The Tax Cuts and Jobs Act of 2017 (the Act) made very significant changes to the taxation of employers on qualified transportation fringes (QTFs) that they offer to their employees. QTFs, which are not taxable to the employee, include “qualified parking,” which is defined as parking on or near the business premises of the employer or on or near a location from which the employee commutes to work. Qualified parking does not include any parking on or near the employee’s residence.
As amended by the Act, Internal Revenue Code Section 274(f) generally disallows an employer’s deduction for expenses with respect to the cost of QTFs provided to employees, effective January 1, 2018. However, the Act doesn’t address how to determine the amount of the cost of employer-provided parking, and this question had been unanswered for almost a year until the IRS recently issued Notice 2018-99.
This article is intended to provide a practical guide for determining the amount of the nondeductible cost of employer-provided parking according to the provisions of this Notice. It is divided based on two categories of employer-provided parking: (a) when the employer pays a third party for employee parking spots and (b) when the taxpayer owns or leases all or a portion of a parking facility that is available for employee parking.
Parking that is Taxable to the Employee Can Be Deducted by the Employer
Before we delve into the rules that apply to these two situations, it is important to note that the employer can still deduct parking that is taxable to the employee. However, parking provided on a pre-tax basis to employees under a salary reduction agreement is not deductible.
What is the Cost of Parking When the Employer Pays a Third Party for Employee Parking Spots?
In this case, the disallowed deduction is the amount paid to the third party, except to the extent that the payment exceeds the Section 132(f)(2) monthly limitation, and therefore is taxable to the employee. For 2018, the amount of this limitation is $260 per month. For 2019, it is $265 per month.
What is the Cost of Parking Provided to Employees When Employer Owns or Leases a Parking Facility?
The Notice allows employers to use “any reasonable method” to calculate the cost of parking provided to employees when the employer owns or leases all or part of a parking facility, although it states that the value of the parking is not a reasonable method for determining the cost. The Notice then sets forth a four-step method that is deemed to be reasonable.
“Parking facilities” are defined as “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.”
The cost of the parking includes, but is 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. However, the Notice specifies that the following are not considered part of the cost of parking:
- Depreciation; and
- Expenses paid for items not located on or in the parking facility, including items related to property next to the parking facility, such as landscaping or lighting
We recommend that, before calculating the cost of parking, the employer take the first two steps below to see if all of the parking can be deducted. If so, then it will not be necessary to perform the calculation.
Step 1: Calculate the disallowance for reserved employee spots
The cost of spots reserved for employees is not deductible. The employer should determine the percentage of reserved employee spots in relation to total parking spots, and multiply this percentage by the total cost of parking.
The Notice provides some potentially very important relief with respect to this step. Until March 31, 2019, an employer that has reserved employee spots may change the parking arrangements (removing signage, etc.) to decrease or eliminate the reserved employee spots. These spots can be treated as unreserved spots retroactively to January 1, 2018.
Step 2: Determine the primary use of the remaining spots
If more than 50 percent of the remaining spots are provided to the general public, then the remaining parking expenses are fully deductible.
Primary use of the parking spots is tested during normal business hours on a typical business day. Non-reserved parking spots that are available to the general public but empty during normal business hours on a typical business day are treated as provided to the general public.
The “general public” includes, but is not limited to, customers, clients, visitors, individuals delivering goods or services to the taxpayer, patients of a health care facility, and students of an educational institution. The general public does not include employees, partners or independent contractors of the taxpayer.
Step 3: Calculate the allowance for reserved nonemployee spots
The cost of spots reserved for nonemployees is fully deductible. The employer should determine the percentage of reserved nonemployee spots in relation to total parking spots, and multiply this percentage by the total cost of parking.
For this purpose, nonemployees includes, but is not limited to, visitors, customers, partners, sole proprietors, and 2-percent shareholders of S Corporations.
Step 4: Determine the remaining use and allocate the expenses
If the employer completes Steps 1-3 above and has any remaining parking expenses not specifically categorized as deductible or nondeductible, the employer should reasonably determine the employee use of the remaining parking spots during normal business hours on a typical business day. Methods to determine employee use of the remaining parking spots may include specifically identifying the number of employee spots based on actual or estimated usage. Actual or estimated usage may be based on the number of spots, the number of employees, the hours of use, or other measures.
The Notice contains some very helpful examples that illustrate the application of these rules.
Finally, it should be noted that the guidance provided by this Notice is interim, not final. The Notice states that the IRS intends to publish proposed regulations that will address the determination of nondeductible parking expenses, as well as other issues related to QTFs. However, until then, taxpayers may rely on the rules set forth in this Notice.
If you have any questions, please contact your regular BNN tax advisor or Drew Cheney at 1.800.244.7444.
Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.