New Tax Applies to Nonprofit Employee Parking
Mike Batts, CPA
Michele Wales, CPA
Kaylyn Varnum, CPA
Updated April 1, 2019
What is the Nonprofit Parking Tax?
As part of the big tax reform law passed by Congress and signed into law by President Trump in late 2017 (the Tax Cuts and Jobs Act), provisions were added that relate to certain fringe benefits provided by tax-exempt employers to their employees. Those provisions became effective January 1, 2018.
One provision, new Section 512(a)(7) of the Internal Revenue Code, says that tax-exempt employers (churches, charities, etc.) must treat as unrelated business taxable income the cost of providing parking to their employees, subject to IRS
What that means in plain language is that Congress created a federal income tax on the cost of employee parking provided by churches, charities, and other nonprofits.
IRS Issues Guidance December 10, 2018
The IRS issued long-awaited guidance in the form of IRS Notice 2018-99 (the Notice) on the nonprofit parking tax on December 10, 2018. The Notice represents interim guidance. The IRS stated that it intends to issue Regulations on the topic and that taxpayers may rely on the Notice until Regulations are issued. The IRS also requested comments regarding the interim guidance and future Regulations.
Following is a summary of key elements of the Notice as it relates to tax-exempt organizations.
Some High-Level Items of Interest from the Notice
No deferral of the effective date – limited payment relief
Many nonprofit organizations and leaders requested that the Treasury Department defer the effective date to allow time for guidance to be issued and for organizations to be able to interpret and apply the guidance. To the disappointment of many, the Notice does not defer the effective date of the tax. As a result, the tax applies to applicable parking expenses incurred from January 1,
The IRS did issue a separate notice granting very limited relief related to the timing of the payment of the tax for some organizations that are subject to it. The relief applies to organizations that were not required to file federal Form 990-T in the prior year, so long as they pay the tax by the original due date of the return (even if the return is extended) for the current year.
Whether the parking has value is not relevant in determining whether the tax applies
If the tax applies, it applies based on the costs of providing parking for employees. The criteria for determining whether the tax applies has nothing to do with whether the parking has value or whether the parking is in an area where paid parking is prevalent. Some attorneys and CPAs took the position prior to the issuance of the Notice that if an organization’s parking facilities are located in an area where paid parking is prevalent (e.g., in a downtown urban area), the tax might apply, but if the organization’s parking is in an area where paid parking is not prevalent (e.g., in a suburban or rural area), the tax would not apply. That is not the standard used by the IRS in the Notice.
Depreciation is not counted as a cost subject to the tax
Even though the law states that the Secretary (Treasury Department or IRS) will issue guidance on the allocation of costs, including depreciation (depreciation is specifically mentioned in the law), the Notice states that depreciation expense is not to be included in measuring the costs of parking facilities for purposes of calculating the tax. That is an extremely positive
Empty parking spaces are deemed to be used by the general public
The Notice states that when unreserved parking spaces are empty, an organization can consider them as being used by the general public and not by employees. That is a helpful element of
Measurement of the use of a parking facility is made on days and at times when the organization conducts activities
The Notice states that measurement of the use of a parking facility is made on the “typical” days and at times when the organization conducts activities. For example, a nonprofit clinic that normally operates only on Monday through Friday, 8 AM to 5 PM, would measure the use of its parking facilities during those hours on those days. A large church that conducts activities on its campus seven days a week at varying hours would make its calculations of the use of its parking facilities based on the days and times that it conducts activities.
A relevant factor is whether parking spaces are reserved for employees
The Notice provides that parking spaces that are reserved for employees are subject to tax.
A special rule for aggregating parking facilities and spaces
If an organization has multiple parking facilities and spaces in a single geographic location, it may aggregate those facilities and spaces for purposes of the assessment. Organizations with multiple geographic locations (e.g., offices or campuses in multiple cities) may aggregate the facilities and spaces in each location but may not aggregate locations.
Multiple geographic locations
If an organization has multiple geographic locations (e.g., offices or campuses in multiple cities), the organization must determine the parking tax (if any) for each geographic location. The Notice does not clearly define the term “geographic location” for this purpose, although it does refer to locations in different cities as meeting the definition. If an organization has multiple offices or campuses within the same city but that are at distinctly separate locations, it would seem reasonable to consider the distinctly separate locations to be distinct “geographic locations.”
If the tax applies
If an organization is subject to the tax, it is treated as a tax on unrelated business income. An organization must file federal Form 990-T with the IRS and pay the applicable tax if the sum of the following is more than $1,000:
- Parking expenses subject to the tax, and
- Gross revenues from any other unrelated business activities.
