Interim Guidance Released! Fringe Benefit Expenses for Not-for-Profits

The Internal Revenue Service (“IRS”) has issued Notice 2018-99 (“Notice”) which provides long-awaited interim guidance with respect to Internal Revenue Code (“IRC”)§274(a) which, as added by the Tax Cuts and Jobs Act (“TCJA”), provides that no deduction will be allowed for expenses of qualified transportation fringe benefits (“QTF”) provided by an employer to its employees. The guidance also addresses IRC §512(a)(7) which requires tax-exempt employers (including multiemployer benefit plans) to treat QTFs disallowed under IRC §274 as unrelated business taxable income (“UBTI”). A companion notice, Notice 2018-100, was also issued by the IRS. This notice provides for a limited waiver of underpayment penalties for certain tax-exempt organizations.


The TCJA added§512(a)(7) to the IRC, which, effective for amounts paid or incurred after December 31, 2017, certain employee fringe benefits for tax-exempt organizations are treated as UBTI unless they would otherwise be deductible under IRC §274. These fringe benefit expenses include any:

  • Qualified transportation fringe benefit (IRC§132(f)); or
  • Parking facility used in connection with qualified parking (IRC§132(f)(5)(C)).

IRS Notice 2018-99

As outlined in the Notice, IRC §274(a)(4) generally disallows a deduction for expenses with respect to QTFs provided by taxpayers to their employees while IRC §512(a)(7) generally provides that a tax-exempt organization’s amount of UBTI is increased by the amount of the QTF that is determined to be nondeductible under IRC §274.

The Notice provides interim guidance for taxpayers to follow when determining the amount of parking expenses for QTFs that are not deductible under IRC §274 and for tax-exempt organizations to utilize in determining the amount of UBTI resulting from the nondeductible parking expenses.

A QTF is defined under IRC §132(f)(1) as:

  1. Transportation in a commuter highway vehicle between the employee’s residence and place of employment;
  2. Any transit pass; and
  3. Qualified parking.

Qualified parking is further defined under IRC §132(f)(5)(c) as parking provided to an employee on or near the business premises of the employer or on or near a location from which the employee commutes to work.

For 2018, under IRC §132(a)(5), the maximum amount of a QTF that can be provided to an employee and excluded from the employee’s gross income is $260 per month (note this amount increases to $265 per month for calendar year 2019). Any QTF provided to an employee in excess of this amount is taxable compensation reportable on Form W-2, Wage and Tax Statement.

The Notice reminds that IRC §274(e) provides nine exceptions to the disallowance under IRC §274(a). Two of these exceptions that apply to parking expenses are discussed in detail in the Notice. These are defined in IRC §274(e)(2) and §274(e)(7).

Under IRC §274(e)(2), QTF expenses are deductible to the extent the fair market value of the QTF exceeds the limit discussed above in IRC §132(a)(5); $260 per month per employee. This is so because any amount by which the QTF exceeds these limits is includible as taxable compensation to the employee.

IRC §274(e)(7) provides an exception to the disallowance under IRC §274(a) if the goods, services or facilities expenses of the taxpayer are also made available to the general public.

Prior to the TCJA, IRC §274 was generally not applicable to tax-exempt organizations. With the introduction by the TCJA of IRC §512(a)(7), tax-exempt organizations are required, effective January 1, 2018, to treat, as UBTI, amounts that are determined to be nondeductible under IRC §274 and paid by the tax-exempt organization for:

  1. Any QTF defined in IRC §132(f) above;
  2. Any parking facility used in connection with qualified parking; or
  3. Any on-premises athletic facility.

QTF Parking Issues

Since the TCJA was enacted, one of the major issues with respect to this provision was how to calculate the amount of parking expenses that are nondeductible under IRC §274 or, for tax-exempt organizations, treated as UBTI. The Notice, issued nearly one year after enactment of the TCJA provides interim guidance on this issue indicating that the amount depends on whether the taxpayer pays a third party to provide parking or the taxpayer owns or leases a parking facility.

