Determining Nondeductible Costs of Providing Employee Parking
The Tax Cuts and Jobs Act eliminated employer business deductions for employee Qualified Transportation Fringe (QTF) benefit expenses paid or incurred after December 31, 2017. This includes the cost of providing parking to employees. A similar change now treats these costs as Unrelated Business Taxable Income for tax exempt employers. IRS Notice 2018-99 provides guidance for determining the nondeductible amount based on whether the taxpayer pays a third party to provide parking for its employees or whether the taxpayer owns or leases a parking facility where the employees park. A parking facility includes parking lots, garages, other structures, and other areas used for parking.
Taxpayer pays a third party for employee parking: If a taxpayer pays a third party an amount so that its employees may park at the third party’s parking lot or garage, the disallowance generally is calculated as the taxpayer’s total annual cost of employee parking paid to the third party. However, if the amount the taxpayer pays to a third party for an employee’s parking exceeds the monthly limitation on exclusion ($260 per employee for 2018), that excess amount must be treated by the taxpayer as taxable wages to the employee and is therefore deductible by the employer.
Taxpayer owns or leases all or a portion of a parking facility: If a taxpayer owns or leases all or a portion of one or more parking facilities where its employees park, the disallowance may be calculated using any reasonable method. Notice 2018-99 establishes a four-step method that may be used as a safe harbor:
- Percentage of parking spots reserved (by signage or gates) for employee use
This percentage of parking expenses is non-deductible.
- Primary use of remaining parking spots
If the primary use (i.e., greater than 50%) of the remaining parking spots is for the general public, the remaining parking expenses remain deductible. Primary use is tested during normal business hours on a typical business day. If some spaces typically remain open during the day (not used by employees or restricted in anyway), then they can be considered general public use.
- Percentage of parking spots reserved for non-employee (visitors and customers) use
If the primary use is not for the general public, then the percentage of parking expenses attributed to reserved spots for non-employee use remains deductible. Non employees include partners in a partnership, sole proprietor owner and a 2% or more shareholder of an S-corporation.
- Reasonable allocation of remaining parking spots
Taxpayer must reasonably determine the employee use of any remaining parking expenses not specifically categorized as deductible or non-deductible based on a typical business day.
The IRS notice further provides that using the value of employee parking to determine expenses allocable to employee parking in a parking facility owned or leased by the taxpayer is not a reasonable method because section 274(a)(4) disallows a deduction for the expense of providing a QTF, regardless of its value. The notice provides that parking expenses do not include depreciation, but do include repairs, maintenance, utility costs, insurance, property taxes, interest, removal of snow, ice, leaf and trash, cleaning, landscape costs, parking lot attendant expenses, security, rent or lease payment or a portion of rent or lease payments.
For tax years beginning on or after January 1, 2019, a method that fails to allocate expenses to “reserved employee spots” cannot be a reasonable method; however, Notice 2018-99 provides a rule that changes in employee reserved spot designations made by March 31, 2019, may be treated as applying retroactively for these purposes.
Be sure to contact your De Boer, Baumann & Company tax advisor for additional guidance.