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Nonprofits – Potential UBTI Exposure

Employee Parking Costs for Nonprofits May Be Subject to Unrelated Business Taxable Income

The Internal Revenue Service (IRS) has issued interim guidance to help Tax-Exempt Organizations manage the changes from the 2017 Tax Cuts and Jobs Act (TCJA). The TCJA imposes new taxes on nonprofits that offer qualified transportation fringe benefits to employees.

Qualified Transportation Fringe Benefits Include:

  • Transportation in a commuter highway vehicle used to transport an employee from their residence to their place of employment.
  • A transit pass, such as a bus pass or fare card
  • Any qualified bicycle commuting reimbursement
  • Qualified parking, including parking through a third party or on the organization's premises

Both for-profit and nonprofit organizations may no longer provide employees with these fringe benefits without paying tax on them.  Furthermore, any nonprofit (including churches and synagogues) that pays for employee parking, or owns or leases property in which employee parking is provided, may have to include those costs in unrelated business taxable income ("UBTI").

What is Qualified Parking?

Parking provided to employees on or near the work premises, or parking on or near a location from which employees commute to work by commuted highway vehicle, mass transit or van pool falls under this definition.  Prior to TCJA, an employee could exclude (up to about $260 per month) employer-provided parking as a tax-free fringe benefit and the employer could deduct 100 % of those expenses.  Also, nonprofits did not need to worry about these costs being added to UBTI.  But that is no longer the case.

IRS Guidance

Recently, the IRS issued guidance to nonprofits on this issue.  In that guidance, the IRS clarified two important points:

  1. If the nonprofit organization pays a third party for employee parking, their UBTI generally must include the total amount paid by the nonprofit to the third party. This amount however, is limited to the lesser of that total amount paid or the monthly IRS exclusion limit of $260 per employee, per month. Therefore, only the amount up to $260 per month, per employee, will be considered unrelated business income.
  2. If the nonprofit owns or leases a parking facility or a parking lot, the nonprofit should perform an analysis to determine the potential UBTI to report. While the IRS allows "any reasonable method" in doing this calculation, they suggest a 4-step method:
Step 1:  Reserved Employee Parking Spaces – Included in UBTI

Analyze the parking spaces which are reserved exclusively for the nonprofit's employees versus spaces available for the public. Multiply the reserved parking percentage by the total expense to determine the expense relating to those spaces. This fractional expense will be included in UBTI.

Step 2:  “Primary Use” Test

If the nonprofit has parking spaces which are not earmarked exclusively for employees and are available for the general public (defined as parking spaces not used by employees during a normal business day), then a calculation must be made to determine if the primary use of the parking is considered public. As such, if this calculation determines that greater than 50% of the remaining parking spaces is considered public, then the related parking expenses are not included in UBTI and the analysis is complete. However, if the nonprofit has remaining parking spaces that do not meet the 50% threshold, then additional analysis should be completed in #3 below.

Step 3:  Reserved Nonemployee Parking Spaces – Exempt from UBTI

After taking into account the parking spaces reserved exclusively for the nonprofit’s employees (see # 1 above), the nonprofit should then consider any parking spaces which are reserved solely for the public (i.e. “Client or Customer Parking Only”). Then they should use that fraction ("Client parking only" spaces over the remaining parking spots not reserved from #1) to determine the amount of parking expense that will not be included in UBTI.  

Step 4:  Determine Remaining Use and Allocable Expenses

Lastly, and after analyzing #1 - #3 above, if there are any remaining parking spaces to account for, the nonprofit should determine the amount and use. The remaining spaces use will be based upon the use of the spaces during the normal hours of a typical day. The amount of employee usage will determine how much of the remaining unallocated parking costs to be included in UBTI.   

IRS Consideration and Penalty Relief

The IRS acknowledges that this guidance as to the above information was provided late to nonprofits in the year.  As a result, the IRS is allowing employers until March 31, 2019, to change their parking arrangements so as to reduce or eliminate the number of employee reserved parking spaces. This change may reduce or eliminate UBTI for some nonprofits.

In addition, the IRS is providing estimated tax penalty relief for 2018 to nonprofits that offer these benefits to their employees and were not required to file a Form 990-T in the prior year.


In summary, nonprofits are no longer allowed to provide parking for their employees without including some allocation of the parking costs in UBTI.  Although Congress intended for these new tax rules to simplify the tax code, they clearly create new complexity for nonprofits. A proposed bill is currently before Congress that would repeal this tax on parking fringe benefits. Until Congress moves on this bill, nonprofits will need to determine if they are subject to UBTI on parking fringe benefits provided to their employees.

Contact your Whittlesey Advisor to discuss strategies for managing these new tax rules and their applicability to your organization.

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