In late 2017, the Tax Cuts and Jobs Acts (TCJA) created the most significant overhaul of the tax system in over 30 years. Throughout 2018, the IRS issued notices to clarify the new law and its effects on taxpayers. The IRS issued notice 2018-99 regarding parking expenses for Qualified Transportation Fringes under Section 274(a)(4) and Section 512(a)(7) of the Internal Revenue Code. These sections disallow deductions for expenses with respect to qualified transportation fringes provided to employees of for-profit organizations.
The TCJA disallows deductions for the expenses of qualified transportation fringe (QTF) benefits that are provided by employers for their employees. QTFs are defined to include: (1) transportation in a commuter highway vehicle between the employee’s residence and place of employment, (2) any transit pass, and (3) qualified parking. 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.
There are a variety of qualified parking methods employers use to provide tax-free parking benefits to employees. Employers may allow employees to park at no cost or at a reduced rate in an employer-owned or leased parking facility. Employers may pay a third party so employees can park at the third party’s garage or lot. Alternatively, employers may reimburse employees for the cost of parking, or allow employees to pay for parking on a pre-tax basis through a salary reduction arrangement. Qualified parking does not include any parking on or near the property used by the employee for residential purposes.
If a taxpayer paid a third party for employees to park in the third party’s garage or lot, the amount paid to the third party is a parking expense. This type of parking expense is an employee-related parking expense and, therefore, is a nondeductible expense up to the statutory limit for exclusion from employee wages, which is $270 per employee in 2020. Amounts above the exclusion maximum are not nondeductible and must be properly included in employee wages.
If a taxpayer owns or leases a parking facility, parking expenses include but are not limited to repairs, maintenance, utility costs, insurance, property taxes, interest, snow and ice removal, leaf removal, trash removal, cleaning, landscape costs, parking lot attendant expenses, security, and rent or lease payments or a portion of a rent or lease payment if not broken out separately. Depreciation on a parking structure is not considered a parking expense for this purpose. These parking expenses are only nondeductible to the extent they relate to employee parking. Parking made available to the general public is excluded from expenses.
To be considered available to the general public, parking needs to be reserved for the public or needs to be unreserved and be used by the public. The notice clarifies that empty spots are considered used by the public. Parking expenses allocated to unreserved spots that are either empty or used by the public are excluded from expenses. The general public includes customers, clients, visitors, patients, students, individuals delivering goods, and congregants of a religious organization. It does not include employees or independent contractors.
The notice provided a primary use test, which is a key factor in reducing the amount of nondeductible expenses. Primary use is defined as greater than 50 percent of actual or estimated usage of the parking spots in the parking facility. If most of a parking facility, excluding employee-reserved spots, is used by the public, all of the unreserved spots in the facility are considered to be available to the general public. Primary use is tested during the normal hours of the exempt organization’s activities on a typical day.
Parking spots reserved specifically for employees are considered employee parking and parking expenses allocated to those spots are nondeductible.
The Further Consolidated Appropriations Act, 2020 repeals the requirement that tax-exempt employers who provide qualified transportation fringe benefits or parking to employees must pay unrelated business income tax on the amount by which a deduction is not allowed. Organizations are encouraged to file an amended Form 990-T to claim refunds for taxes that may have been paid as a result of the parking benefits provided to employees.
As with all aspects of taxation, there are many exceptions and special rules to consider. Please contact us if you would like additional information.
By Svetlana Svetlichnaya, CPA