The Tax Cuts and Jobs Acts revised the income tax treatment of qualified transportation fringe benefits. The general rule is employers can no longer deduct expenses incurred in providing free parking or mass transit costs to employees. The problem with the Tax Cuts and Jobs Act is that it did not define how to calculate the amount of nondeductible expenses.
The IRS recently issued Notice 2018-99 which provides additional guidance on how to calculate the nondeductible expenses. The Notice states that additional regulations will be issued and the IRS is asking for comments to be submitted by February 22, 2019 on what areas the additional regulations should cover. However, until the regulations are issued, Notice 2018-99 or any reasonable method can be relied upon to determine the nondeductible expenses associated with providing employees free parking.
The first step in the analysis is to define what are qualified transportation fringes:
- Transportation in a commuter highway vehicle between the employee’s residence and place of employment.
- Any transit passes.
- Qualified parking — parking that is 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.
The notice states that calculation of nondeductible expenses depends on whether the employer pays for the employee parking spots or owns or leases the parking.
TAXPAYER PAYS A THIRD PARTY FOR EMPLOYEE PARKING SPOTS
If the employer pays for the employees parking, the disallowed expense is generally the amount paid to the third party. The parking benefit, up to IRS limit, is still a tax free fringe benefit to the employee. However, if the employee’s parking exceeds the IRS monthly limitation on exclusion ($260 for 2018), the excess must be treated by the taxpayer as compensation and wages to the employee and is deductible as compensation.
Example 1: Employer A rents a parking garage across the street from an unrelated party at $100 per month for each of A’s 10 employees. The nondeductible employer expense for the year is $12,000 ($100/month * 10 employees* 12 months). The employees do not have to include the parking benefit in wages.
Example 2: The same facts as example 1 but the monthly cost is $300 per month. Employer A pays a total of $36,000 for the parking facility. The nondeductible portion is $31,200 ($260/month * 10 employees * 12 months). The $40 per month per employee is included in the employees taxable wages and is deductible by the employer as compensation..
TAXPAYER OWNS OR LEASES ALL OR A PORTION OF A PARKING FACILITY
The difficult question is how to determine the nondeductible cost when the employer owns or leases the parking lot. Do you need to allocate expenses and what expenses should you allocate? Notice 2018-99 describes a four-step process that will be considered reasonable and states that using the value of employee parking to determine expense allocation to the employee parking lot will not be considered reasonable.
Notice 2018-99 defines a parking facility to include indoor and outdoor garages and other structures, as well as parking lots and other areas where employees may park on or near the business premises of the employer or on or near a location from which the employee commutes to work. For this purpose, total parking expenses include but are not limited to:
- Utility costs
- Property taxes
- Snow and ice removal
- Leaf removal
- Trash removal
- Landscape costs (located on or in the parking facility)
- Parking lot attendant expense
- Rent or lease payments (or a portion of them if not broken out separately)
For the purpose of these calculations, depreciation is not considered part of the total parking expense.
Step 1: Calculate the disallowance for reserved employee spots.
A taxpayer that owns or leases one or more parking facilities must identify the number of spots in the parking facility exclusively reserved for the taxpayer’s employees. This includes spots with specific signage like “employee parking only” or a separate facility or portion of a facility segregated by a barrier to entry or limited by terms of access. The percentage of reserved employee spots in relation to total parking spots is multiplied by the taxpayer’s total parking expenses for the parking facility. Employers have until March 31, 2019 to change their parking arrangements in relation to their reserved employee spots to decrease or eliminate their reserved employee spots and treat those parking spots as not reserved employee spots for purposes of this notice retroactive to January 1, 2018.
Step 2: Determine the primary use of remaining spots.
The taxpayer must determine whether the remaining spots are primarily for the general public or for employees. “Primary” means more than 50 percent of actual or estimated usage of the parking spots in the parking facility. This is to be tested during the normal hours of the company on a typical day. If the primary use of the remaining parking spots in the parking facility is to provide parking to the general public, then the remaining total parking expenses for the parking facility are not included nondeductible expense portion. The general public is defined as customers, clients, visitors, or vendors providing goods and services.
Example 3: Employer B owns a surface parking lot adjacent to its business. B incurs $10,000 of parking expenses. The surface parking lot has 500 spots that are used by employees and the general public. There are no reserved spots in the lot. B’s employees use 50 spots on a typical day or 10%. No part of Employer B $10,000 parking expenses is nondeductible as more than 50% of the lot is provided to the general public.
Step 3: Calculate the allowance for reserved nonemployee spots.
Reserved nonemployee spots include spots reserved for visitors and customers and can be designated as such by specific signage (i.e., “Customer Parking Only”). If the primary use of the taxpayer’s remaining parking spots is not to provide parking to the general public, the taxpayer may identify the number of spots in the parking facility exclusively reserved for nonemployees. The percentage of reserved nonemployee spots in relation to the remaining total parking spots is multiplied by the remaining total parking expenses.
Step 4: Determine remaining use and allocable expenses.
After Steps 1 through 3 above, if there are any remaining parking expenses not specifically categorized as deductible or nondeductible, the taxpayer must reasonably determine the employee use of the remaining parking spots during the normal hours on a typical day and the related expenses allocable to employee parking spots.
Example 4: Employer D owns a surface parking lot adjacent to its facility. D incurs $10,000 of total parking expenses. D has 500 spots that are used by employees and visitors. D has 25 spots that are reserved for visitors and on a typical day 400 spots are used by employees. The primary use of the employer’s parking lot is not to provide parking to the general public as 80% of the lot is used by employees. Employer D will be able to deduct at least $500 of the parking expenses as 5% (25/500) of the spots are reserved for nonemployee spots. The remaining $9,500 of expenses must be reasonably allocated to employee parking spots.
Example 5: Employer F owns a multi-level parking garage adjacent to its building. F incurs $10,000 of total parking expenses. F has 1,000 spots that are used by employees and visitors. One floor in the garage that contains 100 spots is segregated by an electronic barrier and can be entered only with an access card by the employees. The other floors of the parking garage are not used by employees during normal business hours. F has a nondeductible expense of $1,000 in parking expenses ((100/1000) * $10,000). The primary use of the remaining parking lot is for the general public and is deductible by Employer F.
Each employer needs to analyze its parking facility’s use and the costs associated with maintaining the parking facility. Your tax advisor at Wipfli would be happy to assist you with the determining the nondeductible portion of your parking expenses.