If you’ve been keeping up with the Tax Cuts and Jobs Act, you know that businesses can’t deduct expenses for qualified transportation fringes (QTFs)¹ they provide to their employees.
This change also impacts Section 512, which states that a tax-exempt organization’s unrelated business taxable income (UBTI) increases by the amount of QTFs they can’t deduct under Section 274.
QTFs include parking expenses² which presents a significant challenge to employers who provide parking to their employees. So how much of your parking expenses are you allowed to deduct? How do you calculate this amount?
Fortunately, the IRS issued guidance on Dec. 10, 2018, to address these questions. But, the 2019 filing season is nearly here and you may have already adopted a reasonable method to determine your nondeductible parking expenses as it relates to employer-provided parking.
What should you do?
The IRS is allowing you to use this guidance, which is a reasonable method, or any other reasonable method. It’s your choice.
The method you use to determine your nondeductible amount is based on how you provide parking to your employees. Generally, you will fall into one of two categories – paying a third party or owning or leasing a parking facility. Let’s dive in.
Paying a third party for employee parking spots
This calculation is fairly straightforward. If you pay a third party so your employees can park in a lot or garage, your nondeductible amount is the total annual cost you pay to that party for employee parking.
However, if the amount you pay exceeds $260 per month per employee, the excess amount is treated as compensation and wages to the employee.
Under Section 132 of the tax law, any QTFs you provide can be excluded from employees’ gross income and can’t exceed a maximum monthly dollar amount. For 2018, this amount is $260. It’s adjusted for inflation.
Therefore, your total excess amount is deductible.
Example 1 from IRS Notice 2018 – 99
Arnold pays Bob for his employees to park in Bob’s garage. Bob is a third party who owns a parking garage across the street from Arnold’s business.
Arnold pays $100 per month for each of his employees to park in Bob’s garage or $12,000 per year. (100 x 10) x 12 = $12,000
The $100 per month that Arnold pays for each employee for parking is excluded under § 132(a)(5). None of the § 274(e) exceptions apply. The entire $12,000 is subject to the § 274(a)(4) disallowance.
Arnold can’t deduct any parking expenses.
Example 2 from IRS Notice 2018 – 99
The facts from Example 1 are the same here.
Except, Arnold pays Bob $300 per month for each employee, or $36,000 per year. ($300 x 10) x 12 = $36,000
Only $260 of the $300 per month paid for parking for each employee is excluded under § 132(a)(5). None of the § 274(e) exceptions apply to this amount.
Therefore, $31,200 is subject to the § 274(a)(4) disallowance. ($260 x 10) x 12 = $31,200
The excess amount of $40 per employee per month isn’t excluded under § 132(a)(5). It’s treated as compensation and wages. As a result, the § 274(e)(2) exception applies to this amount.
$4,800 isn’t subject to the § 274(a)(4) disallowance and remains deductible. $36,000 – $31,200 = $4,800
Arnold can deduct $4,800 of his parking expenses.
Owning or leasing all or a portion of a parking facility
Your reasonable method must start by identifying which parking expenses are deductible based on which expenses are allocated to the parking facility³. These expenses may include repairs, maintenance, utilities, insurance, property taxes, and more.
If you own or lease all or a portion of parking facilities where your employees park, you calculate your nondeductible amount using a reasonable method to allocate the expenses to employee parking.
The IRS’ suggested reasonable method is below. Steps 1 – 4 walk you through calculating your deductible amount. And, each step of the method categorizes parking expenses as deductible or nondeductible.
Please note – if you own or lease more than one parking facility in a single geographic location, you can combine the number of spots in those facilities using this method. You can’t combine parking spots in different geographic locations.
Step 1: Calculate the disallowance for reserved employee spots
Identify the number of spots in the parking facility that are exclusively reserved for your employees4. These are reserved employee spots.
Calculate the percentage of reserved employee spots in relation to total parking spots. Multiply that percentage by your total parking expenses for the facility.
The sum of this calculation is the amount you can’t deduct for reserved employee spots.
Reserved employee spots = nondeductible
Step 2: Determine the primary use of remaining spots
Identify the remaining parking spots and decide whether their primary use is to provide parking to the general public5.
If yes, you can deduct the total amount of parking expenses that are remaining.
If you need help determining primary use, it’s more than 50% of the actual or estimated usage of the parking spots in the facility. You can apply this test during normal business hours on a typical business day.
General public spots = deductible
Step 3: Calculate the allowance for reserved nonemployee spots
If your remaining parking spots aren’t for the general public, then you can identify the number of spots that are exclusively reserved for nonemployees.
You can reserve these spots for visitors and customers, sole proprietors, partners, or 2% shareholders of S corporations.
If you don’t reserve spots for nonemployees, you can move on to Step 4.
If you do, determine the percentage of reserved nonemployee spots as they relate to the remaining total of parking spots.
