Clarification on the Parking Lot Tax: One of the changes made to the tax laws by the Tax Cuts and Jobs Act (TCJA) was to disallow a tax deduction for qualified transportation fringe benefits businesses provide to their employees. Qualified transportation fringe benefits (QTFs) include:
* Commuter vehicle transportation between employee’s home and workplace
* Transit Passes
* Parking expenses
Tax exempt organizations did not escape this law change. They are required to increase their unrelated business taxable income (UBTI) by the amount that would be nondeductible if they were a taxable entity.
Unfortunately, the law did not contain specific language of how this provision should be applied which left many employers without guidance as to how to calculate the amount of parking expense that was nondeductible or treated as an increase in UBTI for tax exempt entities. Guidance has finally arrived as the IRS issued Notice 2018-99 and 2018-100 on December 10th of 2018.
What is included in parking expenses
Notice 2018-99 says ” total 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).
The notice states that depreciation on a parking structure owned by a taxpayer and used for parking is not a parking expense.
The notice references a single lease agreement that covers both office space and parking but does not separately break out the portion of the lease payments attributable to the parking facilities. Unfortunately, the notice provides no guidance as to how employers should calculate the portion of the lease payments that are treated as parking expenses. This leaves it up to the taxpayer to use “any reasonable method” to make that amount.
Note that expenses paid or incurred for parking to partners of a partnership, 2% shareholders of S corporations, independent contractors and sole proprietors will continue to be deductible as these individuals should have included the value of this benefit in their income. Also parking expenses paid or incurred for employees that are included in their W-2 will be deductible. This is generally related to parking expenses that exceed the monthly allowance excluded under §132 or $260 for year 2018 or $265 for 2019.
Calculation of disallowed deduction
Notice 2018-99 provides two methods for calculating the disallowed deduction, and their applicability depends on how the parking benefits are provided to the employees. The first
method applies to taxpayers who pay third parties for employee parking spots. The second method applies if the employer owns or leases all or a portion of the parking lot or garage.
First method – payments to third parties
The deduction disallowance is calculated as the taxpayer’s total annual cost of employee parking paid to the third party. Any amount paid more than the monthly qualified parking exclusion under §132 ($260 in 2018 and $265 in 2019) is included in the employee’s W-2 income and is exempt from the disallowance rules.
For example, an employer pays a third party operating a parking garage, $100 per month for 10 employees to park in the garage, or $12,000 per year (($100 x 10) x 12 = $12,000). The $100 per month paid for each employee for parking is excludible from income of the employees (since less than the $260 monthly amount). However, the entire $12,000 is not deductible parking expense for the employer.
Assume the same facts as above except employer pays third party $300 per month for each employee, or $36,000 per year (($300 x 10) x 12 = $36,000). Of the $300 per month paid for parking for each employee, $260 is excludible from employees income under §132. The non-deductible amount for the employer is $31,200 (($260 x 10) x 12 = $31,200).
The excess amount of $40 per employee per month is included in employee’s W-2 income which means that $4,800 ($36,000 – $31,200 = $4,800) or (($40 x 10) x 12 = $4,800) remains deductible as a parking expense for the employer.
Second method – employer-owned or leased facility Notice 2018-99 states that the disallowed deduction may be calculated using any reasonable method and provides a four-step methodology that is deemed to be a reasonable method. The notice states that other methods may be used if they are reasonable, however, any methodology that uses the value of employee parking instead of the expenses paid or incurred will not be considered a reasonable method. This four-step methodology is as follows: Step 1: Calculate the disallowance for reserved employee spots Determine whether any parking spots in the lot or garage are specifically reserved for the employer’s employees. For example, the parking may be designated by signage or with a separate facility or portion of the facility segregated by a gate. The amount of the deduction disallowed under this step is determined by multiplying the total parking expenses for the facility by a percentage equal to the total number of reserved employee spots divided by the total number of parking spots in the parking facility.
For example, an employer owns a parking lot with 1,000 parking spots, and the total annual parking expense is $50,000. One hundred of those spots are specifically reserved for the employer’s management team. The employer is not allowed a deduction under this Step 1 for $5,000 of the total annual parking expenses ($50,000 x [100 / 1,000]).
