Guidance for Employers and Nonprofit Organizations on How to Calculate Nondeductible Employee Parking Expenses, Including How You May Be Able to Reduce Them by March 31, 2019

Employer business deductions for qualified transportation fringes ended in 2018. The 2017 tax reform known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, amended Sec. 274(a)(4) by eliminating employer business deductions for employee qualified transportation fringe (QTF) benefit expenses, including qualified parking, mass transit and van pool benefits (although such benefits continue to be excluded from employee income).

Increased cost for tax exempt employers started in 2018. TCJA also amended Sec. 512(a)(7) to require tax exempt employers to increase their unrelated business taxable income (UBTI) for such QTF expenses.

How to calculate employee parking expenses was unclear. These changes were effective for amounts paid or incurred after December 31, 2017, but TCJA did not explain how to determine the amount that is nondeductible or treated as an increase in UBTI. Although the IRS intends to propose regulations under Sec. 274(a)(4) and 512(a)(7) (and under Sec. 6012 for tax exempt employers’ related filing requirements), in the interim, the IRS recently issued Notice 2018-99 (December 10, 2018), providing limited guidance on how to calculate nondeductible parking expenses. Employers may rely on Notice 2018-99 until further guidance is issued.

For simplicity, in this article, we’ll use “nondeductible parking expenses” which tax exempt employers should read to include UBTI increases, since the new UBTI inclusion rules for tax-exempt organizations generally mirror the new Sec. 274(a)(4) rules. But tax exempt employers should also note that in Notice 2018-100, the IRS provided relief from the estimated tax penalty in 2018 for parking QTF benefits for entities that were not previously required to file a Form 990-T or that will not exceed the $1,000 threshold below which a tax exempt organization is not required to file a Form 990-T or pay UBIT.

IRS Guidance and Transition Relief

How to determine an employer’s nondeductible parking expense depends on whether the employer owns (or leases) the parking facility or pays a third party for employee parking.
Importantly, Notice 2018-99 says that employers who own or lease parking facilities that have “reserved” parking spaces for employees have until March 31, 2019, to reduce the reserved employee spaces to qualify for the “general public” parking exception to the nondeductible employee parking rules (discussed below). If that change is timely made, the IRS will treat the change as being in effect since January 1, 2018.

Employers Who Use Third Party Parking Areas

If the employer pays a third party (either directly or through reimbursement) for employee parking, the amount of the nondeductible parking expense is fairly straightforward. It is the lesser of (i) the employer’s total annual cost of employee parking paid to the third party; or (ii) the Sec. 132(f)(2) monthly per employee parking limit (i.e., $260 for 2018; $265 for 2019). If an employer pays more than the Sec. 132(f)(2) limit, the excess is treated as employee wages (and therefore, the excess is deductible as compensation and is not subject to the Sec. 274(a)(4) disallowance). The calculation of the nondeductible expense is more complicated for employers who own or lease employee parking areas.

Employers Who Own/Lease Parking Areas

FAQs for Calculating Expenses

The Notice also answers some commonly asked questions about to how to calculate the amount of nondeductible employee parking expenses.

  1. What counts as an expense? The Notice clarifies which costs can or cannot be included as an employee parking expense. Expenses are based on employer cost, not “value” — so employers can’t simply use fair market value because Sec. 274(a)(4) disallows a deduction for the expense of providing a QTF (regardless of its value). For example, depreciation cannot be included as a parking expense because it is not an actual “paid” expense (since depreciation simply recovers the original investment).
    Also, 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 — are not included.Permissible expenses include (but aren’t limited to) rent or lease payments, insurance, property taxes, interest, utility costs, repairs and maintenance, cleaning, removal of snow, ice, leaves and trash, parking lot attendant expenses and security costs.
  2. What if the employer has multiple parking areas? According to the Notice, if an employer owns or leases more than one parking facility in a single geographic location, the employer may aggregate the number of parking spots when calculating nondeductible parking expenses. But if the employer owns or leases parking facilities in more than one geographic location, the employer may not aggregate those parking spaces.

Other Laws Still Apply

Regardless of these changes in federal tax law, keep in mind that employers must continue to comply with local laws regarding commuter benefits — for example, in New York City and San Francisco.

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