OVERVIEW OF SECTION 512(a)(7): 

UNRELATED BUSINESS TAXABLE INCOME

INCREASED BY DISALLOWED FRINGE BENEFITS

Scheduled for a Public Hearing 

Before the

SUBCOMMITTEE ON OVERSIGHT

of the

HOUSE COMMITTEE ON WAYS AND MEANS

on June 19, 2019

Prepared by the Staff

of the

JOINT COMMITTEE ON TAXATION

June 14, 2019

JCX-25-19
i

CONTENTS

Page

INTRODUCTION .......................................................................................................................... 1

I. BACKGROUND ................................................................................................................ 2

A. Unrelated Business Income Tax ................................................................................... 2

B. Tax Treatment to Employers and to Employees of the Provision of Fringe Benefits

Prior to Public Law 115-97........................................................................................... 4

II. CHANGES MADE TO THE TREATMENT OF CERTAIN TRANSPORTATION 

FRINGE BENEFITS BY PUBLIC LAW 115-97 .............................................................. 8

A. Changes to the Deductibility of Qualified Transportation Fringes............................... 8

B. Increase in Unrelated Business Taxable Income of a Tax-Exempt Employer That 

Provides Qualified Transportation Fringes................................................................... 9

III. ADMINISTRATIVE GUIDANCE .................................................................................. 10

A. Interim Guidance Relating to Parking ........................................................................ 10

B. Penalty Relief Relating to Qualified Transportation Fringes ..................................... 15

C. Reporting By a Tax-Exempt Employer on Form 990-T............................................. 15

IV. LEGISLATIVE RESPONSE............................................................................................ 16

A. Federal Legislation...................................................................................................... 16

B. State Legislation.......................................................................................................... 18
1

INTRODUCTION

The Subcommittee on Oversight of the House Committee on Ways and Means has

scheduled a hearing for June 19, 2019, relating to section 512(a)(7),1 which generally requires a 

tax-exempt organization to increase its unrelated business taxable income by reason of providing 

certain transportation-related fringe benefits to its employees. This document,

2 prepared by the 

staff of the Joint Committee on Taxation, provides an overview of this provision. 

On December 22, 2017, the President signed into law Public Law 115-97, sometimes 

referred to as the Tax Cuts and Jobs Act. The law includes two provisions that, taken together,

modify the tax treatment of tax-exempt employers that provide qualified transportation fringes, 

such as parking and certain transit benefits, to their employees. 

Public Law 115-97 first amends section 274 generally to disallow a deduction to taxable 

employers3 for the provision of a qualified transportation fringe. As a companion provision, the 

law adds new section 512(a)(7), which generally requires a tax-exempt organization to pay 

corporate tax on amounts relating to the provision of qualified transportation fringes, provided 

that a deduction would be disallowed under section 274 (as amended). The mechanism by which 

this corporate tax is imposed is an increase in the organization’s unrelated business taxable 

income, or UBTI. The two provisions of Public Law 115-97 are thus designed to apply to the 

same fringe benefits in the same amounts, in one instance by disallowing a deduction and thus 

increasing taxable income (to a taxable employer) and in the other instance by increasing UBTI 

(of a tax-exempt employer).

Part I of this document includes a summary of relevant law in effect prior to the 

enactment of Public Law 115-97. Part II describes the changes made by Public Law 115-97 to 

the tax treatment of qualified transportation fringes, including the enactment of section 512(a)(7). 

Part III describes IRS guidance relating to section 512(a)(7), including interim guidance 

concerning the determination of the deduction disallowance or UBTI increase when an employer 

provides parking to its employees. Finally, Part IV describes recent legislative activity at the 

Federal and State levels in response to the enactment of section 512(a)(7).

 1

 Section references are to the Internal Revenue Code of 1986, as amended (the “Code”), unless otherwise 

indicated. 

2

 This document may be cited as follows: Joint Committee on Taxation, Overview of Section 512(a)(7): 

Unrelated Business Taxable Income Increased by Disallowed Fringe Benefits (JCX-25-19), June 14, 2019. This 

document can be found on the Joint Committee on Taxation website at www.jct.gov.

3

 Throughout this document, references to taxable employers also include unrelated trades or businesses of 

a tax-exempt organization that give rise to unrelated business taxable income. Such income generally is taxed at 

corporate rates and is computed by allowing deductions that are directly connected with the unrelated trade or 

business. In determining allowable deductions for this purpose, the deduction disallowance rules of section 274 (as 

modified) apply.
2

I. BACKGROUND

This Part describes background law in effect before the enactment of Public Law 115-97. 

Section A provides an overview of the unrelated business income tax (“UBIT”), which applies to 

certain income of a tax-exempt organization that is derived from a trade or business unrelated to 

the organization’s tax-exempt purpose. Section B briefly describes the tax treatment to 

employers and to employees of the provision of certain fringe benefits.

A. Unrelated Business Income Tax

Tax exemption for certain organizations

Section 501(a) exempts certain organizations from Federal income tax. Such 

organizations include: (1) tax-exempt organizations described in section 501(c) (including 

section 501(c)(3) charitable organizations); (2) religious and apostolic organizations described in 

section 501(d); and (3) trusts forming part of a pension, profit-sharing, or stock bonus plan of an 

employer described in section 401(a).

Unrelated business income tax, in general

UBIT generally applies to income derived from a trade or business regularly carried on 

by a tax-exempt organization that is not substantially related to the performance of the 

organization’s tax-exempt purpose or functions.4 An organization determines its unrelated 

business taxable income (“UBTI”) by subtracting from its gross unrelated business income the 

deductions directly connected with the unrelated trade or business.5 UBTI is taxed at the income 

tax rates that apply to corporations.6 For tax years beginning after December 31, 2017, 

corporations pay tax at a flat rate of 21 percent.7

The UBIT rules apply to most tax-exempt organizations, including: (1) organizations 

exempt from tax under section 501(a), including organizations described in section 501(c) 

(except for U.S. instrumentalities and certain charitable trusts);

8 (2) qualified pension, profit-

 4

 Secs. 511-514. 

