In December 2018, the IRS issued Notice 2018-99 to provide taxpayers interim guidance for determining the nondeductible portion of parking expenses for qualified transportation fringe (QTF) benefits. Following a comment period, which has seen hundreds of comments submitted, the IRS intends to issue proposed regulations.
Until the regulations are issued, taxpayers who own or lease employee parking facilities may use any reasonable method to determine the amount of nondeductible parking expense and may rely on guidance provided in the Notice. However, for taxable years beginning on or after January 1, 2019, a method that fails to allocate expenses to reserved employee parking spots can’t be a reasonable method.
Taxpayers have until March 31, 2019, to modify existing parking arrangements for employees, which will be effective for the tax year beginning on or after January 1, 2018.
Here’s a look at interim guidance included in the Notice and potential impacts on employers.
The 2017 tax reform reconciliation act, also known as the Tax Cuts and Jobs Act (TCJA), generally disallows deductions for expenses related to QTFs that taxpayers provide to employees under Section 274(a)(4). However, the TCJA doesn’t provide guidance regarding how to determine which portion of parking expenses related to QTFs are nondeductible.
Areas to review for potential QTFs include the following:
The Notice provides several important areas for employers to consider regarding QTFs.
Employers may provide a QTF fringe benefit to employees. The benefit generally isn’t included in gross income to employees, and the excludable amount can’t exceed a maximum dollar amount, adjusted for inflation. For 2018, the adjusted maximum monthly excludable amount is $260. For 2019, the amount is $265.
The notice further clarifies that if the fair-market value of the QTF exceeds the limitation on exclusion, the excess amount is included in employee compensation.
For parking expenses to qualify as a business deduction, more than 50% of the available space must be used by the general public during the business’s normal operating hours. Empty, unreserved spaces available to the general public and not used by employees are also counted as used by the general public.
The term general public includes, but isn’t limited to, customers, clients, visitors, and individuals delivering goods or services to the business. It doesn’t include employees, partners, or independent contractors of the business.
The method for determining the nondeductible portion of parking expenses depends on the following factors:
Generally, if an employer pays a third party for employees to park in a parking lot or garage, the total annual cost of employee parking paid to the third party is nondeductible. However, if the taxpayer pays the third party for an employee’s parking and that amount exceeds the monthly limitation on exclusion, which is $260 for 2018 and $265 for 2019, the excess amount over the limitation is treated as compensation to the employee and deductible to the employer.
If an employer owns or leases all or a portion of a parking facility, the disallowance of parking expenses provided to employees may be calculated using any reasonable method. The Notice deems the following four-step methodology a reasonable method for determining the nondeductible portion of parking expenses.
Described below, the four-step methodology categorizes parking expenses as either deductible or nondeductible.
Parking expenses include, but aren’t limited to, repairs, maintenance, utility costs, insurance, property taxes, interest, snow and ice removal, leaf removal, trash removal, cleaning, landscaping costs, parking lot attendant expenses, security, and rent or lease payments allocated to parking, if not broken out separately.
The Notice doesn’t clarify how to determine the allocation of expenses between office space and a parking facility when the lease agreement doesn’t itemize the cost for use of parking.
Here are four steps for determining nondeductible parking expense.
The first step for determining nondeductible parking expense is to calculate the disallowance for reserved employee spots. This can be broken out into the following two parts:
Next, an employer determines the primary use of remaining spots, referred to as the primary-use test. Primary-use means greater than 50% of actual or estimated parking spots in the parking facility are used during normal business hours on a typical business day. An employer should identify the remaining parking spots in the parking facility to determine whether the primary use is for employees or the general public.
If it’s determined more than 50% of the total parking spots are available to the general public, the remaining total parking expenses are deductible under Section 274(e)(7). However, if the primary use—more than 50%—is for employees, the employer must continue to step three.
The next step is to calculate the allowance for reserved nonemployee spots, which include parking spots for nonemployees, visitors, customers, partners, sole-proprietors, and 2% shareholders of S corporations. This deductible amount is calculated by total nonemployee reserved parking over total parking spots multiplied by total parking expenses.
If the employer has any remaining parking expenses not specifically categorized in the previous steps, they must determine remaining parking spot use and allocate parking expenses as either nondeductible or deductible.
To determine remaining employee parking spots, an employer can identify the number of employee spots based on actual or estimated usage. The remaining parking expenses allocable to employee parking spots are nondeductible.
Employers have until March 31, 2019, to change parking arrangements and reduce or eliminate the number of parking spots reserved for employees. The change can retroactively apply, dating back to January 1, 2018.
Here are some reminders and clarifications for reviewing qualified transportation fringe benefits and parking expenses.
For more information about guidance relating to Notice 2018-99 or QTFs, contact your Moss Adams professional.