Case Study: How the New “Parking Tax” Affects Nonprofits


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Back in December of 2018, the IRS and Treasury released a notice on the new “parking tax” enacted under provisions of the 2017 Tax Cuts and Jobs Act (TCJA). How does this notice of proposed interim guidance affect not-for-profit, tax-exempt organizations? Consider the following case study describing the implications for one organization. Please be aware that this new parking tax provision is applicable for all types of nonprofits, not just §501(c)(3) organizations.


The TCJA imposes unrelated business income tax on certain fringe benefits paid by nonprofits including any expenses paid or incurred after December 31, 2017, by a nonprofit for qualified transportation fringe benefits and parking facilities used in connection with qualified parking.

In IRS Notice 2018-99, the IRS set forth what they are considering for inclusion in still-to-be-issued interim guidance. The notice does the following:

  • Lists the types of expenses that are included in “total parking expenses” and specifically excludes depreciation
  • Prescribes a 4-step “safe harbor” calculation method for “reasonably” determining the amount of unrelated business taxable income (UBTI) for a nonprofit
  • Disregards expenses for parking spaces that are not reserved for employees if more than 50% of parking is provided to the “general public”


The Charity Institute (TCI) is a private §501(c)(3) educational institution that has a parking lot with 400 spaces. 40 spaces are labeled “Employee Only” and as such are specifically reserved for employee usage. And 25 are labeled “Visitors Only.” The cost to build the lot 8 years ago was $600,000. It is being depreciated over 15 years. TCI leases a parking lot surveillance system for $36,000 per year. They estimate the aggregate annual compensation of security personnel assigned to the parking lot to be $80,000. In addition, TCI pays $16,000 per year for sweeping/cleaning the lot and utilities for the lot for the year were $4,000. A total of 100 TCI employees drive to work and park in the lot.


Noting that depreciation is specifically excluded by the IRS guidance, TCI calculates its annual parking expenses as follows:

Surveillance $36,000
Security compensation 80,000
Sweeping/cleaning 16,000
Utilities 4,000
TOTAL $136,000


Using the prescribed 4-step safe harbor methodology from IRS Notice 2018-99, TCI calculates its parking unrelated business income as follows:

Step 1: Calculate the disallowance for reserved employee spots.

Forty of TCI’s parking spaces are specifically reserved for employees. Therefore, 10% (40 / 400) of TCI’s total parking expenses are includable as UBTI. That is, TCI must increase its UBTI by $13,600 for this portion of the calculation.

Step 2: Determine the primary use of the remaining spots.

TCI has 360 parking spaces that are not reserved for employees. Of TCI’s 100 employees, 40 could park in reserved “Employee Only” spots and 60 could park in the remaining 360 spots. That leaves 300 of the 360 unreserved spots that may be used by the “general public” during “the normal hours of the exempt organization’s activities on a typical day.” TCI’s Step 2 percentage is 83.33% (300 / 360), which is greater than the 50% threshold. Thus, they are done—they have accounted for all 400 spaces in their parking “universe” and determined the related increase in UBTI.

In this example, if they did not have other unrelated business activities, TCI would owe $2,646 in tax ($13,600 – $1,000 specific deduction = $12,600 x 21%). I could have eliminated their “parking tax” if they had undesignated the “Employee Only” parking spots before March 31, 2019. The Notice allows for this “change in parking arrangements” to be considered retroactive to January 1, 2018.

If TCI had not met the 50% threshold in Step 2, they would have continued to Steps 3 and 4, as follows:

Step 3: Calculate the allowance for reserved nonemployee spots.

If TCI had not met the greater than 50% threshold in Step 2, they would have had the opportunity to decrease the employee allocation of remaining-spot (360 spots (400-40))   use by excluding from the calculation the number of parking spots reserved for nonemployees. In TCI’s case, this would be the 25 spaces labeled as “Visitors Only.” This would mean that 6.94% (25 / 360) of the $122,400 remaining cost ($136,000 – $13,600), or $8,500, of the parking lot costs would not be subject to the tax without further analysis on those 25 spots.

Step 4: Determine the remaining use and allocable expenses.

If TCI had not met the 50% threshold in Step 2, they would have had to “reasonably determine the employee use of the remaining parking spots during the normal hours of exempt organization activity on a typical day.” This is where exempt organizations could see significant additions to their tax liabilities. In TCI’s case, if they did not meet the 50% rule in Step 2, they would have remaining employee use calculated as 60 remaining employees divided by 335 spots (400 – 40 “Step 1 spots” – 25 “Step 3 spots”) multiplied by total parking expenses of $113,900 ( $136,000 – $13,600 – $8,500). This would have added an additional  $20,400 to their imputed UBTI of $13,600 from Step 1.

Another way to look at this calculation is as follows:

Total parking costs for the lot: $136,000
Total spots: 400
Parking costs/spot: $340 per spot
Taxable spots:  
“Employee Only” spots:

40 spots x $340/spot =



+ Remaining taxable employee spots (employee usage in a lot not meeting the 50% public usage exception; see discussion at Step 4): 60 spots x $340/spot =  



Total tax:

$13,600 + $20,400 or 100 taxable spots x $340/spot =




Key Points:

  • With the application of the “50% primary use rule” for general public parking provided in Notice 2018-99, many nonprofits should be able to minimize, if not eliminate, their §512(a)(7) parking tax liability.
  • Nonprofits likely will be liable for the §512(a)(7) parking tax if their parking expenses attributable to “Employee Only” parking spots amount to more than $1,000.
  • Calculating applicable costs in a taxable situation should be done using a reasonable, verifiable methodology that is documented at the time of the calculation. Given the current absence of IRS regulations, the §512(a)(7) parking tax calculation may be done in a manner that differs from what Notice 2018-99 sets forth, but documentation as to how the methodology used meets the tax law is key.
  • Be sure to consult with your accounting, tax, and/or legal counsel about the applicable laws and their effects on your specific facts and circumstances as unrelated business income tax scenarios are very facts-and-circumstances dependent and one scenario may give a very different answer from another.
  • The most challenging scenarios in adopting the provisions of this notice are those faced by nonprofits that lease their facilities without a clear charge or carve-out for “free” parking facilities. The IRS notice is largely silent on this topic. While not authoritative and not a basis for reliance on a tax position, the AICPA comment letter to the IRS on Notice 2018-99 contains a discussion of the AICPA’s comments on the following:
    • Parking tax on leased property that does not have the parking costs carved out
    • Calculating parking tax on leased property that is part of a multi-tenant building
    • Calculating parking tax on a multi-use parking facility
  • Many nonprofit organizations remain committed to efforts to have Congress repeal the §512(a)(7) tax.

For more information on the effects of the TCJA on tax-exempt organizations, visit the Not-for-Profit Section’s Tax Compliance Resource Library



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