Does Your Business Provide Parking? Beware of TCJA
While the Tax Cuts and Jobs Act of 2017 (TCJA) is generally considered to be very business-friendly, there are many provisions implemented to pay for the cuts that can be treacherous for business taxpayers. One of these, Internal Revenue Code (IRC) Section 274(a)(4), specifies that “no deduction shall be allowed… for the expense of any qualified transportation fringe…provided to an employee of the taxpayer.” While the qualified transportation fringe includes many items such as bicycle reimbursements, transit passes, and carpool vehicles, the most impactful change by this code section is for “qualified parking.”
Qualified parking is defined by IRC Section 132(f)(5)(C) 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… in a commuter highway vehicle, or by carpool.”
There is an exception, however, for parking provided as part of employee lodging.
What qualified parking means to business owners is that employee parking – or even expenses that can reasonably be allocated to employee parking – is completely nondeductible for tax years 2018 and later.
It’s that second part of the provision that can really trip up businesses.
Employee Parking Lots and Business Taxes
While it makes sense that the provision would cover, for example, a parking structure owned by the employer for the express purpose of employee parking, or the cost of purchasing parking passes at a public lot for reserved spots for employees, what may not be readily apparent is that it also covers a portion of lease expense, for example, if the lease includes use of a parking lot used predominantly by employees.
That’s not all it covers – if insurance, property taxes, cleaning expenses, snow removal expenses, security, etc. can be properly attributed to a parking lot used by employees, it counts as qualified parking expense and is nondeductible.
IRS Clarifies Qualified Parking Expense
The Internal Revenue Service, perhaps acknowledging how much chaos and confusion Section 274(a)(4) could potentially produce, issued Notice 2018-99 last year to help clarify the process of determining qualified parking expense. To begin with, the notice states that any taxpayer who pays a third party for the purpose of employee parking simply uses the amounts paid as the nondeductible portion, unless an amount must be treated as compensation expense to the employee (that is, if it is in excess of $260 per employee per month).
Where it gets more complicated is if a taxpayer owns or leases all or a portion of a parking facility (including open parking lots). In that case, an employer must determine, using a reasonable method, the amount disallowed under 274(a)(4). By way of assistance, Notice 2018-99 provides an example of a reasonable method, a four-step process that involves the following:
- Calculation for the allowance of “reserved employee spots”
- Determination of the primary use of remaining spots
- Calculation for the allowance of “reserved non-employee spots”
- Determination of remaining use, and allocable expenses.
New Provision Applies to Tax-Exempt Organizations
While this new provision is mostly applicable to businesses, it should also be noted that it applies to tax-exempt organizations as well. The amount disallowed for parking expense is treated as an increase to unrelated business taxable income (UBTI) and can potentially lead to a tax liability for exempt organizations that provide parking.
Of all the changes brought about by the new tax law, this is one of the most treacherous and one of the toughest to navigate. We at MRPR stand ready to assist you if you have questions regarding this new law – please contact us to learn more.
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