Specifically, Internal Revenue Code (Code) section 274(a)(4) was added to provide that “no deduction shall be allowed under this chapter for the expense of any qualified transportation fringe (as defined in section 132(f)) provided to an employee of the taxpayer.”
This means various qualified transportation benefits provided to employees, such as van pools, transit passes and qualified parking, are no longer allowable deductions for employers. Regardless of whether the benefits are employer provided, reimbursed by the employer or through a compensation reduction plan, previously allowable tax deductions are not allowed beginning January 1, 2018. This code change does not affect employees as payments for these QTFs are still excluded from wages.
Notice 2018-99 specifically focuses on which expenses to consider when looking at qualified parking and how to determine what portion of those expenses are allowed or disallowed under the new rules. The notice identifies “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)” as included in calculating total parking expenses. One notable item that did not make the list is depreciation expense—it remains fully deductible.
First, taxpayers need to determine whether a third-party is providing parking for its employees or if the taxpayer owns or leases a parking facility. If a third-party provides parking, then the disallowed expense is generally calculated as the total annual cost of employee parking paid to the third-party, taking into account QTF monthly exclusion limitations, currently $260 per month per employee for qualified parking. If excess amounts above this limitation are paid for an employee, the difference is not a disallowed expense and instead should be treated as additional compensation to the employee.
If the taxpayer owns or leases a parking facility for its employees, more detailed analysis is required. In fact, the IRS lays out a four-step methodology that they deem a reasonable method until any regulations are issued. These steps are laid out below:
Step 1: Calculate the disallowance for reserved employee spots
If the taxpayer exclusively reserves parking spots for employees by using a method with specific signage (“Employee Parking Only”) or a separate limited access area, then the taxpayer should determine the portion of disallowed parking expense related to reserved employee spots as follows:
|# of reserved employee spots
# of total parking spots
|X||total parking expenses||=||Disallowed expenses for reserved employee spots|
Step 2: Determine the primary use of remaining spots
If greater than 50% of the remaining parking spots are primarily used to provide parking to the general public, then the remaining total parking expenses are excluded from the new disallowance rules and will be fully deductible. If 50% or less are primarily used for the general public, then the taxpayer must go to Step 3 of the analysis. For purposes of these calculations, “primary use” means greater than 50 percent of actual or estimated usage of the parking spots in the parking facility. The test to determine the percentage should be considered during normal business hours on a typical business day. The term general public is essentially described as most individuals other than employees, partners or independent contractors of the taxpayer. Example 3 from the Notice that illustrates Step 2 in the analysis is provided later in the article.
Step 3: Calculate the allowance for reserved nonemployee spots
If Step 2 reveals that the primary use of the parking facility was not to provide parking to the general public, then Step 3 applies. Step 3 determines the allowance relating to reserved nonemployee spots, such as spots reserved for visitors, customers or owners. Similar to Step 1, these spots would be reserved by another method, such as specific signage (“Visitor Parking Only”) or a separate, limited access area. The calculation for Step 3 is:
|# of reserved nonemployee spots
# of remaining total parking spots
|X||total remaining parking expenses||=||allowable expenses for reserved nonemployee spots|
Step 4: Determine remaining use and allocate expense
If the taxpayer has completed Steps 1-3 and has remaining parking spots and expenses that have not been categorized, then a reasonable determination must be used to determine the employee use of the remaining spots. Similar to Step 2, this must be considered during normal business hours on a typical business day. Once the remaining employee usage is determined, a calculation should be completed to allocate the remaining expenses between employee use and general public use to determine what portion of the expenses will be disallowed. Example 8 from the Notice that illustrates all Steps in the analysis is provided below.
Notice 2018-99, Example 3
Taxpayer C, a big box retailer, owns a surface parking lot adjacent to its store. Taxpayer C incurs $10,000 of total parking expenses. Taxpayer C’s parking lot has 500 spots that are used by its customers and employees. Taxpayer C usually has approximately 50 employees parking in the lot in non-reserved spots during normal business hours on a typical business day. They usually have approximately 300 non-reserved parking spots that are empty during normal business hours on a typical business day.