5

 Sec. 512(a).

6

 Secs. 11 and 511(a)(1). 

7

 Sec. 11(b). A tax-exempt organization that is a fiscal year taxpayer, rather than a calendar year taxpayer, 

must compute tax on its UBTI using a blended tax rate for a fiscal year that begins in 2017 and ends in 2018. Tax 

liability using a blended rate generally is determined by computing tax liability using the pre-2018 tax rate and the 

post-2017 tax rate for the entire year, then prorating those amounts based on the number of days in each period 

relative to the total days in the tax year. On June 5, 2019, the IRS issued a news release that indicates that the 

blended rate applies to UBTI arising from section 512(a)(7). The news release is available at: 

https://content.govdelivery.com/accounts/USIRS/bulletins/2493a03?reqfrom=share. 

8

 Sec. 511(a)(2)(A).
3

sharing, and stock bonus plans described in section 401(a);

9 and (3) certain State colleges and 

universities.10

Exclusions from unrelated business taxable income

Certain types of income are specifically excluded from UBTI, such as dividends, interest, 

royalties, and certain rents,11 unless derived from debt-financed property or from certain 50-

percent controlled subsidiaries.12 Certain types of activities are not considered unrelated trade or 

business activities, such as activities in which substantially all the work is performed by 

volunteers, which involve the sale of donated goods, or which are carried on for the convenience 

of members, students, patients, officers, or employees of a charitable organization.13 Additional 

exempt activities include certain activities of trade shows and State fairs,14 conducting bingo 

games,15 and the distribution of low-cost items incidental to the solicitation of charitable 

contributions.16 

Specific deduction against unrelated business taxable income

In computing UBTI, an exempt organization may take a specific deduction of $1,000. 

This specific deduction may not be used to create a net operating loss that will be carried to 

another year.17

In the case of a diocese, province of a religious order, or a convention or association of 

churches, there is also allowed a specific deduction with respect to each parish, individual 

church, district, or other local unit. The specific deduction is equal to the lower of $1,000 or the 

 9

 Ibid.

10 Sec. 511(a)(2)(B). Most exempt organizations may operate an unrelated trade or business so long as the 

organization remains primarily engaged in activities that further its exempt purposes. Therefore, an organization 

may generally engage in a substantial amount of unrelated business activity without jeopardizing exempt status. A 

section 501(c)(3) (charitable) organization, however, may not operate an unrelated trade or business as a substantial 

part of its activities. Treas. Reg. sec. 1.501(c)(3)-1(e). Therefore, the unrelated trade or business activity of a 

section 501(c)(3) organization must be insubstantial.

11 Sec. 512(b). 

12 Sec. 512(b)(13). 

13 Sec. 513(a).

14 Sec. 513(d).

15 Sec. 513(f).

16 Sec. 513(h).

17 Sec. 512(b)(12).
4

gross income derived from any unrelated trade or business regularly carried on by the local 

unit.18

Annual reporting and reporting of UBIT liability

Exempt organizations are required to file an annual information return, Form 990 (Return 

of Organization Exempt From Income Tax), stating specifically the items of gross income, 

receipts, disbursements, and such other information as the Secretary may prescribe.19 Exempt

from the requirement are churches, their integrated auxiliaries, and conventions or associations 

of churches; the exclusively religious activities of any religious order; certain institutions whose 

income is excluded from gross income under section 115; an interchurch organization of local 

units of a church; certain mission societies; certain church-affiliated elementary and high 

schools; and certain other organizations, including some that the IRS has relieved from the filing 

requirement pursuant to its statutory discretionary authority.20

An organization that is subject to the UBIT rules and that has $1,000 or more of gross 

UBTI must report that income on Form 990-T (Exempt Organization Business Income Tax 

Return). The above-described Form 990 filing exceptions do not apply to the Form 990-T. 

Thus, for example, a church generally does not have to file Form 990, but it must nevertheless 

file Form 990-T if it has $1,000 or more of gross UBTI.

B. Tax Treatment to Employers and to Employees of the

Provision of Fringe Benefits Prior to Public Law 115-97

Limitations on employer deductions

Under the law in effect before the enactment of Public Law 115-97, no deduction is 

allowed with respect to (1) an activity generally considered to be entertainment, amusement, or 

recreation (“entertainment”), unless the taxpayer establishes that the item was directly related to 

(or, in certain cases, associated with) the active conduct of the taxpayer’s trade or business, or 

(2) a facility (e.g., an airplane) used in connection with such activity.21 If the taxpayer 

establishes that entertainment expenses are directly related to (or associated with) the active 

conduct of its trade or business, the deduction generally is limited to 50 percent of the amount 

 18 Ibid. 

19 Sec. 6033(a). An organization that has not received a determination of its tax-exempt status, but that 

claims tax-exempt status under section 501(a), is subject to the same annual reporting requirements and exceptions 

as organizations that have received a tax-exemption determination. An organization that is required to file an 

information return, but that has gross receipts of less than $200,000 during its taxable year, and total assets of less 

than $500,000 at the end of its taxable year, may file Form 990-EZ. If an organization normally has gross receipts 

of $50,000 or less, it must file Form 990-N (“e-postcard”), if it chooses not to file Form 990 or Form 990-EZ. 

Private foundations are required to file Form 990-PF rather than Form 990.

