With the release of Republicans’ “One Big Beautiful Bill,” tax-exempt organizations are once again confronting a familiar and problematic provision: the expansion of Unrelated Business Taxable Income (UBI) to include parking and transportation fringe benefits – what I’ll refer to as the “parking tax.”
What is the Parking Tax?
Under this provision, most tax-exempt organizations – except for churches and church-affiliated organizations not required to file an annual return – would be subject to UBIT on the value of parking and transportation benefits provided to employees. At first glance, this might not appear overly burdensome, but the implications are significant: nonprofits would be taxed on an expense, not income.
The intended goal may have been to create parity between nonprofits and for-profits. However, this misses a critical distinction. While for-profit entities may no longer deduct parking and transportation fringe benefits, they are not levied an additional tax directly on the expense. Nonprofits, on the other hand, would now have to pay a 21 percent income tax on costs incurred to support their employees.
Revisiting the “Church Parking Tax”
This is not a new provision. In fact, it’s one that was put to the test as part of the 2017 Tax Cuts and Jobs Act (TCJA), and it was met with pushback and confusion. Tax-exempt organizations, including churches and religious institutions, raised serious concerns, both about diverting financial resources away from their missions and the administrative complexity it would take to comply. How, for example, do you calculate the taxable value of an employee parking space in a lot owned by a tax-exempt organization? For others, because of legal requirements to offer these benefits in some localities, it would be impossible to change behavior and reduce tax liability.
The successful advocacy effort in response to the passage of TCJA dubbed this provision the “Church Parking Tax”, given the incredible impact this would have on religious organizations. Ultimately the advocacy campaign led to former Rep. Kevin Brady (R-TX) – then Chairman of the Ways and Means Committee and one of TCJA’s authors – to successfully repeal the provision retroactively with bipartisan support two years after its enactment. Most of us haven’t seen a repeal of a revenue-raising tax provision that quick in our entire careers.
The Problem Still Stands
This brings us to today. Now, the parking tax is back, and while certain religious organizations are exempt, the broader problem remains for the tax-exempt sector. In addition to the thousands of tax-exempt organizations this would impact, it still hits many faith-based organizations, including schools, hospitals, and charities. Furthermore, it erodes the resources available to nonprofit missions that our society and government has deemed important for the public good. Sure, houses of worship may be exempt from this tax, but thousands of other nonprofit organizations will now be forced to divert dollars away from communities and services provided in order to send more resources to the federal government.
Keep in mind, UBIT by definition is a tax imposed on income generated by a tax-exempt organization that is unrelated to its mission and exempt purpose. So, it’s likely mind-boggling for some that it would be applied to an expense. If signed into law, it could very well face constitutional challenges, but in the interim nonprofit missions across the country could be significantly and negatively impacted.
Opportunities to Engage
Regardless of the intended policy goal, this provision is flawed. Taxing nonprofits on employee benefits doesn’t create parity – it creates a financial obstacle to serving communities and fulfilling charitable missions. Nonprofits should be focused on impact, not on diverting scarce resources to pay taxes on expenses.
As the bill moves forward, we expect to see tax-exempt organizations of all types coalesce to strongly advocate for the removal of this provision.
If you are concerned about this provision, please reach out to Ali Bedford (abedford@integerpolicy.com) to learn more about opportunities to join advocacy efforts.