Interim IRS Guidance Clarifies Qualified Transportation Fringe Benefits for Not-for-Profit Organizations

The IRS issued Notices 2018-99 and 2018-100 (the Notices) to provide interim guidance related to the new source of unrelated business taxable income (UBTI) from qualified transportation fringe (QTF) benefits. Following a comment period, the IRS intends to issue proposed regulations.

Until the regulations are issued, tax-exempt organizations that own or lease employee parking facilities may use any reasonable method to determine the amount to include in UBTI, and they may rely on the guidance provided in the Notices. However, for taxable years beginning on or after January 1, 2019, a method that fails to allocate expenses to reserved employee spots can’t be a reasonable method.

Here’s a look at guidance included in the Notices and potential impacts on organizations and employers.


The 2017 tax reform reconciliation act, also known as the Tax Cuts and Jobs Act (TCJA), created a new source of UBTI for some tax-exempt entities.

With the addition of Section 512(a)(7) to the Internal Revenue Code, many tax-exempt organizations are now required to increase their UBTI by the cost attributable to employee parking expenses incurred after December 31, 2017.

Areas to review for potential QTFs to include in UBTI include the following:

  • Transportation in a commuter highway vehicle between the employee’s residence and place of employment
  • Transit passes
  • Qualified parking, which can include parking spaces owned by the employer or leased from a third party

Benefits for Employers

The Notices provide several important benefits for employers.

Tax Treatment

The normal additions to tax for underpayment of estimated tax won’t be assessed if an underpayment results from the changes to the tax treatment of QTFs. This exception applies only for tax-exempt organizations that weren’t required to file Form 990-T to report UBTI for the previous tax year which ended before January 1, 2018, and payments required to be made on or before December 17, 2018.

Parking Requirements

Parking made available by the tax-exempt organization to the general public is not a QTF.  To meet this standard, an organization needs to have unreserved parking at least 50% of which is actually or estimated to be used by the general public during the organization’s normal operating hours. The term general public includes, but isn’t limited to:

  • Customers, clients, visitors, individuals delivering goods or services to the exempt organization, patients, students and congregants
  • Empty, unreserved spaces are also counted as used by the general public

The term general public doesn’t include employees, partners, or independent contractors of the tax exempt organization.


Employers have until March 31, 2019, to change parking arrangements and reduce or eliminate the number of parking spots reserved for employees. The change can retroactively apply to past dates, dating back to January 1, 2018.

Reminders and Clarifications

The Notices include a few reminders and clarifications for reviewing transportation benefits:

  • Maximum monthly amounts. QTFs have a maximum monthly amount, per employee, of $260 for 2018—indexed for inflation. The fair market value of the benefit provided above that threshold continues to be taxable income to the employee and isn’t a QTF that’s included in the UBTI calculation.
  • Expense deductions. Section 274(a)(4) disallows a deduction for expenses incurred for QTFs, regardless of whether the benefit is provided by the employer in-kind, through a bona fide cash reimbursement arrangement, or through a compensation reduction agreement. A tax-exempt employer may be subject to UBTI if employees are allowed to use pretax funds to purchase QTFs.
  • Cost. Determining the amount of UBTI is based on cost, not on fair market value. Therefore, there may be UBTI even in cases where no one is required to pay for parking, or if there’s plenty of free parking in the surrounding area.
  • Unrelated trades or businesses. Any expense directly connected with an unrelated trade or business isn’t considered for the QTF calculation.

Determine UBTI

Notice 2018-99 provides a four-step process for determining if there are QTFs that should be included in UBTI. It also provides several examples to help tax-exempt organizations determine the ratio of total parking expenses to include in UBTI. Generally, an organization will have UBTI from QTFs if they have either of the following:

  • Reserved parking for employees
  • Parking that doesn’t meet the primarily for general public test

Total Parking Expenses

If an organization determines it has QTFs that qualify as UBTI, Notice 2018-99 states that a portion of total parking expenses must be included in the UBTI. Total parking expenses include, but aren’t 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 if it isn’t broken out separately. 

Parking Structure Depreciation

Favorably, the Notice clarifies that depreciation on a parking structure is excluded from total parking expenses. Expenses paid for items that aren’t located on or in the parking facility, including items related to property next to the parking facility—such as landscaping or lighting—are also excluded.

Taxable Compensation

The notice doesn’t directly address whether employers can avoid UBTI by treating the benefit as taxable compensation to the employee, or by changing a pretax benefit to an after-tax employee deduction.

We’re Here to Help

For more information about guidance relating to Notices 2018-99 and 2018-100 or QTFs that qualify as UBTI, contact your Moss Adams professional.

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