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It’s holiday time and, in part, that means trips to the mall or downtown and, of course, the struggle to find parking. Well, employers throughout the country have been experiencing their own version of parking woes and feelings of hopelessness since the passage of the Tax Cuts and Jobs Act (TCJA) last December.
One of the many provisions significantly amended by this sweeping tax legislation was Internal Revenue Code Section 274, which now disallows a deduction for tax-free employer-provided parking. Recently, the IRS issued its long-awaited guidance on this code section in the form of Notice 2018-99. The rules also apply to not-for-profit entities by creating unrelated business taxable income. This article will focus on the deduction disallowance applicable to for-profit entities.
The timing of the Notice is important because the new deduction disallowance rules applicable to employer provided parking are effective for expenses incurred beginning January 1, 2018. Thus, this is most definitely a 2018 tax matter. The Notice does not announce any delay in enforcement so employers need to become familiar with the new rules now.
Despite the long waits and frustrations shared by many, perhaps employers will find this Notice to be a good deal for them.
It’s important to note the guidance recently issued was a notice—not substantive legislation. While it can—and should be—relied upon for the time being, the Notice is open to public comment and subject to change.
Section 274(a)(4) states that employers will now lose their traditional business deduction with respect to their expense of providing certain disallowed qualified transportation fringe benefits to their employees, including items such as a commuter highway vehicle, transit passes, qualified parking, and on-premises athletic facilities. Of course, the largest item in that group of disallowed fringes and the one drawing the most ire from the employer community as a whole is qualified parking.
What is qualified parking?
Qualified parking is defined as parking 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. In a nutshell, if you provide parking to your employees, be it through a third-party parking garage, or a parking lot your organization either owns or leases, the organization may lose its deduction for some or all of the expenses incurred in providing the parking.
Notice 2018-99 identifies two separate categories regarding qualified parking:
- Employers that pay a third party for employee parking spots,
- Employers that own or lease all or a portion of a parking facility
Employers that pay a third party for employee parking spots
The rules here are not complex. If an employer pays a third party to provide parking to its employees on a tax-free basis, then, generally, the employer is going to lose its deduction for the costs of the parking. If the amount of the parking provided is more than $260/month (allowable for 2018), then the excess over the $260 threshold will be includible in employee income and will be allowed as a wage deduction.
Employers that own or lease all or a portion of a parking facility
This can get a little complex. Generally, employers are required to use any reasonable method to calculate the amount of any disallowed deduction. Using the value (as opposed to the cost) of employee parking to determine expenses allocable to employee parking in a parking facility owned or leased by the employer is not considered a reasonable method.
The Notice does provide a “safe-harbor” four-step approach that is deemed to be reasonable. That is the approach that many if not most employers will want to use. The steps are as follows:
STEP 1
Calculate the cost of reserved employee spots. All spots reserved by specific signage or segregated by a barrier or limited access for employee parking only are considered reserved employee spots. The percentage of reserved employee spots in relation to total parking spots, multiplied by the total parking costs is the amount of the deduction which is lost. Skip this step if the organization has no reserved employee spots.
Planning tip: Employers have until March 31, 2019, to change parking arrangements to decrease or eliminate reserved employee parking spots and treat those spots as non-reserved retroactively to January 1, 2018. This is a significant opportunity for organizations to greatly reduce their tax burden should they so choose to remove “employee only” parking spaces from their respective parking lots.
STEP 2
Determine the primary use of the remaining parking spots. If the primary use of the remaining parking spots is to provide parking to the general public, then the remaining total parking costs are exempted from deduction disallowance rule. Primary use is defined in the Notice as greater than 50% of actual or estimated usage, tested during normal business hours on a typical business day. The general public includes customers, clients, visitors, individuals delivering goods, patients of a health care facility, students of an educational facility, and congregants of a religious organization. The general public does not include employees, partners, or independent contractors of the organization.
Importantly, empty parking spots are considered to be public spots if they are available to the public. If Step 2 determines that the primary use of the available parking is public (for example: 51%), then there is no deduction disallowance (except for Step 1, if any) and the employer is done. This is a very favorable rule.
STEP 3 (if necessary)
Calculate the allowance for specifically reserved nonemployee spots. All spots reserved by specific signage or segregated by a barrier or limited access for nonemployee parking (i.e., Customer Parking Only) are considered reserved nonemployee spots. The percentage of reserved nonemployee spots in relation to remaining total parking spots, multiplied by the remaining total parking costs is deductible. Skip this step if the organization has no reserved nonemployee spots.
STEP 4 (if necessary)
Determine remaining use and allocable expenses. If parking costs still remain after completing steps 1-3, they are allocated on a reasonably determined basis of use by employees during normal business hours on a typical business day.
Example: An employer owns a parking lot adjacent to its building and incurs $10,000 of total parking expenses. The parking lot has 500 total spots used by clients, visitors, and employees. 50 spots are reserved for management and approximately 100 employees park in the lot in non-reserved spots during the normal operating hours of the hospital.
STEP 1
As 50 spots are reserved for management employees, $1,000 ((50/500) x $10,000 = $1,000) is disallowed as a deduction.
STEP 2
The primary use of the remainder of the parking lot is to provide parking to the general public because 78% (350/450 = 78%) of the remaining spots in the lot are open to the public. Therefore, all of the remaining expenses allocable to the 450 spots are exempted from taxation, and only $1,000 will be disallowed as a deduction. There is no need to go on to Steps 3 and 4 because all parking expenses have been accounted for.
In the example above, if none of the parking spots were reserved, the primary use of the parking lot would be to provide parking to the general public because 70% (350/500 = 70%) of the spots are open to the public (primary use is > 50%). In this situation, none of the parking costs would be subject to loss of deduction.
What is a parking facility?
The term “parking facility” includes 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 or near a location from which an employee commutes to work.
What expenses are included?
Parking expenses include (but are not limited to) repairs, maintenance, utility costs, insurance, property taxes, interest, snow and ice removal, leaf removal, cleaning, landscape costs, parking lot attendant expenses, security, and rent or lease payments or a portion of a rent or lease payment (if not broken out separately). A very important distinguishment in the Notice states that depreciation is NOT to be included as a parking expense. This is certainly welcome news and a departure from what most practitioners and clients expected. Expenses paid for items not located on or in the parking facility are also not included (i.e., landscaping or lighting next to the parking facility).
Notice 2018-99 is generally a welcome sight and it provides a good baseline as to how to go about determining an employer’s exposure to a loss of deduction regarding qualified transportation fringe benefits. During this holiday season, employers should take a few moments to reflect on the past year and count their blessings—and their parking spaces!
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