The TCJA’s piecemeal approach to giving away one tax break and taking away another is evident when you look at the number of guidance documents pouring out of the IRS.
One of the latest urgent explanations, Notice 2018-99, addresses restrictions on employee parking fringe benefits and includes retroactive rules that help employers reduce the amount of their nondeductible parking expenses for 2018. The Notice also describes how tax-exempt organizations determine whether nondeductible parking expenses create unrelated business taxable income (UBTI).
Beginning in 2018, employers lost their business deduction for expenses of providing transportation fringe benefits to their employees, including items such as commuter highway vehicles, transit passes, or “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.” This includes third-party parking garages and parking lots leased or owned by the employer.
Employers, Non-Profits May Still Reduce 2018 Expenses
Employers may retroactively reduce the amount of their nondeductible parking expenses if they change their parking arrangements to reduce or eliminate the number of parking spots they reserve for their employees This must be done by March 31, 2019. By making this change, many churches, schools, hospitals and other tax-exempt organizations may be able to reduce their unrelated business income. In some cases, the organization may avoid having to file a Form 990-T, Exempt Organization Business Income Tax Return, altogether.
This is an important option for businesses and nonprofits that want to substantially reduce their 2018 tax burden, but they have to act fast.
Calculating Disallowed Deduction Going Forward
The Notice describes how to calculate the lost deduction under various scenarios.
Third Party Lots: If a taxpayer pays a third party so that its employees may park at the third party’s parking lot or garage, the disallowed deduction is calculated as the taxpayer’s total annual cost of employee parking paid to the third party. However, if the amount the taxpayer pays to a third party exceeds the fringe benefit exclusion amount of $260 for 2018, that excess amount will be includable wages of the employee and may be deducted by the employer.
Employer-Owned or Leased Lots: Under the Notice, employers must use a “reasonable method” to calculate the amount of any disallowed deduction. Using the value of the parking is not considered a reasonable method. The Notice provides a “safe harbor”, the four-step approach that is deemed to be reasonable.
Step 1 – Calculate the disallowance for reserved employee spots. The percentage of reserved employee spots in relation to total parking spots, multiplied by the total parking costs, is the amount of the disallowed deduction.
Step 2 – Determine the primary use of the remaining parking spots. If the primary use of the remaining parking spots is to provide parking to the general public, then the remaining total parking costs are deductible. “Primary use” is defined as greater than 50% of actual or estimated usage as public parking.
Step 3 – Calculate the allowance for reserved nonemployee spots. These spots include parking reserved for visitors and customers, as well as spots reserved for partners, sole proprietors, and 2% shareholders of S Corporations. The percentage of reserved nonemployee spots in relation to remaining total parking spots, multiplied by the remaining total parking costs, is deductible.
Step 4 – Determine the remaining use and allocable expenses. If a taxpayer has parking costs remaining after Steps 1-3, the taxpayer has to identify which parking spots are used by employees during normal business hours on a typical business day and cannot deduct the associated costs.
Example 1: Taxpayer A pays B, a third party who owns a parking garage across the street from A, $100 per month for each of A’s 10 employees to park in B’s garage or $12,000 per year. The $100 per month paid for each employee for parking is excludable for employees under the fringe benefits rules. Thus, the entire $12,000 is disallowed as an employer deduction.
Example 2: Taxpayer F, a financial services institution, owns a multi-level parking garage adjacent to its office building. F incurs $10,000 of total parking expenses. F’s parking garage has 1,000 spots that are used by its visitors and employees. However, one floor of the parking garage is segregated by an electronic barrier and can be entered only with an employee access card. The segregated floor of the parking garage contains 100 spots. The other floors of the parking garage are not used by employees for parking during normal business hours on a typical business day.
Step 1 – Because F has 100 reserved spots for employees, $1,000 ((100/1,000) x $10,000 = $1,000) is the amount of total parking expense that is nondeductible.
Step 2 – The primary use of the remainder of F’s parking lot is to provide parking to the general public because 100% of the 900 remaining parking spots are used by the public. Thus, the expense allocable to those spots, the remaining $9,000, is deductible.
Depreciation not Included as Disallowed Parking Expense
Parking expenses include repairs, maintenance, utility costs, insurance, property taxes, interest, snow and ice removal, leaf removal, cleaning, landscape costs, parking lot attendant expenses, security, and rent or lease payments. The IRS has generously left depreciation out of the calculation of disallowed parking expenses.
Estimated Penalty Relief for Non-Profits
The IRS also announced it will provide estimated tax penalty relief for 2018 to tax-exempt organizations that offer transportation benefits and were not required to file a Form 990-T last filing season.
Lucia Nasuti Smeal is a guest blogger on tax topics for Frazier & Deeter. Smeal is an attorney, a tax professor with Georgia State University’s J. Mack Robinson College of Business, and former editor of Tax Notes Today, published by Tax Analysts. Smeal also worked as a legislative analyst for the Congressional Research Service and is a former member of the U.S. House Periodical Press Corps. She is a frequent speaker on current tax developments.