Understanding the Implications of the Tax Cuts and Jobs Act on Employee Parking Tax Deductions
Is employee parking tax deductible? There has been much discussion in the business community about the positive aspects of Tax Cuts and Jobs Act (“TCJA”) enacted in December 2017. However, lost in the celebration is one change which affects all types of business entities and organizations. The cost of providing parking to an employee at or near the employer’s business premises or on or near a location from which the employee commutes to work is no longer deductible, effective for amounts paid or incurred after December 31, 2017.
Congress did not provide any details in the law other than to disallow the deduction for the expense of any “qualified transportation fringe” provided to employees. Partners of a partnership, 2% shareholders of a S Corporations and sole proprietors are not employees.
Last month, IRS issued interim guidance for employers to determine the amount of parking expenses that are nondeductible as qualified transportation fringes, pending publication of proposed regulations.
What expenses are subject to disallowance? The notice provides that total parking expenses include, but are 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 or a portion of a rent or lease payment (if not broken out separately.)” Depreciation is not a parking expense. Parking expense does include a portion of rent or lease payment when the lease covers office space and parking. The notice does not provide guidance for determining the portion of lease payments attributed to parking when the lease does not break out the amount attributed to parking. Presumably, any reasonable method could be used. Before spending too much time trying to determine a reasonable method, continue reading. If you have no reserved employee spots and more than 50 percent of the remaining spots are for the general public, your costs may be fully deductible.
The calculation is fairly straightforward if the employer pays a third party for parking in the third party’s lot or garage. In that case, the disallowed amount is the cost paid to the third party. If, however, the cost exceeds the amount that is tax free to the employee ($260 per month for 2018), the excess is treated as wages and excepted from disallowance. Applying the same reasoning, increasing wages in lieu of paying for parking shifts the expense from nondeductible parking to deductible wages. But remember, wages are subject to payroll taxes. Eliminating a tax-free employee fringe benefit could save a 21% income tax deduction, but after factoring in payroll taxes on increased wages, there is little benefit to that approach and most likely a significant tax cost to the employee. The employee will pay regular income tax on the income added to their W-2, most likely at a rate higher than 21%, and will also pay Social Security and Medicare taxes.
But what if the employer doesn’t pay a third party for parking in the third party’s facilities? IRS says that the disallowed amount may be calculated using any reasonable method. Using value in lieu of expense is not a reasonable method. Also, expenses must be allocated to reserved employee parking spots. Employers have until March 31, 2019, to change parking arrangements to decrease or eliminate reserved parking spots.
Under the notice, the following is a reasonable method:
- Calculate the disallowance for the reserved employee spots. The percent of reserved spots to total spots is multiplied by the total parking expenses to determine the portion attributed to the reserved employee spots.
- Determine the primary use of the remaining spots. If the primary use (greater than 50 percent) of the remaining spots is to provide parking to the general public, then the remaining expenses are deductible. Testing is during normal business hours on a typical business day or during normal operating hours on a typical day.
- Calculate allowance for reserved nonemployee spots. If the primary use is not to provide parking to the general public, there may be reserved spots for nonemployees—for example, visitors, partners of a partnership, sole proprietors and 2 percent shareholders of S Corporations. The percent of reserved spots to total spots multiplied by the parking expenses is fully deductible.
- Determine remaining use and allocable expenses. If there are any remaining parking expenses, the employer must determine the employee use of the remaining parking spots and expenses.
There is a corresponding provision in the TCJA that requires tax-exempt organizations to include the expense of employee parking in unrelated business taxable income. The amount that would be nondeductible for a taxable entity is subject to tax for an exempt organization.
The notice provides a few examples, including:
Taxpayer F, a financial services institution, owns a multi-level parking garage adjacent to its office building. F incurs $10,000 of total parking expenses. F’s parking garage has 1,000 spots that are used by its visitors and employees. However, one floor of the parking garage is segregated by an electronic barrier and can be entered only with an access card provided by F to its employees. The segregated floor of the parking garage contains 100 spots. The other floors of the parking garage are not used by employees for parking during normal business hours on a typical business day.
Because F has 100 reserved spots for employees, $1,000 ((100/1,000) x $10,000 = $1,000) is the amount of total parking expenses that is nondeductible for reserved employee spots.
The primary use of the remainder of F’s parking lot is to provide parking to the general public because 100% (900/900= 100%) of the remaining parking spots are used by the public. Thus, expenses allocable to those spots are excepted from the disallowance under the primary use test, and only the $1,000 allocated to the reserved parking in step 1 above is subject to the disallowance. Employers may rely on the notice to calculate the nondeductible expenses until further guidance is issued or consider whether there are other reasonable methods that may apply. Many of those businesses who are aware of this new tax provision are hoping if they close their eyes, it will all be just a bad dream. Unfortunately, with the 2018 tax filing due date approaching for many businesses, this is something that needs some thought and strategy. If you are a business owner who has not yet considered how to calculate your deductible expense, you should contact your tax adviser now.
This material is generic in nature. Before relying on the material in any important matter, users should note date of publication and carefully evaluate its accuracy, currency, completeness, and relevance for their purposes, and should obtain any appropriate professional advice relevant to their particular circumstances.