Step 1. Because none of Taxpayer C’s parking spots are exclusively reserved for employees, there is no amount to be specifically allocated to reserved employee spots.
Step 2. The primary use of Taxpayer C’s parking lot is to provide parking to the general public because 90% (450/500 = 90%) of the lot is used by the public. The 300 empty non-reserved parking spots are treated as provided to the general public. Thus, expenses allocable to these spots are excepted from the § 274(a) disallowance by § 274(e)(7). Because the primary use of the parking lot is to provide parking to the general public, none of the $10,000 is subject to the § 274(a)(4) disallowance.
Since Step 2 shows that the primary use is to provide parking for the general public, there is no need to complete Steps 3 and 4. However, ff the primary use was determined not to be for the general public, the analysis would continue on to Steps 3 and 4.
Notice 2018-99, Example 8
Taxpayer H, a large manufacturer, owns multiple parking lots and garages adjacent to its manufacturing plant, warehouse and office building at its complex in the city of X. Taxpayer H owns parking lots and garages in other cities as well. For purposes of applying the methodology in this notice, Taxpayer H chooses to aggregate the parking spots in the lots and garages at its complex in city X. However, Taxpayer H may not aggregate the spots in parking lots and garages in other cities with its parking spots in city X. Taxpayer H incurs $50,000 of total parking expenses related to the parking lots and garages at its complex in city X. The parking lots and garages at its complex in city X have 10,000 spots in total that are used by its visitors and employees. Taxpayer H has 500 spots reserved for management and has approximately 8,000 employees parking in the garages and lots in non-reserved spots during normal business hours on a typical business day at their complex in city X.
Step 1. Because Taxpayer H has 500 reserved spots for management, $2,500 ((500/10,000) x $50,000 = $2,500) is the amount of total parking expenses that is nondeductible for reserved employee spots under § 274(a)(4).
Step 2. The primary use of the remainder of Taxpayer H’s parking facility is not to provide parking to general public because 84% (8,000/9,500 = 84%) of the remaining parking spots in the facility are used by its employees. Thus, expenses allocable to these spots are not excepted from the § 274(a) disallowance by § 274(e)(7) under the primary use test.
Step 3. Because none of Taxpayer H’s parking spots are exclusively reserved for nonemployees, there is no amount to be specifically allocated to reserved nonemployee spots.
Step 4. Taxpayer H must reasonably determine the employee use of the remaining parking spots during normal business hours on a typical business day and the expenses allocable to employee parking spots at its complex in city X. Because 84% (8,000/9,500 = 84%) of the remaining parking spots in the lot are used by its employees during normal business hours on a typical business day, Taxpayer H reasonably determines that $39,900 (($50,000-$2,500) x 84% = $39,900) of H’s total parking expenses is subject to the § 274(a)(4) disallowance.
The current notice does not touch on the disallowance of expenses for highway commuter vehicles (such as van pools), transit passes, or pre-tax transit and parking plans as the IRS appears to deem these changes as more straight-forward. For example, the disallowed amount would be the expense to the employer for hiring a company to run the van pool, the cost to purchase the transit passes distributed to employees or the portion of payroll expense relating to pre-tax transit or parking deductions.
One item to note from the recently issued guidance is that taxpayers will have until March 31, 2019 to retroactively change their parking arrangements, such as signage and access, in order to reduce or eliminate the amount of reserved employee and nonemployee parking spots. This, in turn, would reduce the amount of disallowed expense. Any changes made by the March 31, 2019 deadline will be retroactively applied as if occurring on January 1, 2018—when the new law took effect.
As you can see, the rules and calculations surrounding the determination of disallowed parking expenses from QTFs can be complex. While Treasury and the IRS intend to issue temporary regulations in the future, this interim guidance should help provide a process for determining a reasonable method for these calculations.