20 Sec. 6033(a)(3); Treas. Reg. secs. 1.6033-2(a)(2)(i) and (g)(1).

21 Sec. 274(a)(1).
5

otherwise deductible.22 Similarly, a deduction for any expense for food or beverages generally is 

limited to 50 percent of the amount otherwise deductible.23 In addition, no deduction is allowed 

for membership dues with respect to any club organized for business, pleasure, recreation, or 

other social purpose.24 

There are a number of exceptions to the general rule disallowing the deduction of 

entertainment expenses and the rules limiting deductions to 50 percent of the otherwise 

deductible amount. One such exception applies to expenses for goods, services, and facilities to 

the extent that the expenses are reported by the taxpayer as compensation and as wages to an 

employee.25 Another exception applies to expenses for goods, services, and facilities to the 

extent that the expenses are includible in the gross income of a recipient who is not an employee 

(e.g., a nonemployee director) as compensation for services rendered or as a prize or award.26 

The exceptions apply only to the extent that amounts are properly reported by the company as 

compensation and wages or otherwise includible in income. In no event can the amount of the 

deduction exceed the amount of the taxpayer’s actual cost, even if a greater amount (i.e., fair 

market value) is includible in income.27 

Other exceptions to the deduction disallowance rules include the following: expenses 

paid or incurred by the taxpayer, in connection with the performance of services for another 

person (other than an employer), under a reimbursement or other expense allowance arrangement 

if the taxpayer accounts for the expenses to such person;28 expenses for recreational, social, or 

similar activities primarily for the benefit of employees other than certain owners and highly 

compensated employees;29 expenses directly related to business meetings of a taxpayer’s 

employees, stockholders, agents or directors,30 or directly related and necessary to attendance at 

business meetings or conventions of organizations described in section 501(c)(6) and exempt 

from taxation under section 501(a);31 expenses for goods, services, and facilities made available 

 22 Sec. 274(n)(1)(B).

23 Sec. 274(n)(1)(A).

24 Sec. 274(a)(3).

25 Sec. 274(e)(2)(A).

26 Sec. 274(e)(9).

27 Treas. Reg. sec. 1.162-25T(a).

28 Sec. 274(e)(3).

29 Sec. 274(e)(4).

30 Sec. 274(e)(5).

31 Sec. 274(e)(6).
6

by the taxpayer to the general public;32 and expenses for goods or services (including the use of 

facilities) which are sold by the taxpayer in a bona fide transaction for an adequate and full 

consideration in money or money’s worth.33 

Employee compensation

Expenses treated as compensation

Except as otherwise provided, gross income includes compensation for services, 

including fees, commissions, fringe benefits, and similar items.34 In general, an employee (or 

other service provider) must include in gross income the amount by which the fair market value 

of a fringe benefit exceeds the sum of the amount (if any) paid by the individual and the amount 

(if any) specifically excluded from gross income.35 Treasury regulations provide detailed rules 

regarding the valuation of certain fringe benefits, such as flights on an employer-provided 

aircraft. 

Excludable fringe benefits

Certain employer-provided fringe benefits are excluded from an employee’s gross 

income and wages for employment tax purposes, including, but not limited to, de minimis

fringes, qualified transportation fringes, on-premises athletic facilities, and meals provided for 

the “convenience of the employer.”36 

Qualified transportation fringes provided by an employer include qualified parking 

(parking on or near the employer’s business premises or parking on or near a location from 

which the employee commutes to work by transit pass, vanpool, or carpool), transit passes, 

vanpool benefits (commuter highway vehicles for travel between the employee’s residence and 

place of employment), and qualified bicycle commuting reimbursements.37 The qualified 

 32 Sec. 274(e)(7).

33 Sec. 274(e)(8).

34 Sec. 61(a)(1).

35 Treas. Reg. sec. 1.61-21(b)(1).

36 Secs. 132(a), 119(a), 3121(a)(19) and (20), 3231(e)(5) and (9), 3306(b)(14) and (16), and 3401(a)(19).

37 Secs. 132(f)(1) and (5). For this purpose, “employee” is defined as any individual who is currently 

employed by the employer, including common law employees and other statutory employees such as officers of 

corporations. Treas. Reg. secs. 1.132-1(b)(2)(i) and -9(b) Q/A-5. Partners, two-percent shareholders of S 

corporations, sole proprietors, and independent contractors are not employees for purposes of section 132(f). Treas. 

Reg. sec. 1.132-9(b) Q/A-24. While many volunteers are not treated as employees for this purpose, some volunteers 

may be treated as employees, depending on the particular circumstances.
7

transportation fringe exclusions are subject to monthly limits. 38 The adjusted maximum 

monthly excludable amount for 2019 is $265.

On-premises athletic facilities are gyms or other athletic facilities located on the 

employer’s premises, operated by the employer, and substantially all the use of which is by 

employees of the employer, their spouses, and their dependent children.39

 38 Sec. 132(f)(2). 

39 Sec. 132(j)(4).
8

II. CHANGES MADE TO THE TREATMENT OF CERTAIN TRANSPORTATION

FRINGE BENEFITS BY PUBLIC LAW 115-97

Public Law 115-97 changed the tax treatment to both taxable employers and tax-exempt 

employers of providing certain transportation fringe benefits to employees. To understand the 

changes that apply to a tax-exempt employer, it is necessary first to understand the changes that 

disallow certain deductions to a taxable employer. Section A therefore describes the changes 

made by Public Law 115-97 to the deductibility of qualified transportation fringes. Section B 

then describes new section 512(a)(7), which increases the UBTI of a tax-exempt employer by 

qualified transportation fringes.

