In TCJA Guidance, IRS Addresses How to Calculate Nondeductible Parking Expenses

Practical Law Legal Update w-018-0422 (Approx. 5 pages)

In TCJA Guidance, IRS Addresses How to Calculate Nondeductible Parking Expenses

by Practical Law Employee Benefits & Executive Compensation

Background

As referenced in this update, qualified transportation fringe benefits (QTFBs) refer to:

Qualified Parking.
Transit Passes.
Vanpooling between an employee's residence and place of employment.

(For 2018 to 2025, under the TCJA, bicycle commuting reimbursements are not considered a QTFB (see Practice Note, Fringe Benefits Under Code Section 132: Transportation and Other Benefits: Qualified Bicycle Commuting Reimbursements).)

The Code generally excludes the value of QTFBs from an employee's gross income (26 U.S.C. § 132). However, the TCJA amended the Code to deny a deduction for the expense of QTFBs provided to an employee by an employer (26 U.S.C. § 274(a)). This change applies for expenses incurred for QTFBs whether they are provided:

By the employer in-kind.
Through a salary reduction election (see Practice Note, Cafeteria Plans).
Using a bona fide cash reimbursement arrangement.

Notably, deductions for expenses that fit within one of several exceptions under Code Section 274 are not disallowed (26 U.S.C. § 274(e)). As discussed below, two of these exceptions (an exception for amounts treated as compensation and wages, and another for amounts involving facilities made available to the general public) come into play in the Notice 2018-99 context.

Interim Guidance on Parking Expenses

Notice 2018-99 provides interim guidance addressing how employers can determine the nondeductible amount for parking expenses. The guidance provides two categories of parking expenses, keyed to whether an employer:

Pays a third party to provide parking for its employees.
Owns or leases a parking facility where employees park.

Employer Pays a Third Party for Employee Parking Spots

The first category under Notice 2018-99 is for an employer that pays a third party so that its employees can park at the third party's parking lot or garage. In this case the amount of parking expenses is generally the employer's total annual cost of employee parking paid to the third party.

An exception applies, however, if the amount the employer pays the third party is more than the Code's monthly exclusion limit of $260 for 2018 ($265 for 2019) (26 U.S.C. 132(f)(2); see Practice Note, Fringe Benefits Under Code Section 132: Transportation and Other Benefits: Limits for 2017 and 2018 and Legal Update, TCJA Changes Reflected in IRS 2019 COLAs for Health and Welfare Plans). In this case, the employer must treat the excess amount as compensation and wages to the employee. Under the Code Section 274(e) exception for expenses treated as compensation and wages, an employer may deduct the amount of expenses that exceeds $260 (for 2018) or $265 (for 2019).

Employer Owns or Leases All or Part of a Parking Facility

Under the second category provided in Notice 2018-99, an employer that owns or leases all or a part of a parking facility where employees park can calculate its deduction disallowance using any reasonable method. The guidance includes a four-step allocation method that the IRS will view as a reasonable method (see Four-Step Method for Calculating Disallowance). Using this method, discussed in more detail below, an employer determines which percentages of its parking expenses are for spaces that are:

Reserved to employees.
Dedicated to general public use.
For use by either employees or the general public.

The tax treatment of the employer's parking expenses (deductible or not) follows from which of the three categories the expense falls under.

An employer may not use the value of employee parking to calculate expenses allocable to employee parking in a facility that is owned or leased by an employer. According to the IRS, this is not a reasonable method because the Code disallows a deduction for expenses related to providing QTFBs, regardless of their value. To be considered reasonable (for tax years beginning in 2019), an employer's method generally must allocate expenses to reserved employee spots.

Meaning of Parking Facility

The term "parking facility" is specifically defined for Notice 2018-99 purposes. It includes indoor and outdoor garages and other structures, and parking lots and other areas, where employees may park on or near:

The employer's business premises.
A location from which the employee commutes to work.

However, the term does not include any parking on or near property used by the employee for residential purposes. The guidance also includes aggregation rules related to parking facilities.

Four-Step Method for Calculating Disallowance

Under the approved method addressed in Notice 2018-99, an employer:

Determines which of the parking spots are exclusively reserved for employees. The percentage of reserved employee spots relative to total spots is multiplied by the employer's total parking expenses for the facility. The result is the amount of total parking expenses for reserved employee spots, which is nondeductible.
Determines the primary use of the remaining parking spots. Under this step, the employer identifies a facility's remaining parking spots and determines whether their primary use (a defined term under Notice 2018-99) is to provide parking to the general public. If so, then the remaining total parking expenses for the parking facility are deductible under the Code Section 274(e) exception for facilities that an employer makes available to the general public (26 U.S.C. § 274(e)(7)).
Calculates the allowance for reserved nonemployee parking spots. If the primary use of an employer's remaining spots is not to provide parking to the general public, the employer identifies the number of reserved nonemployee spots. The employer then:
- determines the percentage of reserved nonemployee parking spots relative to the remaining spots; and
- multiplies that percentage by the employer's remaining total parking spots (the result of which is the amount of nondeductible expenses).

If, after completing the above steps, the employer has any remaining parking spots that are not categorized as deductible or nondeductible, the employer must determine:

The employee use of the remaining spots during normal business hours on a typical business day.
The related expenses allocable to employee parking spots.

Examples in the IRS's guidance illustrate the above method.

Reliance on Notice 2018-99; Future Guidance Planned

The IRS plans to issue proposed regulations that will provide additional guidance on the issues addressed in Notice 2018-99. Until that guidance is published, however, employers and tax-exempt organizations that own or lease parking facilities at which their employees can park may use any reasonable method (as discussed in Notice 2018-99) to calculate nondeductible expenses or increases in UBTI.

In TCJA Guidance, IRS Addresses How to Calculate Nondeductible Parking Expenses | Practical Law