Interim Guidance on Parking Expenses
January 2, 2019
This month the Treasury Department and Internal Revenue Service (“IRS”) issued the first guidance, (Notice 2018-99, “Notice”), to determine the amount of parking expenses considered qualified transportation fringes (“QTF”) that are disallowed as a deduction for businesses and considered unrelated business income to tax-exempt organizations. The guidance comes out almost a year after the Tax Cuts and Jobs Act (TCJA) containing these new provisions was passed. The guidance may be relied upon until proposed regulations are issued.
Of particular importance, the guidance clarifies that the cost of providing parking to employees rather than the value associated with the parking is the basis for the disallowance. Organizations that provide free parking to employees on open lots that are free to everyone are covered by these provisions.
These provisions cover employers that provide qualified parking either in kind, through a bona fide cash reimbursement arrangement or through a compensation reduction arrangement.
For employers that lease parking spaces separately or as part of their lease, the amount that is nondeductible or unrelated business income (“UBI”) to a tax-exempt organization is calculated as the employer’s total annual cost of employee parking paid to the third party to the extent that it doesn’t exceed the qualified transportation fringe benefit amount under IRC §132(f)(2). If the lease includes a building and parking spots, a reasonable allocation of the costs between leasing the building and parking spots must be made.
For an employer that owns or leases all or a portion of one or more parking facilities where its employees park, the employer needs to determine its total direct and indirect parking expenses. Parking expenses include: repairs, maintenance, utility costs, insurance, property taxes, interest, snow and ice removal, leaf removal, trash removal, cleaning, landscape costs, parking lot attendant expenses, security, and rent or lease payments. Note that depreciation is not an expense for this purpose. Expenses paid for items not located on or in the parking facility, including items related to property next to the parking facility such as landscaping, or lighting are not considered parking expenses.
After an employer has determined its parking expenses, it must than go through a four-step analysis to calculate the amount disallowed as a deduction or includable as UBI. To aid in this analysis, assume that the employer has $100,000 of parking expenses.
Step One – Calculate the disallowance for reserved employee spots. Employee spots may be reserved by signage, or a separate facility or a portion of the facility segregated by a barrier to entry or limited by terms of access. The employer must then determine the percentage of reserved employee spots in relation to total parking spots and multiply that percentage by the taxpayer’s total parking expenses for the parking facility. If the parking lot has 1,000 spaces and 100 spots are reserved for management employees, 10% (100/1,000) of the $100,000 of parking expenses or $10,000 are disallowed as a deduction or are UBI under Step One.
Employers are given until March 31,2019 in the Notice to remove the designation of spots as reserved employee spots. Such removal will be treated as a retroactive removal of the spots as reserved employee spots to January 1, 2018. Employers may want to reduce or eliminate reserved employee spots to minimize disallowed parking deductions or UBI for parking expenses.
Step Two – Determine the primary use of the remaining spots (the “primary use test”). Primary use means the greater of 50% actual or estimated usage of the parking spots in the parking facility. Primary use is based on normal business hours on a typical business day as determined by the employer’s business. Non-reserved parking spots that are available to the public during normal hours on a typical day that remain empty, are treated as provided to the general public. If the actual or estimated usage of the parking spots varies significantly between days of the week or times of the year, the employer may use any reasonable method to determine the average actual or estimated usage. The general public includes: customers, clients, visitors, individuals delivering goods or services to the employer, patients of a health care facility, students of an educational institution, and congregants of a religious organization. The general public does not include employees, partners or independent contractors of the employer. If 65% of the spots of the parking facility are used for the general public, the remaining parking expenses are deductible. The primary use of the non-reserved employee spots is for the general public. Following our example, $90,000 ($100,000 – $10,000 reserved employee spots) would be allowed as a deduction to a for-profit employer and would not be UBI to a non-profit employer. If 300 spots are for the general public, 30% (300/1,000) or $30,000 would be allowed as a deduction/not considered UBI to the employer.
Step Three – Calculate the allowance for reserved nonemployee spots. If 300 spots of the 1,000 spots are reserved for patients and visitors, 30% of the parking costs are deductible/not UBI.
Step Four – Reasonably determine the employee use of the remaining parking spots during normal business hours on a typical business day and the expense allocable to employee spots. Using the 1,000- spot parking facility, assume 100 spots are reserved for management, 300 spots are reserved for patients and visitors, 50 spots are normally empty, and 550 spots are normally used by employees. Fifty-five percent of the parking costs, $55,000 would be nondeductible or UBI (550/1,000) under this step. ($10,000 would be UBI under Step 1.)
Tax-exempt organizations are required to include any disallowed parking costs calculated in the above analysis as unrelated business income unless the disallowed parking costs are attributable to an unrelated trade of business in which case they are considered a disallowed deduction of the business. The “Retirement, Savings, and Other Tax Relief Act of 2018” which has passed the House but has not been addressed by the Senate includes a provision to retroactively rescind the Tax Cut and Jobs Act provision that requires tax-exempt organizations to treat disallowed parking costs as unrelated business income.
If you would like to discuss how these provisions will impact your business, please do not hesitate to contact us.