A. Changes to the Deductibility of Qualified Transportation Fringes

Public Law 115-97 amends section 274 to disallow a deduction for items with respect to 

providing any qualified transportation fringe to employees of the taxpayer. Such items include 

amounts elected by an employee to be used on a pretax salary basis towards any qualified 

transportation fringe. The term “qualified transportation fringe”40 includes qualified parking, and 

therefore encompasses costs associated with providing qualified parking, including any parking 

facility maintained by the employer or parking on any portion of the employer’s business 

premises used in connection with qualified parking. This is intended to include appropriate 

allocations of depreciation41 and other costs with respect to facilities used for parking (e.g., 

allocable salaries for security and maintenance personnel, property taxes, repairs and 

maintenance, etc.). The term also includes transportation in a commuter highway vehicle 

between the employee’s residence and place of employment and any transit pass.

The amount of the deduction disallowance is equal to the amount of direct and other 

properly allocable costs of the taxpayer to provide the qualified transportation fringe. 

Accordingly, the deduction disallowance is not determined by reference to the value of the 

transportation fringe benefit calculated for purposes of applying section 132(f).

The provision also disallows a deduction for any expense incurred for providing any 

transportation, or any payment or reimbursement, for commuting between the employee’s 

residence and place of employment, except as necessary for ensuring the safety of an employee.

Generally, the deduction disallowance does not apply to qualified transportation fringe

expenses that are treated by the taxpayer as compensation to its employees.

42

 40 Sec. 132(f).

41 A technical correction may be necessary to reflect this intent. In interim guidance, the IRS takes the 

position that a deduction for an allowance for depreciation is not a parking expense for this purpose. See Notice 

2018-99, December 10, 2018. See also footnote 52 and accompanying text, infra.

42 See section 274(e)(2). See also IRS Notice 2018-99, described below. A technical correction may be 

necessary to reflect this intent. Note that this would apply to qualified bicycle commuting reimbursements during 
9

B. Increase in Unrelated Business Taxable Income of a Tax-Exempt

Employer That Provides Qualified Transportation Fringes

Under section 512(a)(7), added to the Code by Public Law 115-97, UBTI of a tax-exempt 

organization is increased to the extent that a deduction is not allowable by reason of section 274 

for any item with respect to qualified transportation fringe benefits43 or any parking facility used 

in connection with qualified parking.44 The determination of UBTI associated with providing 

qualified transportation fringes, including parking facilities used in connection with qualified 

parking, is intended to be consistent with the determination of the deduction disallowance under 

section 274. 

On its face, new section 512(a)(7) also provides that UBTI is increased by any amount 

paid or incurred by an organization for any on-premises athletic facility (as defined in section 

132(j)(4)(B)) for which a deduction is not allowable by reason of section 274. The enacted 

amendments to section 274, however, do not result in a deduction disallowance for items with 

respect to on-premises athletic facilities if the facility is primarily for the benefit of the 

organization’s employees and does not discriminate in favor of highly compensated 

employees;

45 therefore, such items are not included in UBTI.

Section 512(a)(7) does not apply to any item directly connected with an unrelated trade or 

business that is regularly carried on by the organization.46 The $1,000 specific deduction 

available to organizations under section 512(b)(12) may be used to offset UBTI resulting from 

the provision of qualified transportation fringes.

47 

 

the suspension period (taxable years beginning after December 31, 2017, and ending before January 1, 2026) of the 

exclusion from gross income for such benefits.

43 See sec. 132(f).

44 See sec. 132(f)(5)(C).

45 Secs. 132(j)(4) and 274(e)(4).

46 These amounts are excluded from section 512(a)(7), because income from an unrelated trade or business 

of a tax-exempt organization that is regularly carried on generally is subject to corporate tax under the UBIT rules, 

described above. An organization determines its UBTI by subtracting from its gross unrelated business income the 

deductions directly connected with the unrelated trade or business. In determining allowable deductions for this 

purpose, the deduction disallowance rules of section 274 (as modified) apply.

47 A separate provision of Public Law 115-97 created new section 512(a)(6), which relates to the 

computation of UBTI by an organization with more than one unrelated trade or business. For such an organization, 

section 512(a)(6) requires that UBTI first be computed separately with respect to each trade or business and without 

regard to the $1,000 specific deduction generally allowed under section 512(b)(12). The organization’s UBTI for a 

taxable year is the sum of the amounts (not less than zero) computed for each separate unrelated trade or business, 

less the specific deduction allowed under section 512(b)(12). A net operating loss deduction is allowed only with 

respect to a trade or business from which the loss arose. The result of the provision is that a deduction from one 

trade or business for a taxable year may not be used to offset income from a separate unrelated trade or business for 

the same taxable year. The provision generally does not, however, prevent an organization from using a deduction 
10

III. ADMINISTRATIVE GUIDANCE

On December 10, 2018, the IRS issued two notices concerning the changes made by

Public Law 115-97 to the tax treatment of transportation fringe benefits. Notice 2018-99, 

described in section A below, provides interim guidance to employers to determine the 

nondeductible amount (in the case of a taxable employer) or increase in UBTI (in the case of a 

tax-exempt employer) attributable to the provision of parking to employees. Notice 2018-100, 

described in section B below, provides relief to a tax-exempt employer from penalties for 

underpayment of estimated taxes that relate to the provision of qualified transportation fringes.

Section C, below, describes modifications to IRS Form 990-T (Exempt Organization 

Business Income Tax Return) for the reporting of a tax-exempt employer’s increase in UBTI 

under section 512(a)(7).