Assuming the organization is a nonprofit corporation, the flat federal corporate tax rate of 21% applies (except for fiscal years ending after 12/31/2017 and before 12/31/2018, where a blended rate applies).
Many states require a state corporate income tax return to be filed and tax to be paid (if applicable) when a nonprofit organization subject to their jurisdiction has unrelated business income and files federal Form 990-T. Organizations required to file federal Form 990-T should analyze applicable state filing requirements.
How is the Tax Determined Based on the IRS Guidance in the Notice?
Note – we will use the terms “parking facility” and “parking facilities” in the remainder of this summary to refer to parking garages or parking lots – which include any areas or spaces in which automobiles park.
Also, based on the guidance in the Notice, where we refer to parking by an “employee” or “employees,” those terms include parking by independent contractors who are working for the organization and parking in a parking facility provided by the organization at or near the place of work.
The summary below describes the process for determining the tax for a single location (see explanation above regarding multiple geographic locations). An analysis is required for each location maintained by an organization and the taxable amount for each location is added to determine the total taxable amount for the organization.
Many Organizations Have an Easy Out
For nonprofits that have one or more parking facilities in a single location (e.g., surrounding a single office or campus), they are not subject to the tax with respect to parking at that location if the following two criteria are both met:
- The organization has no parking spaces reserved exclusively for employee use.
- A majority of the use of the parking facilities is by the general public. (For purposes of this tax, the term “general public” means anyone other than employees of the organization. As mentioned above, empty/unused unreserved parking spaces are deemed to be used by the general public.)
Organizations that do not meet both of the above criteria must perform further analysis to determine if they are subject to the tax.
Cost Information Needed to Compute the Tax
If a nonprofit does not meet the “easy out” criteria described above, then it must gather cost information to determine the amount subject to the tax.
Nonprofits that Pay a Third Party for Employee Parking Spots
When a nonprofit pays a third party for employee parking spaces, the information needed to compute the tax on those parking spaces is relatively simple. The taxable amount is the total amount paid for the tax year (but only from January 1,
Nonprofits that Own or Lease All or Part of Parking Facilities Where Its Employees (and Potentially Others) Park
When a nonprofit owns or leases its parking facilities, it must first determine its total parking expenses.
“Total parking expenses” include, but are not limited to, the portion of the following expenses allocable to the organization’s parking facilities that are paid or incurred during the tax year (but only from January 1,
- Rent or lease payments
- Utility costs
- Property taxes
- Snow and ice removal
- Leaf removal
- Trash removal
- Landscape costs
- Parking lot attendant expenses
As noted above, depreciation expense is not to be included in determining total parking expenses.
In determining the amount of these expenses that are allocable to parking facilities, the Notice allows for “any reasonable method” to be used. This will be the most difficult aspect of compliance for most nonprofits that are subject to the tax. Determining the appropriate portion of such costs to allocate to parking facilities will most certainly require estimates and approximations.
Calculating the Tax
Armed with the cost information described above, the organization is ready to calculate the amount subject to tax…and the tax itself.
First, the organization should determine the total number of all parking spaces, including those reserved for employee use.
Next, the organization should determine the number of parking spaces reserved for employee use.
Note that if an organization has reserved parking spaces for employees, a portion of the organization’s total parking expenses will be subject to the tax. The only way an organization that has reserved employee parking can avoid the tax and the federal Form 990-T filing requirement entirely is if the sum of the following is less than $1,000:
- Parking expenses allocable to reserved employee parking,
- The taxable amount from unreserved parking spaces (see below), and
- Gross revenues from any actual unrelated business activities.
Next, the organization must determine the taxable portion of its total parking expenses attributable to both (a) employee use of reserved parking spaces and (b) employee use of spaces other than those reserved for employee use.
The Notice provides a “safe harbor” method that, if followed, is deemed to be a reasonable method for computing employee parking expenses subject to the nonprofit parking tax.
The basic premise of the IRS’ safe harbor method is to allocate a portion of the total parking expenses to the spaces reserved for employee parking, and then determine if the remaining portion of the parking facility is primarily used (more than 50%) to provide parking to the general public. (As noted above, when unreserved parking spaces are empty, an organization can consider them as being used by the general public and not by employees.)
If the portion of the parking facility not reserved for employee use is deemed to be used primarily by the general public, then the parking expenses related to that parking facility (other than those allocable to reserved employee spaces) are not subject to the nonprofit parking tax.