In the event a taxpayer pays a third party to provide a place for its employees to park, the nondeductible amount (or amount that is treated as UBTI) is generally equal to the taxpayer’s annual cost. Remember the nondeductible amount or the amount of UBTI is limited to $260 per month per employee ($265 per month in 2019); any cost over and above this amount is taxable compensation to the employee.

If the taxpayer owns or leases a parking facility where its employees can park, the Notice provides that, until further guidance is issued, taxpayers can use any reasonable method to determine the amount and provides a four-step methodology that is deemed to be a reasonable method under current IRS rules and regulations. These four steps are to:

  1. Calculate the amount of disallowed parking expenses for reserved employee spots;
  2. Determine the primary use of the remaining spots;
  3. Calculate the allowance for reserved non-employee spots; and
  4. Determine the remaining use and allowable expenses.

The Notice defines a parking facility to include indoor and outdoor garages and other structures, as well as parking lots and other areas, for qualified parking defined earlier. The Notice further defines total parking expense to include expenses such as repairs, maintenance, utilities, insurance, property taxes, interest, snow/ice removal, leaf removal, trash removal, landscaping, parking lot attendants, security, and the applicable portion of rent or lease payments. The Notice includes 10 examples to be utilized by both tax-exempt and for-profit employers in determining the amount to be included in UBTI or amount of disallowed deductions.

Significantly, the Notice provides that taxpayers with reserved employee parking spots have the opportunity, through March 31, 2019, to change the parking arrangements they have in place to either decrease or completely eliminate the number of reserved employee parking spots. Any change in a parking arrangement would be effective retroactive to January 1, 2018.

More on Applicability to Tax-Exempt Organizations

Under IRC §512(a)(7), tax-exempt organizations are required to treat any QTF that is disallowed under IRC §274 as UBTI and report that amount on a Form 990-T, Exempt Organization Business Income Tax Return. The rationale for this provision, in the words of the House Ways and Means Committee, was “…that aligning the tax treatment between for-profit and tax-exempt employers with respect to nontaxable transportation and gym benefits provided to employees will make the system simpler and fairer for all business.”

It is important to note that, although unrelated business income taxability was intended to be provided for on-premises athletic facilities provided to employees, the TCJA did not include a change to IRC §274 for these types of facilities. Because of this drafting error, any expense incurred with respect to this type of fringe benefit is not included in a tax-exempt organization’s UBTI nor are deductions disallowed provided that there is no discrimination in favor of the highly compensated employees with respect to the facility.

IRS Notice 2018-100

As indicated previously, the IRS also released Notice 2018-100 which provides certain tax-exempt organizations a waiver of IRC §6655 underpayment of estimated tax penalties assessed on estimated income tax payments that were required to be made on or before December 17, 2018 if the underpayment resulted from changes to the tax treatment of QTFs. Notice 2018-100 provides that this relief applies to a tax-exempt organization that:

  1. Provides QTFs to an employee for which estimated income tax payments, affected by TCJA changes to IRC §274 and §512 would otherwise be required to be made on or before December 17, 2018; and
  2. Was not required to file a Form 990-T for the tax-exempt organization’s first taxable year ending after December 31, 2017.

The relief only applies to tax-exempt organizations that timely file a Form 990-T and timely pay the amount reported for the taxable year for which relief is granted.


The Notice provides 10 detailed examples for tax-exempt and for-profit employers. Until further guidance is issued, both for-profit and tax-exempt employers may use any reasonable method to determine the amount of nondeductible QTFs under IRC §274(a)(4) or the increase in UBTI under IRC §512(a)(7).

The Treasury Department and the IRS have provided a comment period for the Notice and outlines several specific areas for which they are looking for comments. Comments are required to be submitted by February 22, 2019, and can be submitted electronically, by mail or by hand/courier delivery.

A copy of IRS Notice 2018-99 and 2018-100 can be accessed here.

For additional questions around the IRS Notice 2018-99 or 2018-100, fringe benefit expenses for not-for-profits, or any other tax-related questions, fill out the form below and a member of our tax team will be in touch.

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