As with most of the tax changes under the Tax Cuts and Jobs Act (TCJA), the changes to the deductibility of qualified parking expenses is not as simple as it proclaims to be. But don’t worry, I’m here to help you break down the new tax law to determine what you need to do for your business.
Before the TCJA, qualified parking expenses paid on behalf of employees was considered 100% deductible and was excluded from the employee’s gross income for employment tax purposes. Now, under the TCJA, the employer must determine how much of their parking expenses are for the benefit of their employees, versus customers or the general public, and report those expenses as non-deductible. However, the tax law change failed to specify how to determine the amount of parking expenses that would be considered non-deductible to the employer or the amount to include as taxable wages on the employee’s W-2. Notice 2018-99 came out to provide temporary guidance while the IRS and Treasury work on proposed regulations. Please note this article only refers to parking expenses as they relate to for-profit companies. There are different rules in place and further guidance in Notice 2018-99 for exempt organizations.
Applying Notice 2018-99
Determining the deductibility of employer parking expenses can vary depending on if the employer pays a third party for parking expenses or if the employer owns or leases the parking facility. See each scenario below.
Parking expenses paid to a third party
If the employer pays a third party to cover parking for their employees, the non-deductible amount would be equal to the amount the taxpayer paid to that third party, with one exception. If the monthly amount paid, per employee, exceeds $260 for 2018, than the excess is deducted by the taxpayer and conversely reported as wages to the employee.
Parking facility owned or leased by the Employer
If a taxpayer owns or leases all or a portion of the parking facility for the benefit of their employees, the non-deductible amount it is not as clear. The notice states that the taxpayer should use any reasonable method and then provides a suggested four-step method. The suggested four-step method is as follows:
Step 1 – Determine the percentage of parking spots reserved for employee use—which means parking spots which are clearly marked “employee only” or have restricted access, such as only accessible via an employee access card. The percentage reserved for employees is the non-deductible portion. However, similar to when the employer pays a third party, for 2018 amounts over $260 per month per employee are deductible by the employer and again included as wages on the employee’s W-2.
Note: Taxpayers have until March 31, 2019, to evaluate their parking arrangements to decrease or eliminate spots reserved for their employees and treat as retroactively to January 1, 2018. In addition, as noted in example 3 in Notice 2018-99, if the primary use of the parking lot is to provide parking to the general public, meaning if 50% or less of the parking spots are used by employees on a typical business day, and there are no reserved spots for employees, then 100% of the parking expenses would be deductible. The general public includes customers & potential customers, patients, students, and individuals delivering goods.
Step 2 – Determine the primary use of the remaining parking spots. If greater than 50% of the remaining parking spots are for the general public, then the remaining parking expenses are all deductible.
Step 3 – If the remaining parking spots available are 50% or less for the general public, the percentage of parking expenses attributed to reserved spots for non-employee use (ex. visitor spots) remain deductible. So the employer must determine the percentage of parking spots that are reserved for non-employee purposes and are not available to the general public. If there are no reserved spots, the employer can move straight to Step 4.
Note: Non-employee reserved spots include parking spots reserved for partners, 2% shareholders, and sole proprietors.
Step 4 – The employer must use a reasonable method to determine the employee use of any remaining parking spots based on employee use on a typical business day. So for example, if there are 10 spots remaining that are not reserved for either employees or non-employees and on a typical business day 6 employees park in those 10 spots, then 60% of the remaining parking expenses would be considered non-deductible.
Step 4 is vague about what a reasonable method implies, but the IRS and Treasury intend to publish proposed regulations under section 274 to aid in determining the amount of parking expenses that are nondeductible. In the meantime, please refer to Notice 2018-99 for ten different examples for determining non-deductible parking expenses. If you have further questions such as the IRS definition of total parking expenses or how this change may affect you or your business, please contact a tax professional.
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