IRS Guidance About Nondeductible Expenses for Employee Parking
Section 274(0)(4) of the new IRC Tax Cuts & Jobs Act (TCJA) has made employee parking a nondeductible expense. This relates to expenses incurred or paid by employers from December 31, 2017, for the provision of employee parking facilities. Here, we look at how these changes to employee parking expense deductions can affect companies.
Section 132 of the TCJA still excludes the value of employer-provided parking from the employee’s taxable income. (That is as long as its value does not exceed the specified monthly threshold, which is $265 for this year). Should the value exceed that threshold, an employee must include it on his or her W-2 as a taxable fringe benefit.
Employee Parking Expense Deduction Changes
Under the new rules, the term “employee parking” will include any parking that a company provides to its employees. Employee parking can take a variety of different forms depending on the employer and the needs of the employees. The employee parking may either be on or near the employer’s business premises. Alternatively, it may be near or on a location from where the worker commutes to his or her workplace.
Tax-Free Parking Benefit Options Include:
- Employees may park free or for a lower cost in a parking facility leased or owned by the employer. This may take the form of either a garage, parking lot or some other parking area.
- Employers can pay for a third party’s lot or garage that will allow their employees to park there.
- Employers can reimburse their employees for parking costs. Alternatively, they can allow workers to pay their parking charges on a pretax basis by reducing their salaries accordingly.
The IRS Notice 2018-99 requires employers to work out the total amount of parking expenses incurred or paid. Section 274(a)(4) of the IRC states the disallowed deduction only relates to the cost of providing those parking benefits. It does not relate to the parking value provided to the employees. This is the amount used to work out the excluded amount from the workers’ taxable income.
Expenses Incurred or Paid In Order to Provide Employee Parking Benefits Include:
- Utilities
- Maintenance
- Repairs
- Property Tax
- Insurance
- Snow Removal
- Interest
- Trash Removal
- Leaf Removal
- Landscaping
- Cleaning
- Expenses for Parking Attendants
- Lease or rent payments
- Security Costs
This notice also appears to refer to single lease agreements that cover both parking and office space. However, it does not break out separately the portion on lease payments that is attributable to parking facilities.
What is Deductible
The following are also specific expenses that are not subject to Section 274(a)(4)’s disallowance rules and are deductible:
- Expenses incurred or paid to supply parking to a partnership’s partners. Also included here are S corporations’ 2% shareholders, independent contractors, and sole proprietors. Generally, these expenses will are deductible because these individuals cannot exclude parking benefits value from their incomes. This is outlined in Section 132 of the IRC.
- Expenses to supply parking for employees required to include their parking benefits’ value in their incomes for tax purposes. Generally, this will occur insofar as the parking benefits’ fair market value exceeds certain monthly limits. Those monthly limits stand at $265 in 2019 and $260 in 2018. Unfortunately, this notice fails to address certain ways in which the special rule will apply. Specifically, this is when the benefits’ fair market value exceeds that monthly limit. In particular, this applies if the expenses incurred to provide such benefits total a lower amount than the benefits’ market value.
- Expenses incurred or paid for any parking that is available for use by the public. Guidance is, however, provided in the notice regarding situations in which the public can use the parking area. This applies so long as the company’s employees are the primary users of the parking area.
- Any depreciation on parking structures that are the property of a taxpayer and that the workers use. Depreciation in such cases is deductible according to the general deduction rules. Conversely, the lease payments a company incurs from third-party-owned parking structures can encounter deduction disallowance regulations.
- Expenses incurred or paid for items that are not located in or on the parking facilities. This includes lighting and landscaping that is next to the structure or walkways linking the premises and parking.
Use Notice 2018-99 as the Guideline
When determining the value of any nondeductible parking expenses, employers can use Notice 2018-99 as their guideline. This will remain in effect until further guidance from the IRS. It is advisable to re-evaluate company parking arrangements and parking facility lease agreements to reduce or avoid deduction disallowance. Employers also should quantify the total amount of parking expenses, then strive to cut their costs. Employers should look to find additional tax credits and incentives. These can also help to determine the nondeductible portion of their parking expenses. This will reduce their exposure to the new rules regarding the Employee Parking Expenses Deduction. When employers reduce this exposure, they will also lower their costs.
There is a lot to consider regarding the new regulations. However, this is only an interim guide. Until the IRS submits further guidance to companies, several areas continue to require further clarification. Employers must take care to comply with the interim guidance to the extent that it applies at the present time. However, the onus lies on the companies themselves to determine the best ways to reduce exposure to the latest regulations. The Employee Parking Expenses Deduction could prove to be costly for companies that do not look for alternative solutions. Therefore, employers would be wise to take the time to find out more about existing tax credits and incentives to lower their costly tax burden. However, seeking professional advice is the best course of action to ensure minimal expense.
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