Parking Expenses and Qualified Transportation Fringes
Since the Tax Cuts and Jobs Act went into effect a year ago, there has been some grey areas that needed guidance. One of which pertains to qualified transportation fringe (QTF) benefits and what portion is a business owner’s expense for parking spaces provided to employees (either owned on-site or parking spaces rented from others for employee use). Under the new tax law, this type of expense is not deductible. However, the IRS recently provided interim guidance that determines the amount of nondeductible qualified parking expenses incurred after Dec. 31, 2017.
This guidance comes late in the year, and most taxpayers have already adopted their own way of determining the amount of nondeductible parking expenses. For now, taxpayers can rely on this new guidance or use any reasonable method to determine nondeductible parking expenses for employer-provided parking until the IRS issues further guidance.
Read Also: Fringe Benefits Are Not ‘Tax Free’ Benefits
What taxpayers need to know
If you own or lease a parking facility, whether you pay for your employees to park or not, you may be subject to disallowance rules.
There is also a special rule that allows employers to retroactively reduce the amount of their nondeductible parking expenses. This rule gives employers until March 31, 2019, to reduce or eliminate the number of employee parking spots they reserve. This will apply retroactively to Jan. 1, 2018.
For 2018, the exclusion limit is $260 per employee, per month. The way to determine the nondeductible amount is dependent on whether the taxpayer pays for employee parking to a third party or if the taxpayer owns or leases a parking facility for its employees to park. There is a distinction between the disallowed portion of qualified parking and the amount to include as compensation for employees. An employer can pay for its employees’ parking, and as long as it falls under $260 per month per employee, it does not have to be included as compensation. This is separate from whether or not the amount is then treated as nondeductible by the employer.
The following examples are geared to help you understand the impact of these new regulations.
Listen to episode 118: “Tax Cuts & Jobs Act: Domestic & International Tax Provisions For Business Owners,” featuring Chris Axene, on unsuitable on Rea Radio to learn more about how tax reform has impacted your company’s tax situation.
Paying a Third Party for Employee Parking Spots
If a business pays a third party for its employees to park in a lot or garage, the amount of disallowance would generally equal the business’s total annual cost of the parking. However, if the amount paid per employee, per month exceeds $260, the excess amount is treated as compensation to the employees. Therefore the excess is deductible, and the $260 is not deductible.
Taxpayer Owns or Leases All or a Part of a Parking Facility
This example involves a four-step reasonable method:
1 – Calculate the disallowance for reserved employee spots
2 – Determine the primary use of remaining spots
3 – Calculate the allowance for reserved nonemployee spots
4 – Determine remaining use and allocable expenses
Example 1. ABC Company pays Pete’s Parking, a third-party parking garage, $100 per month for each of ABC’s 10 employees to park. This is $12,000 per year (($100 x 10) x 12 = $12,000). The monthly parking cost per employee is excludable, and no exceptions apply. This makes the entire $12,000 subject to disallowance.
Example 2. This is similar to Example 1, except ABC Company pays Pete’s Parking $300 per month for each employee, or $36,000 per year. Only $260 of the $300 monthly parking cost per employee is excludable, and no exceptions apply. Thus, $31,200 (($260 x 10) x 12 = $31,200) is subject to the disallowance.
The remaining $40 per employee per month is not excludable, so it is treated as compensation and wages. This means the exception applies to this amount, which is $4,800 ($36,000 – $31,200 = $4,800) that is not subject to the disallowance and remains deductible.
Example 3. Seth’s Sports, a big box retailer, has its own surface parking lot and has $10,000 of total parking expenses. The lot has 500 spots that are used by customers and employees. As a rule, about 50 of Seth’s Sports’ employees park in the lot in non-reserved spots each day. The lot has around 300 non-reserved parking spots that are typically empty.
1. Since none of the lot’s parking spots are exclusively reserved for employees, there is no amount to be specifically allocated to reserved employee spots.
2. The primary use of the Seth Sport’s parking is for the general public to park – about 90 percent of the lot (450/500 = 90 percent). The 300 empty non-reserved parking spots are treated as provided to the general public, so the expenses allocable to these spots are an exception from the disallowance. As the primary use of the parking lot is for the general public, none of the $10,000 is subject to the disallowance.
Calculating these expenses under the new guidance can be a very involved process as most property owners don’t specifically break out “rent” paid for their building vs. parking spaces. The examples above are fairly basic, but enough to get the conversation started. Our staff of tax professionals are happy to help you with these and all other tax calculations. Give me a call or email us to find out how this guidance impacts you.