IRS Provides Guidance on Nondeductible Employee Parking Expensing
The Tax Cuts and Jobs Act (TCJA) enacted into law in December 2017 added Internal Revenue Code Section 274(a)(4) to eliminate employers from deducting expenses paid after December 31, 2017 to provide employee parking. The TCJA also created the new Internal Revenue Section 512(a)(7) which requires tax-exempt organization to increase their unrelated business taxable income (UBTI) by the amount of employee parking expenses that would be nondeductible if they were subject to the same deduction disallowance rules as taxable entities.
However, the TCJA did not change the rules that exclude the value of employer-provided parking from the employees’ taxable income. The value of these benefits continues to be excluded from an employee’s income to the extent that it does not exceed a monthly threshold ($260 for 2018 and $265 for 2019 as indexed for inflation).
Notice 2018-99 which was issued by the Internal Revenue Service on December 10, 2018 provides interim guidance on how to determine employee parking expenses that are no longer deductible for businesses or may increase the unrelated business taxable income (UBTI) for tax-exempt organizations. The notice provides two methods for calculating the disallowed deduction, and their applicability depends on how the parking benefits are provided to the employees. The first method applies to taxpayers who pay third parties for employee parking spots. The second method applies if the employer owns or leases all or a portion of the parking lot or garage.
Payment to a Third Party for Parking Spaces
When an employer contracts with a third party for the use of a parking facility, the disallowance under Section 274(a)(4) is generally the amount that the employer pays to the third party. However, if that monthly amount exceeds $260 per employee (for tax year 2018), the employer must treat the excess as additional compensation.
For example, an employer pays a third party $300 per month for an employee to park in the garage during 2018. $260 of the monthly benefit is excluded from the employee’s income and the employee recognizes $40 of compensation income monthly which is subject to Form W-2 reporting and employment tax withholding. The employer is not allowed a deduction for $260 of the monthly cost but is allowed a deduction for the $40 included in the employee’s income.
Employer-Owned or Leased Facility
According to the Internal Revenue Service, until it issues further guidance, employers may use any reasonable method to calculate the Code Section 274(a)(4) disallowance in cases where the employer owns or leases the parking facility. The IRS has provided a four-step reasonable method:
1. Calculate the disallowance for reserved employee spots
The amount of the deduction disallowed under this step is calculated by determining the percentage of reserved employee spots in relation to total parking spots and multiplying that percentage by the taxpayer’s total parking expenses for the facility. “Total parking expenses” include, but are not limited to repairs, maintenance, utility costs, insurance, property taxes, snow removal, trash removal, cleaning and parking lot attendant expenses. Until March 31, 2019, taxpayers that have reserved employee spaces may change their parking arrangements to decrease or eliminate their reserved spaces and treat as “not reserved” for purposes of this notice retroactively to January 1, 2018.
For example, an employer owns a parking facility with 100 spaces and the total annual parking expense is $100,000. If ten of the spots are specifically reserved for company executives, the employer is not allowed a deduction for $10,000 ($100,000 x (10/100).
2. Determine the primary use of the remaining spots
The remaining parking facility costs are fully deductible if the primary use of the remaining spaces is to provide parking to the general public meaning that less than 50% of the actual usage of the remaining spaces is be employees during normal business hours on a typical day, or in the case of an exempt organization during the normal hours of the exempt organization’s activities on a typical day.
“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, students of an educational organization and congregants of a religious organization. The general public does not include employees, partners or independent contractors of the taxpayer.
For example, assume from the example in Step 1, that there are 90 spaces remaining (excluding the ten reserved employee spaces) and that 50 spaces are estimated to be used by employees during normal business hours. Therefore, greater than 50% of the remaining spaces are used by employees, not the “general public”.
If greater than 50% of the remaining spots are used by employees, the primary use of the parking facility is not by the general public, so the taxpayer must proceed to Step 3.
3. Calculate the allowance for reserved nonemployee spots
If the primary use of a taxpayer’s remaining parking spots is not to provide parking to the general public, the taxpayer may identify the number of spaces reserved for nonemployees such as visitors, customers, independent contractors, partners and 2% or higher S-corporation shareholders. If the taxpayer has reserved nonemployee spaces, it may determine the percentage of reserved nonemployee spaces in relation to the remaining total parking spaces and multiply that percentage by the taxpayer’s remaining total parking expenses which will result in a tax deduction that is not disallowed under Section 274(a)(4).
For example, considering the same facts as used in the Step 1 example, 30 of the remaining 90 spaces (or 33%) are specifically reserved for nonemployees. Therefore, $33,000 (33% x $100,000) of the $100,000 total annual parking expense is deductible and not disallowed under Section 274(a)(4).
4. Determine remaining use and allocable expenses
If the employer completes Steps 1-3 above and has any remaining parking expenses not specifically categorized as deductible or nondeductible, the employer must use a reasonable method to determine the employee use of the remaining spaces and the related expenses allocable to those spaces. A reasonable method may consider the estimated or actual usage of spaces, the number of employees, hours of use, or other measures.
However, until the IRS releases further guidance, a tax-exempt organization with only one unrelated trade or business can reduce the increase to UBTI to the extent that the deductions directly connected with the carrying on of that unrelated trade or business exceed the gross income derived from such unrelated trade or business.
Estimated Tax Penalty Relief for Tax-Exempt Organizations
If a tax-exempt organization must file the Form 990-T, its unrelated business income will be taxed at the corporate tax rate. Once estimated tax is expected to be $500 or more, the organization must make quarterly estimated tax installments. Because of the increase to UBTI from the disallowed deduction for parking expenses, many tax-exempt organizations that provide parking and other qualified transportation fringe benefits to their employees may owe unrelated business income tax and must pay estimated income tax for the first time.
In light of this, the addition to tax for failure to make estimated income tax payments required on or before December 17, 2018 is waived for tax-exempt entities that owe unrelated business income tax due to the TCJA changes to parking benefits. However, this relief is only available to tax -exempt organization that were not required to file a Form 990-T for the taxable year immediately preceding the organization’s first taxable year ending after December 31, 2017 and that the tax-exempt organization timely files the Form 990-T and pays the amount reported for the tax year for which relief is granted.
What should employers do now?
Employers may rely on Notice 2018-99 to determine the amount of nondeductible parking expense and increase to UBTI until further guidance is issued by the IRS in the form of proposed regulations. In the meantime, companies may need to re-evaluate their parking arrangements or lease agreements related to parking facilities to avoid or reduce the deduction disallowance or, for tax -exempt organizations, increase their unrelated business taxable income.