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Updated Guidance on Determining Nondeductible Amount of Parking Fringe Expenses and Unrelated Business Taxable Income

Jan 25, 2019

After the Treasury Department and the IRS received many questions regarding how to determine the amount of parking expenses that is nondeductible as well as treated as unrelated business taxable income (UBTI), the IRS has issued Notice 2018-99, which provides interim guidance for taxpayers to determine the amount of parking expenses for qualified transportation fringes that is nondeductible under IRC Section 274(a)(4)  and for tax-exempt organizations to determine the corresponding increase in the amount of UBTI under IRC Section 512(a)(7) attributable to those expenses.  The Tax Cuts and Jobs Act had not previously addressed how to determine the amount of the qualified transportation fringe benefits (“QTF”) expense that is nondeductible or treated as an increase in UBTI.  This notice only provides clarification on the parking expenses, and does not impact any of the other QTFs such as transit checks.

The method of determining the nondeductible amount depends on whether the taxpayer pays a third party to provide parking for its employees or the taxpayer owns or leases a parking facility where its employees park:

  • For a taxpayer that pays a third party an amount so that its employees may park at the third party’s parking lot or garage, the nondeductible amount is calculated as the taxpayer’s total annual cost of employee parking paid to the third party. However, if the amount the taxpayer pays to a third party for an employee’s parking exceeds the IRC Section132(f)(2) monthly limitation on exclusion ($260 per employee for 2018; $265 for 2019), that excess amount must be treated by the taxpayer as compensation and wages to the employee, and is not a disallowed amount for the employer and therefore not treated as UBTI for tax-exempt employers.  In simpler terms, the amount that the employee must pay tax on is not considered UBTI to the employer. If a company has one employee who they pay parking expense of $300 per month to a third party, the $40 per month that is taxable to the employee is not UBTI. The UBTI is only $260 per month.
  • Until further guidance is issued, if a taxpayer owns or leases all or a portion of one or more parking facilities where its employees park, the Section 274(a)(4) disallowance may be calculated using any reasonable method. For purposes of this notice, “total parking expenses” include, but are not limited to, repairs, maintenance, utility costs, insurance, property taxes, interest, snow and ice removal, leaf removal, trash removal, cleaning, landscape costs, parking lot attendant expenses, security, and rent or lease payments or a portion of a rent or lease payment, but not depreciation. Using the value of employee parking to determine expenses allocable to employee parking in a parking facility owned or leased by the taxpayer is not a reasonable method.

Notice 2018-99 provides a four-step methodology for determining these expenses that is deemed to be a reasonable method:

  • Step 1. Calculate the disallowance for reserved employee spots. Determine the percentage of the total parking spots which are reserved exclusively for employees and use this percentage to determine the nondeductible expense under Section 274(a)(4).
  • Step 2. Determine the primary use of remaining spots (Primary Use Test). If the primary use of the remaining parking spots in the parking facility is to provide parking to the general public, then the remaining total parking expenses for the parking facility are excepted from the Section 274(a) disallowance by the general public exception under Section 274(e)(7).  “Primary use” means greater than 50% of actual or estimated usage of the parking spots in the parking facility. 
  • Step 3. Calculate the allowance for reserved nonemployee spots. If the primary use of a taxpayer’s remaining parking spots is not to provide parking to the general public, the taxpayer may identify the number of spots in the parking facility, or the taxpayer’s portion thereof, exclusively reserved for nonemployees. The percentage of expenses allocated to these nonemployee spots remains deductible.
  • Step 4. Determine remaining use and allocable expenses. If the taxpayer completes steps 1-3 in the methodology above and has any remaining parking expenses not specifically categorized as deductible or nondeductible, the taxpayer must reasonably determine the employee use of the remaining parking spots during normal business hours on a typical business day.

Until March 31, 2019, taxpayers that have reserved employee spots as defined in this notice may change their parking arrangements (changing signage, access, etc.) to decrease or eliminate their reserved employee spots and treat those parking spots as not reserved employee spots for purposes of this notice retroactively to January 1, 2018.

Notice 2018-99 also announces that the Department of the Treasury and the IRS intend to publish proposed regulations under IRC Sections 274 and 512. The proposed regulations will include guidance on the determination of nondeductible parking expenses and other expenses for QTFs and the calculation of increased UBTI attributable to QTFs.

A second notice, Notice 2018-100, provides relief for tax-exempt organizations from any additions to tax for underpayment of estimated income tax for the portion of unrelated business income tax related to providing these qualified transportation fringe benefits to their employees. This relief applies to all taxable QTFs, not just the ones related to parking.


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Cindy Feder

Cindy Feder is a Director and a member of the Private Client Services Group. She is also a member of the firm’s Philanthropy and Charitable Giving Practice.

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