A. Interim Guidance Relating to Parking

Overview

IRS Notice 2018-99 provides interim guidance to assist taxpayers in determining the 

amount of a qualified transportation fringe for qualified parking that is nondeductible under 

section 274 or for which an amount is includible in UBTI under section 512(a)(7). The Notice 

indicates that the Treasury Department and IRS intend to issue proposed regulations on this 

matter. Until such time, however, taxpayers and tax-exempt organizations that own or lease 

parking facilities where their employees park may use any reasonable method (including the 

method set forth in the Notice) to determine the nondeductible or includible amount.

Consistent with the Joint Committee staff’s General Explanation of Public Law 115-97,

48

Notice 2018-99 clarifies that section 274 denies a deduction for qualified transportation fringes, 

such as employer-provided parking, whether the fringe benefit is provided in-kind, through a 

bona fide cash reimbursement arrangement, or through a compensation reduction agreement.49

Exceptions to deduction disallowance or UBTI inclusion

The Notice describes two exceptions to the deduction disallowance rule under section 

274 that are particularly relevant in determining the nondeductible amount (or, in the case of a 

tax-exempt employer, the amount of the increase in UBTI) with respect to qualified 

transportation fringes: (1) expenses treated by the taxpayer as compensation to its employees;

 from one taxable year to offset income from the same unrelated trade or business activity in another taxable year, 

where appropriate.

48 JCS-1-18, December 2018, p. 189.

49 See also IRS Publication 15-B, “Employer’s Tax Guide to Fringe Benefits (For Use in 2019)” (revised 

December 18, 2018), p. 21 (providing that, by reason of the Public Law 115-97 amendments to section 274, no 

deduction is allowed for qualified transportation fringes whether provided directly by the employer, through a bona 

fide reimbursement arrangement, or through a compensation reduction arrangement).
11

and (2) expenses for goods, services, or facilities made available by the taxpayer to the general 

public.

Expenses treated as compensation to the taxpayer’s employees

Although section 274(a)(2) generally denies a deduction for qualified transportation 

fringes (including qualified parking), section 274(e)(2) provides an exception for amounts that 

are treated as compensation and wages to the employee. As is discussed above, qualified 

transportation fringes generally are excluded from an employee’s gross income and from wages 

for employment tax purposes, but only up to a monthly limit that is annually adjusted.50 The 

monthly limit for 2019 is $265. 

Notice 2018-99 provides that expenses for a qualified transportation fringe qualify for the 

section 274(e)(2) exception to the extent that the fair market value of the fringe benefit exceeds 

the monthly limit on the amount of the employee’s exclusion, and such excess amount is 

included in the employee’s compensation and wages. In other words, to the extent the value of 

the qualified transportation fringe provided to an employee exceeds $265 per month (for 2019)

and the value in excess of $265 per month is treated as compensation, the employer’s expenses 

with respect to such fringe benefit remain deductible. In the case of a tax-exempt employer, such 

excess expenses do not increase the employer’s UBTI under new section 512(a)(7).

Goods, services, or facilities made available to the general public

Although section 274(a)(2) generally denies a deduction for qualified transportation 

fringes (including qualified parking), section 274(e)(7) provides an exception for goods, services, 

or facilities made available by the taxpayer to the general public. Notice 2018-99 provides that 

expenses for parking made available to the general public qualify for this exception. In the case 

of a tax-exempt employer, such expenses do not increase the employer’s UBTI under new 

section 512(a)(7).

Methods for determining the amount of the deduction disallowance or, for a tax-exempt 

employer, the UBTI inclusion

Notice 2018-99 includes guidance for determining the nondeductible amount or increase 

in UBTI where (1) the employer pays a third party for employee parking spots or (2) the 

employer owns or leases all or part of one or more parking facilities that are used by its 

employees. This guidance is based, in part, upon the two exceptions to the deduction 

disallowance under section 274 described immediately above.

Where the employer pays a third party for employee parking spots

Where a taxable or tax-exempt employer pays a third party an amount so that the 

employer’s employees may park in the third party’s parking facility, Notice 2018-99 provides 

that the amount that is nondeductible or that is includible in UBTI generally is the total annual 

cost of employee parking paid to the third party. If, however, the amount paid to the third party 

 50 Sec. 132(f)(2).
12

exceeds the monthly limit on the amount of the exclusion from the employee’s gross income and 

wages ($265 per employee for 2019), the excess amount is treated by the employer as 

compensation and wages to the employee. Such excess amount therefore remains deductible 

and, in the case of a tax-exempt employer, does not increase UBTI.

Where the employer owns or leases all or a portion of a parking facility

In general.–Determining the amount of the deduction disallowance or increase in UBTI 

may be more complex where the employer owns or leases all or a portion of one or more parking 

facilities that are used by its employees. Under Notice 2018-99, an employer may use any 

reasonable method to determine this amount until further guidance is issued. The Notice also 

sets forth a four-step method that is deemed to be a reasonable method.51

Total parking expenses.–To determine the amount of the disallowance or inclusion, 

Notice 2018-99 requires that the employer first determine the amount of “total parking 

expenses.” The Notice provides that 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 (if not broken out separately).” 

The Notice excludes expenses paid for items not located in or on the parking facility, including 

items related to property next to the parking facility such as landscaping or lighting. 

The Notice further takes the position that a deduction for an allowance for depreciation is 

not a parking expense for this purpose. This position conflicts with the statement in the Joint 

Committee staff’s General Explanation of Public Law 115-97 that the term “qualified 

transportation fringe” includes “appropriate allocations of depreciation and other costs with 

respect to facilities used for parking.”52 

Four-step method for determining the amount of the deduction disallowance or increase 

in UBTI.–As stated above, Notice 2018-99 includes a four-step method that is deemed to be a 

reasonable method for determining the amount of the deduction disallowance or increase in 

 51 Using the value of employee parking to determining expenses allocable to employee parking is not a 

reasonable method, because section 274(a)(4) denies a deduction for the expense of providing a qualified 

transportation fringe regardless of its value. In addition, for tax years beginning on or after January 1, 2019, a 

method that fails to allocate expenses to reserved employee spots is not a reasonable method.

