IRS issues guidance on taxation of employee parking
Much discussion of the new tax law for 2018 has focused on how it will benefit businesses. But alongside the reduction of corporate tax rates and the 20% deduction for pass-through entities, there are other changes that would limit deductions that businesses have historically been able to claim. One such deduction is employee parking expense. This is now considered a qualified transportation fringe (QTF) benefit and a nondeductible expense under the new tax law.
It is not just for-profit businesses that are impacted by the new treatment for QTFs. Tax-exempt organizations must now report these same QTFs as Unrelated Business Income (UBI) on Form 990-T and pay federal tax at the new 21% corporate tax rate.
The rules for QTFs are effective for all costs incurred as of January 1, 2018, regardless of the tax year-end of the employer. For example, a tax-exempt organization with a fiscal year end of June 30, 2018, would need to determine if it has any UBI on its parking expenses for the second half of its fiscal year (Jan 1 – June 30) and report and pay the tax on Form 990-T.
Tax preparers, as well as the business and the nonprofit communities, have anxiously awaited formal guidance from the IRS on the treatment of parking expenses. On December 10, 2018, this guidance was released with IRS Notice 2018-99. This notice provides guidance to determine nondeductible parking expense or the parking expenses that must be reported as UBI for tax-exempt organizations. Sometime in 2019, proposed, and ultimately, final regulations will be passed, but until the regulations are in place, Notice 2018-99 is the guideline that the IRS expects businesses and organizations to follow.
It is important to note this only applies to employee parking at the employer’s place of business and not for parking incurred while the employee is away on business. It is only parking that is considered commuting costs that are disallowed under the new law.
If an employer directly pays for its employees’ parking, meaning the employer pays a third party for use of a parking facility or individual parking spots or it reimburses the employee for their parking, then the amount paid by the employer is disallowed. The employer can exclude from an employee’s salary up to $260 per month of the direct parking paid. Anything over $260 per month must be treated as additional compensation to the employee and added to their salary. Any portion of parking costs that is included in the employees’ salaries are not disallowed and therefore can be deducted by the employer.
Employers that lease all or a portion of a parking facility should first look to its written lease agreement to see if the cost of the use of the facility is separately stated, particularly when the parking is included as part of a lease for an office or a building. If the amount paid for the use of the parking facility is not separately stated, then the employer would need to calculate the portion of the rent or lease payment that is for the use of the parking facility using “any reasonable method”.
Employers that own all or a portion of a parking facility must allocate its costs to operate the facility. Both its direct costs (snow removal, cleaning, repairs and maintenance, lot attendant or security) and its indirect costs (property taxes, insurance, interest) must be allocated by, again, “any reasonable method”. Depreciation on the parking lot or garage itself is not a cost that needs to be considered for limitation on its deduction.
Once an employer has determined what its parking costs are, it must then determine how much of these costs will be disallowed. For employers who lease or own all or a portion of a parking facility, Notice 2018-99 provides a 4-step method for determining deductibility.
As we go through these steps, we will use a hypothetical company that has $10,000 in allocable parking costs for the year for a parking lot with 100 parking spots
Step 1 – Calculate the disallowance on reserved employee spots
The employer must first determine if there are any parking spots exclusively reserved for employees. This would be any spots that are specifically marked or there is signage that indicates it is for employee parking or is assigned to a specific employee. Also, any separate facility or portion of a facility that is segregated by a barrier to entry or limited by terms of access for employee parking.
For our example company there are 5 spots which have signs that reserve them for the company executives and another spot for the employee of the month. That is 6 parking spots (6% of all the spots) that are considered reserved for employees. The disallowed cost that the company cannot deduct (or would be UBI if it were a tax-exempt organization) is $600 ($10,000 x (6/100)).
The IRS is providing some relief for employers with reserved employee spots. Employers have until March 31, 2019 to remove all reserve signage or barriers and amend any lease agreement to remove any specific reference to reserved spots, and the IRS will retroactively treat these spots as not reserved as of January 1, 2018.
Step 2 -Determine the primary use of the remaining spots
The purpose of this step is to determine if the primary use of the facility is for the general public or for employees. If more than 50% of the spots are determined as not being used by the employees on a typical business day, then the entire facility is considered a public lot and none of the costs for the other spots are disallowed. For purposes of this guidance, general public does not include employees, partners/owners or independent contractors.
In our example, in addition to the 6 reserved spots, there are another 30 employees who park in the lot during normal business hours of a typical business day. Then under 50% (36/100 = 36%) of the spots are deemed to be used by the employees and none of the other parking costs are disallowed. The employer will still have to disallow $600 of the costs under Step 1 for the reserved spots, but none of the other parking spots will be considered.
However, if we were to double the number of other employee spots to 60, then we have 66 deemed employee spots, which is over 50% of the total spots in the lot (66/100 = 66%) and we would have to move forward to Step 3.
Step 3 – Calculate the allowance for reserved nonemployee spots
Just like with Step 1, however, these are spots that are reserved specifically for visitors or customers. The employer can deduct all costs allocable for these reserved nonemployee spots.
Step 4 – Determine the use and allocable costs of the remaining spots
The company in our example has 70 total employees, but some of these employees either travel for work or work from home and are not typically in the office. We have already considered the 6 reserved spots. For the remaining spots we have determined that there are 58 employees who regularly come in to the office on a typical business day and for the employees who work remotely, it is determined that on any given work day 2 of them will typically be at the office. That is how we came to the 60 employee used spots in Step 2. Therefore $6,667 ($10,000 x (66/100)) of the allocable parking costs for the lot at determined to be disallowed.
There has been no formal guidance issued by the Indiana Department of Revenue, but for now we are considering the State of Indiana will conform to the new federal tax law as it pertains to the treatment of employee parking expenses.
A second notice from the IRS, Notice 2018-100, was released the same day. This notice provides penalty relief for tax-exempt organizations who normally do not pay tax on UBI. The IRS is allowing a waiver on the penalty for underpayment of quarterly estimated tax payments made on or before December 17, 2018, as it pertains to UBI tax for parking expense. This notice does not relieve organizations on penalties for underpayment of estimated taxes on their other UBI. It does also not relieve penalties for late payment of tax made after the original due date of Form 990-T. Organizations are expected to pay their full tax, including the UBI for parking, when they file their Form 990-T or with an extension to file.
This new treatment for parking expense adds a great deal of complexity for figuring out your taxable income, or if you have UBI to report if you are a tax-exempt organization. Many taxpayers will have questions, both for the IRS and their tax preparers. If you have any questions, or you would like to schedule a time for a consultation on these new parking rules and what they might mean for your business or organization, please contact our Tax Services Group.