Alternatively, if the use of the remaining portion of the parking facility is primarily by employees, then the portion of the organization’s total parking expenses allocable to the employees’ use of the spaces in the facility not reserved for employee use is subject to the nonprofit parking tax.
The taxable amount determined above is reduced by the value of parking (if any) that is reported as wages to the employees on Form W-2. 
Add it All Up
An organization’s taxable amount for each geographic location includes the portion of its total parking expenses allocable to payments to third parties for spaces used exclusively by employees plus the portion of its total parking expenses allocable to reserved employee parking spaces plus the portion of its total parking expenses allocable to employee use of other parking spaces (but keep in mind special rules described above that allow an organization to disregard the expenses associated with the unreserved portion of a parking facility where the majority of use is non-employee use.)
The sum of the taxable amounts from all geographic locations is the amount of the organization’s parking expenses subject to federal income tax.
Example 1 – A church has a parking lot containing 2,000 spaces, 100 of which are used by employees on a typical weekday and during worship services on the weekend. The lot has no reserved employee spaces. In this situation, because the parking lot has no reserved employee spaces and is not used primarily by employees (employee use is approximately 5%), then the parking lot is considered to be used primarily by the general public and none of the parking expenses are subject to the tax.
- Twist – what if one spot is reserved for the senior pastor?
- 1/2000th of the parking lot is considered to be employer-provided parking, and therefore 1/2000th of the church’s total parking expenses is subject to the tax.
- However, if this amount is less than $1,000, and the church has no other unrelated business activities, then it is not required to file a Form 990-T
- 1/2000th of the parking lot is considered to be employer-provided parking, and therefore 1/2000th of the church’s total parking expenses is subject to the tax.
Example 2 – A nonprofit organization has a parking lot containing 40 spaces, 30 of which are used by employees on a typical weekday. The organization’s offices are closed on the weekend. The lot has no reserved employee spaces. The organization’s total parking expenses for the year are $12,000. Since the organization’s parking spaces are used primarily for employee parking (30/40 = 75%), 75% x $12,000 (or $9,000) of the organization’s parking expenses are subject to the tax.
Additional examples can be found in the BMWL Whitepaper.
We Have Created a Flowchart Tool to Help!
BMWL has developed a Nonprofit Parking Tax Flowchart to assist organizations in computing the amounts subject to the nonprofit parking tax. We recommend that the flowchart tool
Due to the new and complex nature of this issue and the related guidance, updates and/or corrections to the information in this summary may be made in the days ahead. For the most up-to-date information about the Nonprofit Parking Tax, check this website NonprofitParkingTax.com.
Can Something Be Done to Stop This Bizarre New Tax?
While we are ready, willing, and able to assist our clients in complying with this new tax, we at BMWL consider this new nonprofit parking tax to be both bizarre and inappropriate.
It is an income tax assessed on a cost (which in and of itself is bizarre if not unconstitutional) – applied to tax-exempt entities for providing parking to their employees in carrying out their exempt activities. It is hard to imagine a tax that is much more bizarre than that.
Our firm initiated an effort very early on to attempt to have this provision in the law repealed. Other groups have sought repeal as well.
Some members of Congress have been supportive and have filed legislation that would repeal the Nonprofit Parking Tax. Most recently, outgoing House Ways and Means Chairman Kevin Brady filed on November 28, 2018 an amendment to pending tax legislation that would repeal this controversial new tax. The fact that an amendment to repeal the tax was filed by Chairman Brady is particularly important because Brady is thought by many to be the author of the tax. He is the only member of Congress that our firm has found defending it.
Passage of legislation to repeal the nonprofit parking tax faces a number of political hurdles. We are monitoring the repeal effort very closely.
 Federal tax law generally treats employer-provided parking as a nontaxable fringe benefit under Section 132 of the Internal Revenue Code. However, if the value of the parking exceeds a certain inflation-adjusted threshold ($260 per employee per month for 2018, and $265 for 2019), the value in excess of the threshold is generally required to be treated as taxable wages. Generally, parking provided in locations where paid parking is not prevalent (e.g., in a suburban or rural area) is considered to have no value for this purpose. IRS Notice 94-3 provides detailed information about determining the value of employee parking for this purpose.
 See note 1 above.
Mike Batts is a CPA and the managing partner of Batts Morrison Wales & Lee (BMWL), a CPA firm dedicated exclusively to serving the nonprofit sector. Michele Wales is a CPA and the national director of tax services for BMWL. Kaylyn Varnum is a CPA and the assistant national director of tax services for BMWL.