The Tax Cuts and Job Act passed by Congress in late 2017 added a new tax provision that applies to local churches: a new category of “unrelated business income tax.” Historically, local churches that engage in for-profit business unrelated to their core mission must pay income tax on these unrelated for-profit businesses. Income from such business is called “unrelated business taxable income” or UBTI.

The new category of UBIT which impacts local churches include a tax on the amount a local church spends to provide for parking for its employees. The amount of this expense per year is deemed to be income – unrelated business income – and therefore, subject to tax.

The new tax was effective January 1, 2018, so spending by local churches on employee parking began accumulating after the Act’s passage. The rules for taxation of unrelated businesses are similar in some way to those for other kinds of taxpayers and require, for example, quarterly payment of estimated taxes.

For more information or if you have questions, contact John Cardillo. 

Questions & Answers

Does the interim guidance apply to our local churches?


Will local churches incur UBTI in relation to parking provided to their employees? 

The short answer is “maybe,” and is in large part dependent upon how the local church provides parking for its employees – i.e., whether it (1) pays a third party for parking spots for its employees or (2) owns or leases its own parking facility.

What happens if a local church pays a third part for its employees to have access to parking? 

All the expense is UBTI unless it exceeds $260 per month for any individuals; in that case, the amounts up to and including $260 are taxed to the church; the amounts over $260 are taxed as wages to the employee.

What if the local church owns or leases a parking facility?

For a local church that owns the parking lot or facility used by its employees, the interim guidance provides a four-step, safe-harbor approach to determine the amount of UBIT:

1.) Count the spots reserved for employees (“reserved employees spots”) and calculate the percentage of the total number of spots. That percentage of the total spent on parking for the year will be taxed as UBTI as if it were income from an unrelated business under the new taking scheme.

2.) Determine the primary use of the remaining spots. If the rest are primarily for the general public (e.g. members of the church, visitors, vendors, etc.) then the cost of providing those spots will not create additional taxes to the local church.

If the inquiry is not resolved within the first two steps, as it should be for most local churches, complete steps 3 and 4.

3.) Exclude spots that are reserved exclusively for persons who are not employees (e.g. visitors, etc.), if the remaining spots under step two are not for the primary use of the general public. The spots in this category will not trigger taxation, and this percentage of the total expense of the parking lot is excluded from the new tax.

4.) Determine the number of spots used by employees on a typical day during normal business hours, if any remaining spots have not been categorized as taxable or not taxable. The Interim Guidance indicates various ways to establish usage, including situations where usage may vary on certain days of the week or times of the year. Once the remaining spots typically used by employees is established, the local church can calculate the tax due on those spaces in the same way (e.g. 60% of remaining spots are used by employees on a typical day, multiplied by the percentage of parking spots remaining after applying the first three steps, multiplied by the “total parking expenses.”

The Interim Guidance includes a number of helpful examples, which serve to illustrate how these steps are to be applied.

So, if a local church has reserved spots for its employees, or even just for its pastor, the guidance says the cost associated with those spots would increase the church’s UBTI?

Yes, and this could be the only potential problem area for the vast majority of local churches as step two, above, would usually result in a conclusion that the primary use of the remaining spaces would be for the general public. Fortunately, the IRS has given employers (including churches) until March 31, 2019 to reduce or eliminate reserved spaces for employees and will allow such reduction or elimination to be treated as if it happened prior to Jan. 1, 2018. A church that would have a tax obligation solely because of the spaces it reserves for employees would be able to avoid that liability by making changes by the March 31, 2019 deadline. Thus, for example, a local church that had posted a sign saying “Employee Parking Only” for 10 spaces in its lot this year, can take the sign down and treat those spots, for tax purposes, as not reserved for employees any more, not only going forward, but also retroactively to Jan. 1, 2018 (as long as they act before March 31, 2019 to take the sign(s) down).

Indeed, for local churches whose parking lots are mostly for congregants, eliminating all reserved parking for employees might be the best option. Then the result for step one would be $0, and step two would conclude that the primary use of the parking spots is for church congregants or visitors of the church. If there are no other reserved spots to consider, then the church has no expense for employee parking, and will not owe the new tax. This would also eliminate the need to calculate total annual parking expenses (which would otherwise need to be calculated before the four steps are applied.) If a church has no other triggers of unrelated business income, it will not have to file a Form 990-T, at least for UBIT for parking and the following years will be the same.

If the local church determines some portion of its total parking expenses result in an increase to UBTI, does it have to file Form 990-T?

In its Notice, the IRS points out two important rules regarding UBTI and the requirements to file Form 990-T. First, the $1,000 specific deduction available to decrease UBTI applies to any UBTI which results from the new tax treatment of certain fringe benefits. Second, the requirements to file the form applies only to organizations that have UBTI of at least $1,000. Thus, in applying the Interim Guidance, if a local church determines that it must “increase” its UBTI by an amount less than $1,000, it will not have any tax liability and would not have to file the form if either of the following is true:

  • The church has no unrelated business activities which generation additional UBTI
  • The church has unrelated business activities which generate UBTI, but the sum of that UBTI and the increase required by applying the interim guidance is less than $1,000.

Local churches which must increase UBTI by at least $1,000, or which have UBTI from other sources that, when combined with any increase required by the interim guidance, amounts to $1,000 or more, will be subject to the Form 990-T filing requirement and may have to pay some amount of tax.

Why is the IRS calling this “interim guidance”?

The IRS states in the Notice that it will be publishing regulations which will cover the issues addressed by the guidance provided in the Notice. The Notice makes it clear that the interim guidance may be relied on until those regulations are finalized.

What does a local church do if, in applying the interim guidance, it determines it must file a Form 990-T for 2018? 

The IRS simultaneously issued Notice 2018-100, in which it states it will provide relief, under certain circumstances. In this Notice, the IRS acknowledges the changes to the taxation of certain fringe benefits could result in many nonprofit organizations having to file Form 990-T for the first time. The IRS is therefore providing relief from underpayment penalties if:

1.) The underpayment results from the changes made to the tax treatment of the fringe benefits

2.) The nonprofit was not required to file Form 990-T for its prior tax year

3.) The nonprofit both timely files Form 990-T and pays any taxes due

4.) The nonprofit writes “Notice 2018-100” on top of its Form 990-T.