Employee parking expenses – how much can your business deduct?
The Tax Cuts and Jobs Act (TCJA) resulted in many tax law changes. One of them was the new rule for determining the deductible portion of employee parking expenses.
Under the new Section 274(a)(4), expenses paid by employers after Dec. 31, 2017, to provide employee parking are generally no longer deductible. Also, new Section 512(a)(7), requires tax-exempt organizations to increase their unrelated business taxable income (UBTI) by the amount of employee parking expenses that are nondeductible.
The TCJA did not change the rules under Section 132, under which the value of employer-provided parking (and other qualified transportation fringes) is excluded from an employee’s compensation to the extent the value does not exceed a monthly threshold ($260 for 2018 and $265 for 2019). Thus, employer-provided monthly parking expenses in excess over $265 per employee (for 2019) are deductible by employers as long as the excess is included in employee’s compensation.
For purposes of these new rules, employee 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.
Parking is provided by an employer if the parking is on property that the employer owns or leases; the employer pays for the parking (for example, third party’s garage); or the employer reimburses the employee for the parking expenses.
For a parking facility owned or leased by the employer, the lost deduction is attributable to the expenses related to the facility. These expenses include, but are not limited to, repairs, maintenance, utilities, insurance, property tax, interest, snow removal, leaf and trash removal, cleaning, landscaping, parking attendant expenses, security, and rent or lease payments or a portion of rent and lease payments. However, depreciation is not an expense for this purpose and is still an allowed deduction. In addition, 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 deductible as well.
The method of determining the nondeductible amount of parking expenses depends on whether the employer pays a third party to provide parking for its employees or the employer owns/leases a parking facility where its employees park. In the first instance, the disallowance amount is based on the amount paid to the third party by the employer, and, in the second, an employer is allowed to use any reasonable method to determine the amount of nondeductible expense. In addition, Notice 2018-99 issued by IRS as initial guidance on the issue, provides a four-steps method that can be used as a safe harbor for the calculation of nondeductible parking expenses.
To summarize, parking expenses allocated to “reserved employee parking” spots are always nondeductible. If more than 50% of the remaining parking spots are for public use, then the remaining parking expenses are fully deductible and no further calculation is required. In addition, parking expenses allocated to the “reserved nonemployee spots” (for visitors and customers, as well as partners, sole proprietors, and two percent shareholders of S corporations) are excluded from calculation and are deductible expenses.
As noted above, under new tax law, tax-exempt organizations that have employees are required to increase their UBTI by any amount for which a deduction is not allowable. Tax-exempt organizations with UBTI less than $1,000, after taking into account the increase to UBTI for parking expenses, are not required to file a Form 990-T. This may provide relief to some tax-exempt organizations with a small amount of parking expenses and little or no gross income from unrelated trades or businesses.
There are still some uncertainties and questions that remain about the new tax law and the calculations that are required. The Department of the Treasury and the IRS intend to soon publish proposed regulations under sections 274 and 512, which should provide more clarification and guidance on determination of nondeductible parking expenses and the calculation of increased UBTI.
To discuss how this legislation may impact you or your business, please contact Viktoryia Olunina, CPA at volunina@capaldireynolds.com or Jeffrey A Wilson, CPA at jawilson@capaldireynolds.com
Article contributed by Viktoryia Olunina, CPA and Jeffrey A Wilson, CPA.
