The Tax Cut & Jobs Act (TCJA) changed the rules for employers offering Qualified Transportation Fringe (QTF) benefits to employees. Effective January 1, 2018, employers may no longer deduct the expense of those benefits, unless it’s necessary for the safety of the employee. Most notably, QTFs include qualified parking and will impact many employers and their employees.
Qualified 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. An employee is any individual currently employed by the employer; including common law employees and other statutory employees, such as officers of corporations. Note that two-percent shareholders of S Corporations, sole proprietors and independent contractors are not employees for purposes of these calculations.
Determining the portion of parking expenses that are nondeductible as a QTF can be tricky. Accordingly, Treasury and the IRS have issued interim guidance in Notice 2018-99 for determining the amount of parking expenses that is nondeductible or treated as an increase in unrelated business taxable income (UBTI). The method of determining the nondeductible amount depends on whether the employer pays a third party to provide parking for its employees, or the employer owns or leases a parking facility where its employees park.
Additionally, if an employer owns more than one parking facility in a geographical location/city, the employer may aggregate facilities. If an employer owns more than one parking facility in separate geographical locations, the employer must make the determinations separately.
The following examples help illustrate the guidance. Note that for exempt organizations any disallowed deduction would be an increase to UBTI. Some exempt organizations that are not required to file a 990, such as a church, may have to file a 990T if this provision caused UBTI of $1,000.
What Happens When an Employer Pays a Third Party for Employee Parking Spots?
If an employer pays a third party so its employees may park at the third-party lot or garage, the disallowance is the employer’s total annual cost of employee parking paid to the third party reduced by any amount that must be treated as compensation by the employee under Internal Revenue Code Section 132(f)(2). For 2018, the amount that must be treated as compensation by the employees is any amount over $260 per month.
>> Example 1. Taxpayer A pays B, a third party who owns a parking garage across the street from A, $100 per month for each of A's 10 employees to park in B's garage, equaling $12,000 per year (($100 x 10) x 12 = $12,000). The $100 per month paid for each employee is excludible from compensation; thus, the entire $12,000 is disallowed.
>> Example 2. Assume the same facts as Example 1, except A pays B $300 per month for each employee, or $36,000 per year (($300 x 10) x 12). Of the $300 per month paid for each employee, $260 is excludible from compensation and $4,800 [(($300-260) x 10) x 12] must be treated as compensation by the employees. Thus, $31,200 ($36,000 - $4,800) is disallowed.
What Happens When an Employer Owns or Leases All or a Portion of a Parking Facility in which Employees Park?
Until further guidance is issued, if an employer owns or leases all or a portion of one or more parking facilities where its employees park, the disallowance may be calculated using any reasonable method. The methodology described below is deemed to be a reasonable method. Additionally, until March 31, 2019, employers who have reserved employee spots as defined below in Step 1 may change their parking arrangements (changing signage, access, etc.) to decrease or eliminate their reserved employee spots and treat those parking spots as unreserved employee spots retroactively to January 1, 2018.
Step 1. Calculate the disallowance for reserved employee spots.
Step 4. Determine remaining use and allocable expenses.
Identify the number of employer spots in the parking facility exclusively reserved for employees. Employee spots in the parking facility, or portion thereof, may be exclusively reserved for employees by a variety of methods, including, but not limited to, specific signage (for example, “ Employee Parking Only”) or a separate facility or portion of a facility segregated by a barrier or given limited access.
The employer must then determine the percentage of reserved employee spots in relation to total parking spots and multiply that percentage by the employer’s total parking expenses for the parking facility.
Step 2. Determine the primary use of remaining spots (“primary use test”).
Identify the remaining parking spots in the parking facility and determine whether their primary use is to provide parking to the general public. Primary use means greater than 50% of actual or estimated usage of the parking spots during normal business hours on a typical business day, or in the case of an exempt organization, during the normal hours of the exempt organization's activities on a typical day. Non-reserved parking spots available to the general public but empty are treated as being provided to the general public. The 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 institution and congregants of a religious organization.
Step 3. Calculate the allowance for reserved nonemployee spots.