In the notice, the IRS provides a grace period until March 31, 2019, for employers to modify their parking arrangements to reduce or eliminate reserved employee parking spots. Any such changes will be applied retroactively to Jan. 1, 2018, for purposes of the notice.
The remaining steps apply to any remaining parking that is not specifically reserved for the employer’s employees. Step 2: Determine the primary use of remaining spots
The remaining parking facility costs are fully deductible if the primary use of the remaining parking spots is to provide parking to the general public. This occurs if less than 50% of the actual or estimated usage of the remaining parking spots is by employees during normal business hours on a typical business day. Non-reserved parking spots that are available to the general public, but empty during normal business hours on a typical business day are treated as provided to the general public.
The percentage is determined by dividing the number of parking spots actually or estimated to be used by employees (excluding reserved employee spots identified in Step 1) by the total number of remaining parking spots in the facility (excluding reserved employee spots identified in Step 1). Following the same facts as the example in Step 1. The parking lot is generally available to the public. Of the remaining 900 parking spots (excluding the 100 reserved employee spots), 600 spots are estimated to be used by employees during normal business hours on a typical business day. Thus, greater than 50% of the remaining spots are used by employees, so the primary use of the parking lot is not by the general public. If the primary use of the remaining parking is not for the general public, proceed to Step 3. Step 3: Calculate the allowance for reserved nonemployee spots The parking facility, or the employer’s portion of the facility, may reserve parking spots for
the exclusive use of nonemployees, such as visitors, customers, independent contractors, partners, 2% or higher S corporation shareholders or sole proprietors. Employers may deduct the portion of total parking expenses associated with these reserved nonemployee spots.
The deductible portion of the parking facility is determined by dividing the number of reserved nonemployee spots by the total remaining parking spots (excluding reserved employee spots identified in Step 1) and multiplying the percentage by the total annual cost of parking. Using our Step 1 example; 90 of the remaining 900 spots (or 10%) are specifically reserved for nonemployees. Thus, $5,000 of the $50,000 total annual parking expense is deductible under this Step 3. Step 4: Determine remaining use and allocable expenses If any of the total annual parking expense amount remains after completing Steps 1-3, employers must use a reasonable method to determine the employee use of the remaining parking spots and the related expenses allocable to those parking spots. The notice states that the reasonable method may consider the estimated or actual usage of spots by employees based on the number of spots, the number of employees, the hours of use or other measures.
Form 990-T Filing requirements for tax-exempt organizations Notice 2018-99 states that tax-exempt organizations with UBTI less than $1,000, after considering the increase to UBTI for parking expenses, are not required to file a Form 990-T.
Estimated tax penalty relief for tax-exempt organizations Many tax-exempt organizations that provide parking and other qualified transportation fringe benefits to their employees may owe UBTI tax and be required to pay estimated income tax for the first time. The IRS issued Notice 2018-100 to provide tax-exempt entities transition relief for underpayment of estimated income tax. The failure to make estimated income tax payments penalty for payments due on or before Dec. 17, 2018, is waived for tax-exempt entities that owe UBTI tax due to the TCJA changes to parking benefits. Transition relief is only available to tax-exempt organizations that were not required to file a Form 990-T for the taxable year immediately preceding the organization’s first taxable year ending after Dec. 31, 2017. To claim this relief, the tax-exempt organizations must timely file
Form 990-T and timely pay the tax. In addition, the tax-exempt organization must write “Notice 2018-100” on top of Form 990-T.
What’s next?
Calculating these expenses under the new guidance can be a very involved process as most leases don’t specifically break out “rent” paid for their building vs. parking spaces. However, employers may rely on Notice 2018-99 to determine the amount of nondeductible parking expenses and increases to UBTI.
Employers should re-evaluate their parking arrangements or lease agreements related to parking facilities to avoid or reduce the deduction disallowance for reserved employee parking spots. Remember the IRS provides a grace period until March 31, 2019, for employers to modify their parking arrangements to reduce or eliminate reserved employee parking spots. Any such changes will be applied retroactively to Jan. 1, 2018, for purposes of the notice.
Employers should also assess their total parking expenses and consider opportunities to reduce those expenses or look for alternative calculations that reduce the non-deductible parking amount associated with the new law.
Please contact John Csargo, CPA, MBT at jcsargo@myboyum.com if you need additional guidance on ways to minimize the impact of these new rules.