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March 25, 2019


What is the “parking tax”?

The Tax Cuts and Jobs Act (Tax Act) which was signed into law in late 2017 includes the controversial treatment of qualified transportation fringes (QTF). The Tax Act disallows the deduction of QTFs provided by taxpayers to their employees. The tax treatment of QTFs for nonprofit employers will mirror those of for profit employers as an effort to “level the playing field” between for profit and nonprofit organizations. What has been coined the “parking tax” has stirred up some confusion. To help clear up some of the confusion, let’s break it down.

What is a QTF?

  • A QTF could be one of the following:
  • Qualified parking
  • Transit passes
  • Rides in commuter highway vehicles

For the purposes of this article, the focus will be on qualified parking. The IRS defines “qualified parking” as parking provided to employees on or near your business. It does not include parking on or near property used by the employee for residential purposes. The term “employee” is defined as a current or leased employee who provides services on substantially a full time basis for at least one year, including common law employees and officers. Partners, sole proprietors, independent contractors and two percent shareholders are not considered employees under the IRS definition.

An employer may provide a QTF to their employees as a supplement to their employee’s compensation, either in kind, as a reimbursement, or via a compensation reduction arrangement. Under the Tax Act, an employee could exclude the value of qualified parking benefits from their wages up to $260 per month for 2018, which increases to $265 per month in 2019. Unfortunately, nonprofit employers must include the amount of QTF expense that exceeds the portion excluded from the employee’s wages as unrelated business income (UBI). Parking provided to employees through an employer owned parking lot or facility is also considered a QTF.

How is the taxable portion calculated?

Calculating the amount disallowed depends on the circumstances in which the parking benefit is provided. There are a couple of scenarios under which a QTF may be incurred:

Scenario 1: The employer pays a third party directly for employee parking.


  • A nonprofit employer pays a parking facility directly for the nonprofit employees parking at that facility. The employer pays $200 per month for 10 employees in 2018. The total expense is ($200x10) x12 = $24,000. The entire $24,000 is disallowed and should be included as UBI. The employee does not report any taxable income.
  • Consider the same scenario as above, although instead of paying $200 per month, the employer pays $400 per month for 10 employees, equaling $48,000 in 2018. Since the amount per month per employee is more than the threshold of $260, the amount considered UBI is calculated as follows: ($260x10) x 12 = $31,200. The amount in excess of $260 per month, $140, is treated as additional compensation and wages to the employee.

In a nutshell – the first $260 ($265 for 2019) is subject to UBI at the nonprofit employer’s rate and the amount over that is subject to tax at the employee’s rate.

Scenario 2: The employer owns or leases all or a portion of the parking facility.

The IRS states that any reasonable method may be used to calculate the disallowance when parking is provided by an employer who owns or leases the parking lot or facility. There are a couple of caveats to be aware of – using the value of the parking is not a reasonable method, it must be based on the cost, and, beginning Jan. 1, 2019, a reasonable method is one in which reserved employee parking spots must be considered when allocating costs. The IRS published Notice 2018-99 to offer guidance on how to calculate the disallowed QTF expense. The IRS has outlined a four step approach which has been deemed “reasonable”. The steps are as follows:

Step 1: Calculate the disallowance for reserved employee spots. Identify the number of spots that are reserved for employees, these spots may be marked with signage, or segregated by a barrier or limited by terms of access. Determine the percentage of reserved employee spots in relation to the total spots in the facility, this percentage is multiplied by the total parking expenses for the facility, the resulting product is the amount disallowed for reserved parking spots. Employers have through March 31, 2019 to eliminate employee only parking spots retroactive to Jan. 1, 2018.

Step 2: Determine the primary use of the remaining spots. Primary use is 50 percent or more. If the remaining spots are to provide parking to the general public, the total remaining spots are exempt from the disallowance calculation. The IRS defines the “general public” to include customers, clients, visitors, patients, students of an educational institution, and congregants of a religious organization.

Step 3: Calculate the allowance for reserved non-employee spots, when the primary use of the parking facility is not for the general public. If there are spots reserved through signage or other means for visitors, customers or partners and sole proprietors, the amount not disallowed is a percentage of these spots to the total spots, multiplied by the total parking expense.

Step 4: Determine remaining use and allocable parking expenses. Parking expenses may include rent, repairs, maintenance, insurance, property tax, snow and leaf removal, security and attendant expenses. Depreciation is not deemed a parking expense by the IRS, nor are capital improvements such as paving or construction costs. If, after completing steps 1-3, the employer has remaining parking expenses not allocated, the employer must reasonably determine the employee use of the remaining spots on a typical day during normal business hours.

Remember – the amount included as UBI is the cost of providing the parking, not the value.

Example 1: A nonprofit organization owns a parking lot with 100 spaces, and incurs $5,000 in parking-lot related expenses, on a typical day 40 spots are used by employees, 60 spots are typically used by visitors and no spots are specifically reserved.

Step 1 – none of the spots are reserved for employees, nothing to allocate to employee reserved spots.

Step 2 – the primary use is to provide parking to the general public since the primary use is 60% for the general public ((100 – 40)/100). Since the primary use is for the general public none of the $5,000 in parking expenses are subject to UBI.

Example 2: Same scenario as above except 40 spots are reserved for employees through signage.

Step 1 – calculate the disallowed portion for employee spots: (40/100) X 100 = 40%, 40% x $5,000 = $2,000. $2,000 is UBI, since the primary use of the remaining spots is for the general public, that portion of the remaining expenses ($3,000) is not subject to the disallowance.

Example 3: A nonprofit owns a parking lot and incurs $5,000 in related expenses. The lot includes 100 spaces, 10 spaces are reserved for visitors, 20 spaces reserved for employees. The remaining spaces are not reserved, but on a typical day 60 of those spaces are used by employees, and 10 spaces are used by visitors.

Step 1 – 20% of the spaces are reserved for employees, ($5,000 x 20%) $1,000 of total parking expense is UBI.

Step 2 – 60%, of the spaces are used by employees, the primary use is not for the general public since the majority (60/100 = 60%) of total parking expense is disallowed, therefore $3,000 ($5,000 x 60%), is considered UBI.

Step 3 – 10% of the spaces are reserved nonemployee spaces, these spaces are excluded from UBI.

Step 4 – on a typical day 60 of the unreserved spaces are used by employees, so the remaining spaces are available to the general public.

Since the primary use is for employees, the cost subject to UBI is allocated based on the primary use and the reserved employee spots, therefore the total UBI is $4,000.

Now what?

Nonprofit employers that provide parking through owned lots or facilities that do not have employee reserved spaces, and if the primary use is determined to be for the general public, are not subject to the tax. An employer who has reserved employee parking, and if the remaining primary use is not for employee use, signage or other means to designate employee only parking can be removed by March 31, 2019 to be retroactive to Jan. 1, 2018, to avoid the tax.

An organization that has more than $1,000 in disallowed parking expenses may be subject to the tax and should include it on their 2018 990T. Under the current IRS guidance, UBI resulting from a QTF is not considered an “activity” so therefore can be offset by losses from other UBI activity.

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