52 JCS-1-18, December 2018, p. 190. The Notice compares the use of the term “item” in section 274(a)(1) 

(disallowing deductions relating to entertainment activities or facilities) with the term “expenses” as used in section 

274(a)(4) (disallowing deductions for qualified transportation fringes), and concludes that the narrower term 

“expenses” does not include a deduction for an allowance for depreciation. As is discussed in Part IV, below, on 

January 2, 2019, Representative Kevin Brady, then-Chairman of the Ways and Means Committee, released as a 

discussion draft a bill that would make technical corrections to Public Law 115-97. Two of the proposed technical 

corrections would have the effect of denying a deduction (under section 274) or increasing UBTI (under section 

512(a)(7)) for “items” with respect to qualified transportation fringes. The discussion draft is available at the 

following link: https://republicanswaysandmeansforms.house.gov/uploadedfiles/tax_technical_and_clerical_corrections_act_discussion_draft.pdf.
13

UBTI for a qualified transportation fringe where an employer owns or leases all or a portion of a 

parking facility.

1. Step 1: Calculate the disallowance for reserved employee spots. The employer must 

identify the number of spots in the facility (or the taxpayer’s portion of the facility) 

exclusively reserved for the taxpayer’s employees (“reserved employee spots”). The 

percentage of reserved employee spots in relation to total parking spots is multiplied 

by the employer’s total parking expenses. The product is the amount of total parking 

expenses for which a deduction is disallowed, or for which an amount is included in 

UBTI, for reserved employee spots.

Under a special safe harbor rule provided in the Notice, employers that had reserved 

employee spots were permitted to change their parking arrangements by March 31, 

2019, to decrease or eliminate reserved employee spots (by changing signage, access, 

etc.). Employers are permitted to treat any such spots as not reserved employee spots 

under the Notice retroactively to January 1, 2018.

2. Step 2: Determine the primary use of the remaining spots. The employer must next 

identify the remaining parking spots in the facility and determine whether their 

primary use is to provide parking to the general public. If the primary use of the 

remaining spots is to provide parking to the general public, then the remaining total 

parking expenses (after completing Step 1) are excepted from the deduction 

disallowance (and, in the case of a tax-exempt employer, do not increase UBTI). 

“Primary use” means greater than 50 percent of actual or estimated usage of the 

parking spots in the parking facility. Primary use is tested during normal business 

hours on a typical business day, or in the case of an exempt organization during the 

normal hours of the exempt organization’s activities on a typical day. Unreserved 

spots that are empty but available to the general public during normal business hours 

on a typical business day are treated as provided to the general public.

For this purpose, the general public includes, but is not limited to: customers and 

potential customers, clients, visitors, individuals delivering goods or services to the 

taxpayer or organization, patients of a health care facility, students of an educational 

institution, and congregants of a religious organization. 

3. Step 3: Calculate the allowance for reserved nonemployee spots. If, under Step 2, the 

primary use of the employer’s remaining spots is not to provide parking to the general 

public, then the employer may identify the number of spots reserved exclusively for 

nonemployees (e.g., spots reserved for visitors and customers). If the employer has 

reserved nonemployee spots, it may determine the percentage of its remaining total 

parking spots (after Step 1) that are reserved nonemployee spots and multiply this 

percentage by the remaining total parking expenses (after Step 1). The product is the 

amount of remaining total parking expenses for which a deduction is not disallowed or 

for which there is not an increase in UBTI.
14

4. Step 4: Determine remaining use and allocable expenses. If, after completing Steps 

1-3, the employer has any remaining parking expenses that have not been classified as 

deductible or nondeductible (or for a tax-exempt employer includible or excludible 

from UBTI), then the taxpayer must reasonably determine the employee use of the 

remaining parking spots during normal business hours on a typical business day (or, in 

the case of an exempt organization, during the normal hours of the exempt 

organization’s activities on a typical day), and the related expenses allocable to the 

employee parking spots.

Example.–The following example is reproduced from Notice 2018-99 (Example 9).

Tax-Exempt Organization J, a religious organization that operates a church and a 

school, owns a surface parking lot adjacent to its buildings. J incurs $10,000 of total 

parking expenses. J’s parking lot has 500 spots that are used by its congregants, 

students, visitors, and employees, and 10 spots that are reserved for certain employees. 

During the normal hours of J’s activities on weekdays, J usually has approximately 50 

employees parking in the lot in non-reserved spots and approximately 440 nonreserved parking spots that are empty. During the normal hours of J’s activities on 

weekends, J usually has approximately 400 congregants parking in the lot in nonreserved spots and 20 employees parking in the lot in non-reserved sports.

Step 1. Because J has 10 reserved spots for certain employees, $200 ((10/500) x 

$10,000 = $200) is the amount of total parking expenses that is nondeductible for 

reserved employee spots under § 274(a)(4). Thus, under § 512(a)(7), J must increase 

its UBTI by $200, the amount of the deduction disallowance under § 274(a)(4).

Step 2. Because usage of the parking spots varies significantly between days of the 

week, J uses a reasonable method to determine that the primary use of the remainder 

of J’s parking lot is to provide parking to the general public because 90% (440/490 = 

90%) of the spots are used by the public during the weekdays and 95% (470/490) of 

the spots are used by the public on the weekends. The empty, non-reserved parking 

spots are treated as provided to the general public. Thus, expenses allocable to these 

spots are excepted from the § 274(a) disallowance by § 274(e)(7) under the primary 

use test, and only $200 of the expenses for the provision of the [qualified 

transportation fringe] will result in an increase in UBTI under § 512(a)(7).

