On December 10, 2018, the IRS issued long-awaited guidance on the application of one of the new tax provisions added by the Tax Cuts and Jobs Act, Section 274(a)(4). This provision under the Act is effective January 1, 2018. Notice 2018-99 provides guidance for taxable entities on how to compute the non-deductible amounts related to parking provided to employees under IRC Section 274(a)(4).
This section of the Internal Revenue Code applies to the costs incurred by employers in providing Qualified Transportation Fringes (QTFs). This provision applies even if the entity does not charge employees for parking, that charge is below the market value employees would have to pay to park elsewhere in the area or employees pay for parking on a pre-tax basis.
The method of determining the non-deductible amount depends on whether the employer pays a third party to provide parking or if the employer owns or leases a parking facility (or a portion thereof).
If the employer pays a third party to provide parking to employees, the non-deductible amount is the amount paid to the third party for employee parking up to the parking benefit exclusion amount ($260 per month in 2018). Amounts in excess of $260 per month are to be included in the employee’s taxable income, therefore these amounts are deductible. It is important to review the terms of your facility lease agreement to determine if the cost of parking is specifically stated or if it is included within your overall lease payment. If the latter, the employer will need to determine a reasonable allocation of the overall lease payment to parking, which should be non-deducible for the employer up to the threshold noted above.
If the employer owns or leases all or a portion of a parking facility, any reasonable method may be used to calculate the non-deductible amount. However, the Notice does state that using the market value of parking to determine the cost is not a reasonable method. Rather, according to the Notice, parking expenses includes repairs, maintenance, utilities, insurance, property taxes, interest, snow and ice removal, leaf removal, cleaning, landscape costs, parking lot attendant expenses and security. Depreciation is not considered an expense of providing parking.
The Notice provides a four-step method that is deemed to be a reasonable allocation of costs. The cost of spaces reserved for employees is non-deductible. Parking reserved for employees can be denoted by signs, barriers limiting access or other methods. The Notice states that if signage, barriers, etc. indicating employee-reserved spots are removed by March 31, 2019, they then can be treated as “not reserved” retroactive to January 1, 2018, which could reduce the non-deductible amount for employers, depending on the degree of usage by nonemployees.
In addition, if more than 50% of the total parking spots (other than spaces reserved for employees) are normally used by the general public (e.g. clients, customers, visitors, etc.), none of the entity’s parking expense for non-reserved parking spots should be non-deductible.
In essence, if less than 50% of the parking spots are normally used by non-employees, the non-deductible amount would be reasonable expenses allocated to parking spots specifically designated for employees and the employee allocable portion of remaining parking spots.
There are still many unanswered questions related to this provision of the new tax law, please contact one of RubinBrown’s tax professionals to further discuss how these rules may impact your organization.
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