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The New Tax on Churches

Most everyone is aware that with the Tax Cut and Jobs Act (TCJA) of December 2017, President Trump signed into law a sweeping update to the American tax system. Many of us will experience these changes first hand when it comes time to file our tax returns on April 15.


The TCJA included some important changes to business taxes too. For example, some moving expenses and entertainment expenses are no longer deductible as a business expense.  Churches may not realize one change will also affect them directly. The TCJA changed the tax code to no longer allow a business deduction for certain transportation expenses called qualified transportation fringes (QTFs). This change to QTFs means that some churches will be faced with a new tax--a parking lot tax--on the cost of their parking and transportation expenses.


Although the TCJA went into effect on January 1, 2018, there was widespread confusion on how to identify nondeductible QTFs and what impact they would have on a nonprofit’s unrelated business taxable income (UBTI). In December 2018, the IRS provided interim guidance (Notice 2018-99) on identifying nondeductible transportation expenses and computing UBTI.


To summarize the tax, if your church or nonprofit rents parking spaces for your employees or has reserved parking spots for your pastor and staff, your church could be subject to a 21% tax on the cost of providing those parking spots.


  • The tax is now due for calendar year 2018 but continue reading to learn one important change you can make before March 31, 2019 to reduce or eliminate your tax liability.

Determining the potential tax liability

The good news is that many churches may have little to no tax liability. The bad news is that every church will need to spend some time and research determining if this tax is applicable. There are 2 scenarios where a church is immediately subject to this tax and many churches will fall under one of these scenarios:

  1. A church rents parking spaces, such as in a public garage
  2. A church has reserved spots for church staff

Scenario 1: If a church pays a third-party to provide parking for employees, generally, the total amount paid to the third-party vendor (up to $260 per employee, per month) will be subject to a 21% tax.


Important note: If the total amount paid exceeds $260 per employee, per month, then any expense above this limit must be added to the employee’s wages as compensation. (The $260 limit is for 2018 and is adjusted annually). 


Scenario 2: A more prevalent scenario is when the church owns the parking lot and has reserved spaces for employee parking.


The first step to determine the amount taxable is to calculate the total annual parking expenses. Total parking expenses include, but are not limited to, repairs, maintenance, utility costs, insurance, property taxes, interest, security, parking lot attendant expenses, cleaning, landscaping costs, rent or lease payments, snow, ice, leaf and trash removal.


Important note: The IRS clarified that depreciation on a parking structure is excluded from this analysis. Further, expenses for items not located on or in the parking lot like landscaping or lighting around the parking lot can also be excluded.


The next step is to identify the portion of these costs that are attributable to reserved employee parking. To help, the IRS provided a 4-step process that churches can use:


1.       Calculate the total number of parking spots that are specifically reserved for church employees. Include spots reserved for independent contractors but don’t include spots reserved for visitors, church attenders, or the general public. Determine the percentage of reserved spots in relation to the total number of parking spots and multiple the percentage by the total parking expenses. This amount will be subject to the 21% tax.


2.       Calculate the “primary use” of the remaining unreserved spots. If the general public, to include church attenders, uses more than 50% of the remaining parking spots on a typical day, the remaining amount of parking expenses are excluded from this analysis. For churches, a typical day would include any day that has normal church activities, like Sunday services.


3.       Identify the total parking spots that are specifically reserved for non-employees, such as those reserved for visitors or first-time guests. The portion of your total parking expenses allocated to these spots is excluded from this analysis.


4.       Add up the allocated expenses for reserved employee parking. This total will increase UBTI for the church which is reported on Form 990-T, Exempt Organization Business Income Tax Return.  The threshold for reporting gross income from unrelated trades or businesses, including expenses attributable to reserved employee parking, is $1,000 or more. Anything less does not need to be reported.


Important note: The IRS did provide a method of relief for churches. If a church reduces or eliminates all reserved parking spots by March 31, 2019, the IRS will consider this change to be retroactive to January 1, 2018 for purposes of this analysis.


Here are some important definitions to consider for this analysis:


  • Parking includes indoor and outdoor garages and other structures, as well as parking lots. It does not include parking used by the employee for residential purposes.
  • If a church owns or leases more than one parking facility in a single geographical location, the church can aggregate the total number of parking spots for this analysis. However, for churches with more than one location, the church cannot aggregate parking spots from different geographic locations.


Here are some examples based on the guidance provided by the IRS in Notice 2018-99:


Example 1: A third-party owns a parking garage across the street from a church. The church leases 10 parking spots for employee use and pays $100 a month for each spot. The annual cost of $12,000 (100 x 10 spots x 12 months) is subject to the 21% unrelated business income tax.


Example 2: Same facts as example 1, except the church pays $300 a month for each parking spot. For 2018, any payment above $260 per employee, per month ($40 in this example) must be treated as compensation to the employee. The remaining $260 is used to compute the unrelated business taxable income. Therefore, the total cost of $31,200 ($260 x 10 spots x 12 months) is subject to the 21% unrelated business income tax.


Example 3: A church has one parking lot with 100 spaces. During the year, the church spent $10,000 on related parking expenses (snow removal, sealing, striping, and lighting). None of the spots are reserved but 11 church employees park in the lot during normal office hours and on Sunday morning during services. During the week, the remaining 89 spots are normally unused. However, on Sunday morning, the remaining spots are all used by church attenders. Since there are no reserved spots for employees, and the unreserved spots are primarily used by the general public, the annual parking expense of $10,000 is not classified as unrelated business taxable income.


Example 4: Same facts as example 3, except the church has 11 reserved parking spots. Since 11% of the parking spots (11/100) are reserved for employees, $1,100 (11% x $10,000) is considered UBTI. The remaining 89 spots are primarily used by the general public, so no additional parking expense is treated as UBTI.  The church must report $1,100 on Form 990-T since it is greater than the reporting threshold. 


Example 5: Same facts as example 3, except the church has 2 reserved parking spots. Since 2% of the parking spots (2/100) are reserved for employees, $200 (2% x $10,000) is considered UBTI. The remaining 98 spots are primarily used by the general public, so no additional parking expense is treated as UBTI. If the church does not have any other unrelated business income, the church does not need to file Form 990-T, since the $200 UBTI is below the reporting threshold. 


For more information on this topic, see IRS Notice 2018-99 CPA firm Batts, Morrison, Wales & Lee, also has an in-depth analysis here.