IRS Guidance Puts Businesses, Non-Profits in a Tight Spot with New Parking Rules by Richard Cabrera, JD, LLM, CPA
Since Congress passed the Tax Cuts and Jobs Act (TCJA) in December 2017, it has focused a lot of attention on the new law’s lower individual and corporate tax rates. What Congress is not publicizing are some of the revenue raisers it wrote into the TCJA to pay for the new tax cuts, including the elimination of the deduction that employers previously claimed for providing qualified transportation fringe (QTF) benefits to their employees, notably employee parking. The result is that employers and non-profits will instead report phantom income on their tax returns in 2018 and for tax years to come, even when they do not incur a direct expense for providing that QTF benefit.
In December 2018, the IRS issued temporary guidance to help taxpayers, but the guidance leaves questions unanswered and is leaving taxpayers questioning the how to comply with the administrative burden of this change in the tax law.
Changes in the New Tax Law
The TCJA makes two significant changes to the treatment of QTF benefits beginning on Jan. 1, 2018: (1) employers no longer have the ability to deduct costs they incur for providing parking benefits to employees, and (2) not-for-profit employers must include these now non-deductible parking costs in their UBTI. As a result, not-for-profit entities could be liable for excise tax solely because there is a cost they incur when providing its employees with parking.
Calculating the non-deductible expense may be simple for employers who pay a specific monthly fee, per employee, for each parking space they use, but that is not the same for all employers. The calculation can be complex for other employers whose landlords provide free employee parking, or for employers that own surface lots or parking garages and that offer free parking to both employees and the businesses’ customers.
In situations in which employers own the property where their employees park, or their office leases entitle them to parking spaces at no additional costs, the letter of the law requires them to assign indirect parking costs to the in-kind benefit that they provide to their employees, and to treat those costs as non-deductible expenses.
Virtually all employers and non-profit entities that provide or subsidize the cost of parking for their employees are discovering this unfavorable change in the law as they file their first tax returns under the new law. The implementation of this provision of the TCJA, combined with a lack of clear guidance from Congress and the IRS, creates a unique challenge for taxpayers to fairly implement this change without incurring additional costs and administrative burdens or finding ways to sidestep compliance.
Limited IRS Guidance
The IRS issued Notice 2018-99 in an effort to help businesses calculate the loss of their employee parking deduction, or the increase to their UBTI in the case of not-for-profit organizations, for tax years beginning in 2018.
First, the guidance defines “total parking expense” as the costs taxpayers incur to care for an employee parking lot or garage, including, but not limited to, repairs, maintenance, utilities, insurance, property taxes, security and employing a parking attendant and the portion of rent or lease payments it makes to a third party for use of the space. It goes on to explain how different taxpayers can compute the deduction disallowance based on their unique circumstances.
The guidance also states that taxpayers that own or lease all or a portion of the facilities where their employees park may use “any reasonable method” (excluding fair market value) to determine the portion of their rent or lease payments that they can allocate for non-deductible employee use of parking spots and the related expenses for managing and maintaining those parking spaces. Furthermore, the IRS notice makes it clear that businesses may not use a daily value of parking to determine the portion of expenses allocable to employee parking in a facility owned or leased by the taxpayer because the law disallows a deduction for the expense of providing a QTF, regardless of its value.
Under the proposed guidance, taxpayers may use a four-step, safe-harbor method to calculate the parking deduction disallowance. This involves allocating total parking costs between the number of parking spaces reserved primarily for employees, those reserved for nonemployees, such as customers, and those available to both employees and the public. In general, the percentage of total expenses allocated to employee parking is non-deductible, whereas employers may deduct the percentage of total costs for the non-employee portion of total parking expenses.
When non-reserved parking spots can be used by both employees and by customers or others, the employer must determine the “primary use” of each space. If more than 50 percent of the use on a typical business day, during normal business hours, is by employees, the employer costs of the remaining spots are non-deductible. If the spots are typically empty during normal business hours, the taxpayer can assume they are available to the general public and subsequently deduct the costs for those unreserved spaces.
One of the more significant challenges that the IRS guidance does not address concerns how employers can “reasonably” determine the non-deductible expenses of “employee use of parking spots” during normal business hours on a typical business day when the employer does not pay for the parking expense separately and distinctly from the employer’s monthly office rent expense. While the four-step, safe-harbor method is helpful to determine the employee use of parking facilities, it fails to address how taxpayers can assign a value to the more ambiguous costs associated with maintaining and managing those facilities.
For-profit businesses and non-profit organizations, including churches and synagogues, that provide parking for their employees, either in their own lots or those owned by a landlord as part of their lease agreements, should meet with experienced tax advisors while filing their 2018 tax returns to ensure they adopt reasonable methods for calculating the disallowed QTF deduction and, for non-profits, increasing their UBTI. Taxpayers have a window of opportunity to implement strategies that may help them improve tax efficiency even with the loss of deductions for employee parking expenses.
About the Author: Richard E. Cabrera, JD, CPA, is a senior manager with Berkowitz Pollack Brant’s Tax Services practice, where he provides tax planning, consulting, and mergers and acquisition services to businesses and their owners located in the U.S. and abroad. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at firstname.lastname@example.org.