If the primary use of an employer’s remaining parking spots is not to provide parking to the general public, the employer may identify the number of spots in the parking facility exclusively reserved for nonemployees. Reserved nonemployee spots include spots reserved for visitors and customers, as well as those reserved for partners, sole proprietors and two-percent shareholders of an S Corporation.
The number of reserved nonemployee spots in the parking facility may be exclusively reserved for nonemployees by a variety of methods, including, but not limited to, specific signage (for example, “Customer Parking Only”) or a separate facility or portion of a facility segregated by a barrier or given limited access.
If an employer has no reserved nonemployee spots, move onto Step 4.
If an employer has reserved nonemployee spots, it may determine the percentage of those spots in relation to the remaining total parking spots, and multiply that percentage by the remaining total parking expenses. The product is the amount of the allowed deduction for remaining total parking expenses.
If an employer completes Steps 1-3 and has any remaining parking expenses not specifically categorized as deductible or nondeductible, they must reasonably determine the employee use of the remaining parking spots during normal business hours on a typical business day and the related expenses allocable to the spots. Methods to determine this may include specifically identifying the number of employee spots based on actual or estimated usage. Actual or estimated usage may be based on the number of spots, the number of employees, the hours of use or other measures.
>> Example 1.
Taxpayer C, a big box retailer, owns a surface parking lot adjacent to its store. C incurs $10,000 of total parking expenses. C's parking lot has 500 spots that are used by its customers and employees. C usually has approximately 50 employees parking in the lot in non-reserved spots during normal business hours on a typical business day. C usually has approximately 300 non-reserved parking spots that are empty during normal business hours on a typical business day.
- Because none of C's parking spots are exclusively reserved for employees, there is no amount to be specifically allocated to reserved employee spots.
- The primary use of C's parking lot is to provide parking to the general public because 90% of the lot is used by the public. The 300 empty non-reserved parking spots are treated as being provided to the general public.
Because the primary use of the parking lot is to provide parking to the general public, the entire $10,000 is deductible.
>> Example 2. Taxpayer E, a manufacturer, owns a surface parking lot adjacent to its plant. E incurs $10,000 of total parking expenses. E's parking lot has 500 spots that are used by its visitors and employees. E has 50 spots reserved for management and has approximately 400 employees parking in the lot in non-reserved spots during normal business hours on a typical business day. Additionally, E has 10 reserved nonemployee spots for visitors.
- Because E has 50 reserved spots for management, $1,000 ((50/500) 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 E's parking lot is not to provide parking to the general public because 89% of the remaining parking spots in the lot are used by its employees. Thus, expenses allocable to these spots are disallowed under the primary use test.
- Because 2% of E's remaining parking lot spots are reserved nonemployee spots, the $200 allocable to those spots ($10,000 x 2%)) is not subject to the disallowance and continues to be deductible.
- E must reasonably determine the employee use of the remaining spots during normal business hours on a typical business day and the expenses allocable to employee parking spots. Because 91% (400 of the remaining 440 spots) of E's parking spots are used by E's employees during normal business hours on a typical business day, E reasonably determines that $8,008 (($10,000 - $1,000 - $200) x 91% = $8,008) of E's remaining parking expenses is disallowed.
E has nondeductible parking expenses of $9,008.
>> Example 3. Tax-Exempt Organization K is a hospital and owns a surface parking lot adjacent to its building. K incurs $10,000 of total parking expenses. K’s parking lot has 500 spots used by its patients, visitors and employees. K has 50 spots reserved for management and has approximately 100 employees parking in the lot in non-reserved spots during the normal operating hours of the hospital.
- Because K has 50 reserved spots for employees, $1,000 ((50/500) x $10,000 = $1,000) is the amount of total parking expenses that is nondeductible for reserved employee spots. Thus, under Section 512(a)(7), K must increase its UBTI by $1,000, the amount of the deduction disallowed.
- The primary use of the remainder of K’s parking lot is to provide parking to the general public because 78% of the remaining spots in the lot are open to the public. Thus, expenses allocable to these spots are excepted from disallowance under the primary use test, and are deductible.
K will need to add the $1,000 increase of UBTI to its gross income from unrelated trades or businesses. K is required to file a Form 990-T because the $1,000 increase to UBTI meets the filing threshold.
Contact Pargat Singh at email@example.com or a member of your service team to discuss this topic further.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.