Will You Owe Tax on Your Parking Lot?

The Tax Cuts and Jobs Act (Act) legislation signed into law on December 22, 2017, was sweeping in several ways.  The Act has eliminated any deduction for business entertainment expenses, eliminated 2% miscellaneous itemized deductions for individuals, set the Corporate tax rate to a flat 21%, and created a new deduction for individuals who own pass-through entities, to name a few of the significant changes.

 

The Act also eliminated the deduction available to employers for Qualified Transportation Fringe Benefits when the benefit is not taxable to an employee. Qualified Transportation Fringe Benefits include 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.  As explained below, this definition now includes not only employer paid parking, but also costs incurred by employers that have a parking lot at an owned or leased building.

 

Under prior law, if a business pays for parking for an employee, up to $260 per month was non-taxable to the employee and deductible for the employer.  Or if the monthly parking cost exceeded the $260 limit, the entire monthly cost was deducted by the employer, but the excess over the limit was taxable compensation to the employee.  Under the Act starting January 1, 2018 the entire $260 is no longer deductible for the employer but remains non-taxable to the employee.  If monthly parking exceeds the $260 limit the excess is deductible to the employer and taxable to the employee as compensation.

 

Prior to January 1, 2018 Example

 

Employer

Employee

Monthly Parking Cost

Deductible

Non-Deductible

Non-Taxable

Taxable

  $260 per month

$260

$0

$260

$0

  $300 per month

$300

$0

$260

$40

 

Beginning January 1, 2018 Example

 

Employer

Employee

Monthly Parking Cost

Deductible

Non-Deductible

Non-Taxable

Taxable

  $260 per month

$0

$260

$260

$0

  $300 per month

$40

$260

$260

$40

 

In addition to for-profit business losing the parking deduction, the Act requires a non-profit organization to include in unrelated business income the amount that would be non-deductible parking. This inclusion results in both for-profit and non-profit employers being treated similarly in regard to employee parking benefits.

 

Until Notice 2018-99 (Notice) was issued by IRS on December 10, 2018, this seemed straight forward, only Qualified Transportation Fringe Benefits were affected.  The Notice clarifies that qualified parking now also includes parking costs on owned or leased parking lots in the calculations for non-deductible parking costs.  This clarification means most taxpayers will be impacted by non-deductible parking.

 

The Notice provides that a reasonable method must be used to determine the parking costs.  Parking costs “include, but are not limited to, repairs, maintenance, utility costs, insurance, property taxes, interest, snow and ice removal, leaf removal, trash removal, cleaning, landscaping 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)”.  The Notice also states the depreciation is not a parking expense and that items not located on or in the parking facility, including items next to it such as landscaping or lighting, are also not included as parking expenses.  The method for determining the non-deductible parking costs for for-profit entities is the same process for determining unrelated business income parking costs for non-profit entities.

 

Once the parking costs have been identified, the Notice provides a 4-step process for determining which costs are deductible or non-deductible parking costs.  The safe harbor method provides interim guidance to look at the type of parking, as well as the general use of the parking spots provided.

 

  1. Calculate the disallowance for reserved employee spots (spots for exclusive use of employees by signage or gates).
    1. All costs associated with reserved employee spots are non-deductible.
    2. Partners, sole proprietors, and 2% or greater S-corporation shareholders are not considered employees.

  2. Determine the primary use of the remaining spots (primary use is defined as more than 50% and is to be determined on a normal business day with typical use)
    1. If the remaining parking sports are to provide parking to the general public (customers, clients, visitors, patients, students, etc.) then the costs are deductible.
    2. If the remaining spots are used primarily by employees, then you must continue to determine how much of the remaining costs are non-deductible.

  3. Calculate the allowance for reserved non-employee spots
    1. Identify the number of spots specifically reserved for non-employees.
    2. The allocable portion of the parking costs for reserved non-employee spots are deductible.

  4. Determine remaining use and allocable expenses
    1. If any expenses remain unallocated after completing steps 1-3, the employer must reasonably determine the employee use of the remaining parking spots.  Actual or estimated usage may be based on the number of spots, the number of employees, the hours of use, or other measures.

Example using 4-step safe harbor process:

Taxpayer A, owns a surface parking lot adjacent to its building.  A incurs $10,000 of parking expenses.  A’s parking lot has 500 spots that are used by its visitors and employees.  A usually has approximately 400 employees parking in the lot in non-reserved spots during normal business hours on a typical business day.  Additional, A has 25 spots for nonemployee visitors.

 

  1. Disallowance for reserved employee spots: no spots are specifically reserved so no costs are specifically allocated in this step
  2. Determine primary use: 400 employees/500 available spots = 80% primary use is for employees
  3. Calculate cost for reserved non-employee spot:  25 reserved non-employee spots/500 available spots = 5% * 10,000 = $500 deductible parking costs
  4. Determine remaining use and allocable expenses:  A will have to determine the employee use of the remaining parking spots during normal business hours on a typical day and determine how much of the remaining $9,500 of parking expenses is allocable to the employee parking spots.  The portion allocable to employee parking spots will be non-deductible parking costs.  Assuming A determines the 400 of the remaining 475 spots are primarily used by its employees, then (400/475) * 9,500 = $8,000 will be considered non-deductible parking costs.

 

In summary, of A’s total parking expenses of $10,000:  $2,000 is deductible ($500 for reserved non-employee spots and $1,500 for non-employee use of available spots) and $8,000 is non-deductible.

 

Until March 31, 2019, employers that have reserved employee spots may change their parking arrangements (changing signage, access, etc.) to decrease or eliminate the reserved employee spots and treat them as not reserved employee spots for purposes of this notice retroactively to January 1, 2018.

 

If you have any questions or need assistance, please contact your AHP representative.

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