, due to its cost as well as due to the fact that religious organizations are not generally required to file Forms 990. 

We Can Help You

Contact us today to learn more about how the attorneys at Casner & Edwards can help you with your legal needs.

Let's Talk