If J does not have gross income from any unrelated trades or businesses of $800 or 

more included in computing its UBTI (to reach the $1,000 filing threshold), J is not 

required to file a Form 990-T for that year.

Interaction between new sections 512(a)(6) and 512(a)(7).–As indicated above, new 

section 512(a)(6), which was also added to the Code by Public Law 115-97, requires that a taxexempt organization that has more than one unrelated trade or business compute UBTI 

separately for each such trade or business (sometimes referred to as the “UBIT basketing” rule). 

The effect of the provision generally is to prevent the use of a deduction from one unrelated trade 

or business to offset income from another unrelated trade or business.
15

Notice 2018-99 clarifies that the provision of a qualified transportation fringe that results 

in an increase in UBTI under section 512(a)(7) is not an unrelated trade or business for purposes 

of determining whether an organization has more than one unrelated trade or business, thereby 

causing the organization to be subject to the UBIT basketing rule. As a result, an organization 

with an increase in UBTI under section 512(a)(7) and only one unrelated trade or business is not 

subject to the UBIT basketing rule of section 512(a)(6). Such an organization may use 

deductions from the unrelated trade or business to offset its increase in UBTI under section 

512(a)(7).

B. Penalty Relief Relating to Qualified Transportation Fringes

In Notice 2018-100, the IRS indicates that, because of new section 512(a)(7), certain taxexempt organizations that provide qualified transportation fringes will owe UBIT and be 

obligated to make quarterly estimated tax payments for the first time. As a result, an

organization cannot qualify for penalty relief under an existing safe harbor for taxpayers that 

made estimated tax payments for the current year that are at least equal to 100 percent of the tax 

shown on the taxpayer’s return for the preceding year.53

Accordingly, Notice 2018-100 provides that the penalty (addition to tax) under section 

6655 for failure to make estimated income tax payments otherwise required to be made on or 

before December 17, 2018, is waived for certain tax-exempt organizations that provide qualified 

transportation fringes to an employee to the extent that the underpayment results from the 

enactment of section 512(a)(7). The relief applies only to a tax-exempt organization that (1) was 

not required to file a Form 990-T for the taxable year immediately preceding the first taxable 

year ending after December 31, 2017, and (2) timely files Form 990-T and timely pays the 

amount reported for the taxable year for which relief is granted.

C. Reporting By a Tax-Exempt Employer on Form 990-T

The IRS revised Form 990-T (Exempt Organization Business Income Tax Return) and 

the related instructions for 2018 to provide for reporting of an increase in UBTI by reason of the 

provision of qualified transportation fringes. An organization that has no UBTI other than an 

increase in UBTI attributable to transportation fringes must complete the introductory portions of 

Form 990-T that appear above Part I of the form, with the exception of blocks C (book value of 

all assets at end of year), E (unrelated business activity code), H (number of unrelated trades or 

businesses), and I (whether the organization was a subsidiary in an affiliated group or a parentsubsidiary controlled group). In addition, the organization must complete Parts III (total 

unrelated business taxable income), IV (tax computation), and V (tax and payments). Amounts 

that relate to the provision of qualified transportation fringes are reported on line 34 of Part III

(“[a]mounts paid for disallowed fringes”).

An organization is not required to file Form 990-T unless the sum of its gross income 

from a regularly conducted unrelated trade or business and any increase in UBTI under section 

512(a)(7) is $1,000 or more.

 53 Sec. 6655(d)(1)(B).
16

IV. LEGISLATIVE RESPONSE

A. Federal Legislation

This section describes legislation relating to the repeal or modification of new section 

512(a)(7), which increases a tax-exempt organization’s UBTI for the provision of qualified 

transportation fringes.

116th Congress

Introduced bills that would repeal section 512(a)(7)

• H.R. 513 (116th Congress), the “Nonprofits Support Act,” was introduced January 11, 

2019, by Representative Michael Conaway. The bill would repeal both section 

512(a)(6) (requiring that UBTI be computed separately for each of an organization’s 

unrelated trades or businesses) and 512(a)(7) (increasing UBTI for qualified 

transportation fringes). The repeal would be retroactive, as if originally included in 

Public Law 115-97.

• S. 501 (116th Congress), the “Stop the Tax Hike on Charities and Places of Worship 

Act,” was introduced on February 14, 2019, by Senator Sherrod Brown. The bill 

would repeal section 512(a)(7). The repeal would be retroactive, as if originally 

included in Public Law 115-97. The bill would also increase the income tax rate on 

corporations from 21 percent to 22 percent, effective for taxable years beginning after 

the date of enactment.

• H.R. 1223 (116th Congress), the “Stop the Tax Hike on Charities and Places of 

Worship Act,” was introduced on February 14, 2019, by Representative James 

Clyburn (for himself and other Representatives). The bill would repeal section 

512(a)(7). The repeal would be retroactive, as if originally included in Public Law 

115-97. The bill would also increase the income tax rate on corporations from 21 

percent to 21.03 percent, effective for taxable years beginning after the date of 

enactment.

• S. 632 (116th Congress), the “Lessen Impediments From Taxes (LIFT) for Charities 

Act,” was introduced on February 28, 2019, by Senators James Lankford and 

Christopher Coons. The bill would repeal section 512(a)(7). The repeal would be 

retroactive, as if originally included in Public Law 115-97.

• H.R. 1545 (116th Congress) was introduced on March 5, 2019, by Representative 

Mark Walker (for himself and other Representatives). The bill would repeal section 

512(a)(7). The repeal would be retroactive, as if originally included in Public Law 

115-97.

• S. 1282 (116th Congress), the “Preserve Charities and Houses of Worship Act,” was 

introduced on May 2, 2019, by Senators Ted Cruz and Jeanne Shaheen. The bill 

would repeal both section 512(a)(6) (requiring that UBTI be computed separately for 
17

each of an organization’s unrelated trades or businesses) and 512(a)(7) (increasing 

UBTI for qualified transportation fringes). The repeal would be retroactive, as if 

originally included in Public Law 115-97.

115th Congress

Bills that passed the House

In December 2018, Representative Kevin Brady, then-Chairman of the House Committee 

on Ways and Means, introduced a manager’s amendment to H.R. 88 (which included various 

retirement, savings, and other tax provisions). The manager’s amendment included a provision 

to repeal section 512(a)(7). The repeal would be retroactive, as if originally included in Public 

Law 115-97. H.R. 88, as amended, passed the House on December 20, 2018.

Other introduced bills that would repeal section 512(a)(7)

• H.R. 6037 (115th Congress), the “Nonprofits Support Act,” was introduced June 7, 

2018, by Representative Michael Conaway. The bill is similar to H.R. 513 (116th

Congress), described above.

• H.R. 6460 (115th Congress), the “Lessen Impediments From Taxes (LIFT) for 

Charities Act,” was introduced on July 19, 2018, by Representative Mark Walker (for 

himself and other Representatives). The bill is similar to H.R. 1545 (116th Congress), 

described above.

• H.R. 6504 (115th Congress), the “Stop the Tax Hike on Charities and Places of 

Worship Act,” was introduced July 25, 2018, by Representative James Clyburn (for 

himself and other Representatives). The bill is similar to H.R. 1223 (116th Congress), 

described above, except that H.R. 6504 would increase the corporate tax rate to 22 

percent.

• S. 3317 (115th Congress), the “Protect Charities and Houses of Worship Act,” was 

introduced August 1, 2018, by Senator Ted Cruz. The bill is similar to S. 1282 (116th

Congress), described above.

• S. 3332 (115th Congress), the “Lessen Impediments From Taxes (LIFT) for Charities 

Act,” was introduced on August 1, 2018, by Senator James Lankford. The bill is 

similar to S. 632 (116th Congress), described above.
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Proposed technical corrections to section 512(a)(7)

On January 2, 2019, Representative Kevin Brady, then-Chairman of the House 

Committee on Ways and Means, released as a discussion draft a bill that would make technical 

corrections to Public Law 115-97.54 The discussion draft would make several changes to the 

provisions of Public Law 115-97 relating to the tax treatment of qualified transportation fringes.

First, as noted above, subsection 274(e)(2) provides an exception to the deduction 

disallowance rule of section 274(a) for expenses properly treated as compensation to employees. 

This exception is intended to apply to qualified transportation fringes. Accordingly, the

discussion draft amends the list of items eligible for the exception under subsection (e)(2) to 

include qualified transportation fringes.55 

In addition, the discussion draft conforms the language relating to the deduction 

disallowance under section 274 with the language of section 512(a)(7). This includes 

conforming language relating to regulations or other guidance that the Secretary shall issue, as 

necessary or appropriate, to carry out the changes made by Public Law 115-97, including 

regulations or other guidance to provide for the appropriate allocation of depreciation and other 

costs with respect to facilities used for parking. More specifically, two of the proposed technical 

corrections would have the effect of denying a deduction (under section 274) or increasing UBTI 

(under section 512(a)(7)) for “items” with respect to qualified transportation fringes to clarify 

that the provisions can apply to a deduction for an allowance for depreciation.

B. State Legislation

Most States also impose tax on unrelated business income. The majority of States that 

tax unrelated business income conform to the Federal definition of UBTI, either as of a fixed 

date or on a rolling basis. States that conform to the Federal definition as of a fixed date must 

take affirmative action (generally by changing the date of conformity enacted into State law) to 

incorporate any subsequently enacted changes to the Federal UBTI definition. But in States that 

conform to the Federal definition on a rolling basis, any changes to the Federal definition 

generally are incorporated into the State computation automatically, unless the State decouples

the State law in whole or in part from the Federal law.

Following the enactment of section 512(a)(7), some States have partially decoupled their 

computations of unrelated business income from Federal UBTI. For example, in 2018 New 

York enacted legislation that would subtract from Federal UBTI “any amount which is included 

therein solely by reason of the application of section . . . 512(a)(7)” in determining unrelated 

 54 The text of the proposal is available at the following link: https://republicanswaysandmeansforms.house.gov/uploadedfiles/tax_technical_and_clerical_corrections_act_discussion_draft.pdf.

55 As is discussed above, IRS Notice 2018-99 takes the position that the subsection 274(e)(2) exception 

applies to qualified transportation fringes.
19

business income for New York State law purposes.56 North Carolina similarly has enacted 

legislation that would decouple from Federal UBTI for an increase in UBTI by reason of section 

512(a)(7), but only for section 501(c)(3) organizations and only for parking facilities.57

 56 The change is effective for taxable years beginning on or after January 1, 2018. See 

https://assembly.state.ny.us/leg/?default_fld=&bn=A11051&term=2017&Summary=Y&Actions=Y&Text=Y&Com

mittee%2526nbspVotes=Y&Floor%2526nbspVotes=Y.

57 See North Carolina Department of Revenue, “2018 Tax Law Changes,” available at

https://files.nc.gov/ncdor/press-release/files/2018_law_change_book.pdf, p. 15. The North Carolina legislation is 

also effective for taxable years beginning on or after January 1, 2018.