Multiply that percentage by your remaining total parking expenses. The sum of this calculation is deductible.
Reserved nonemployee spots = deductible
Step 4: Determine remaining use and allocable expenses
If you have additional parking expenses that don’t fall into the categories listed above, you must determine your use of these spots during normal business hours on a typical business day.
Also, you must determine the related expenses that are allocated to employee parking spots.
To do this, you can identify the number of employee spots based on actual or estimated usage. You can base usage on the number of spots, number of employees, hours of use, or other factors.
Example 3 from IRS Notice 2018 – 99
Business C, a big box retailer, owns a surface parking lot adjacent to its store. C incurs $10,000 of total parking expenses.
C’s parking lot has 500 spots. C’s customers and employees use these spots. C usually has about 50 employees parking in the lot in nonreserved spots during normal business hours on a typical business day.
C usually has about 300 nonreserved parking spots that are empty during normal business hours on a typical business day.
Step 1. C isn’t exclusively reserving any spots for employees, so it can’t allocate a specific amount to reserved employee spots.
Step 2. The primary use of C’s parking lot is providing parking to the general public because the public uses 90% of the lot. 450/500 = 90%
The 300 empty nonreserved parking spots are treated as provided to the general public.
Therefore, expenses allocable to these spots are excluded from the § 274(a) disallowance by § 274(e)(7). Because the primary use of the parking lot is to provide parking to the general public, the $10,000 isn’t subject to the § 274(a)(4) disallowance and remains deductible.
Business C can deduct all $10,000 of its parking expenses.
Example 4 from IRS Notice 2018 – 99
Business D, a manufacturer, owns a surface parking lot adjacent to its plant. D incurs $10,000 of total parking expenses.
D’s parking lot has 500 spots. Visitors and employees use these spots. D usually has about 400 employees who park in the lot in nonreserved spots during normal business hours on a typical business day.
Additionally, D reserves 25 spots for nonemployee visitors.
Step 1. D isn’t exclusively reserving any parking spots for employees, so it can’t allocate a specific amount to reserved employee spots.
Step 2. The primary use of D’s parking lot is not providing parking to the general public. D’s employees use 80% of the lot. 400/500 = 80%
Therefore, expenses allocable to those spots aren’t excluded from the § 274(a) disallowance by § 274(e)(7) under the primary use test.
Step 3. 5% of D’s parking lot spots are reserved nonemployee spots. 25/500 = 5% Up to $9,500 of D’s total parking expenses are subject to the § 274(a)(4) disallowance under this step. $10,000 x 95% = $9,500
Step 4. D must reasonably determine the employee use of the remaining parking spots during normal business hours on a typical business day and the expenses allocable to employee parking spots.
Example 7 from IRS Notice 2018 – 99
Business G, an accounting firm, leases a parking lot adjacent to its office building. G incurs $10,000 of total parking expenses related to the lease payments.
G’s leased parking lot has 100 spots. Clients and employees use these spots. Usually, G has about 60 employees parking in the leased parking lot in nonreserved spots during normal business hours on a typical business day.
Step 1. G isn’t exclusively reserving any of its leased parking spots for employees, so it can’t allocate a specific amount to reserved employee spots.
Step 2. The primary use of G’s leased parking lot is not providing parking to the general public. D’s employees use 60% of the lot. 60/100 = 60%
Therefore, G may not use the general public exception from the § 274(a) disallowance provided by § 274(e)(7).
Step 3. Because none of G’s parking spots are exclusively reserved for nonemployees, it can’t allocate a specific amount to reserved nonemployee spots.
Step 4. G must reasonably determine the use of the parking spots and the related expenses allocable to employee parking.
Because G’s employees use 60% of G’s parking spots during normal business hours on a typical business day, G reasonably determines that $6,000 of G’s total parking expenses is subject to the § 274(a)(4) disallowance. $10,000 x 60% = $6,000
Business G can’t deduct $6,000 of parking expenses. It can deduct the remaining $4,000.
How does this affect UBTI?
Tax-exempt organizations with employees can run through these same methods to calculate their nondeductible amount of parking expenses.
While they can’t deduct this amount, they can use the exact amount to increase their UBTI.
The calculation is the same for businesses and tax-exempt organizations because, “The Committee believes that aligning the tax treatment between for-profit and tax-exempt employers with respect to nontaxable transportation and gym benefits provided to employees will make the tax system simpler and fairer for all businesses” (H.R. Rep. No. 115-409).
If your UBTI or gross income is more than $1,000, you must file a Form 990-T.
Example 9 from IRS Notice 2018 – 99
Tax-Exempt Organization J is a religious organization that operates a church and a school. It owns a surface parking lot adjacent to its buildings.
J incurs $10,000 of total parking expenses. J’s parking lot has 500 spots. Congregants, students, visitors, and employees use these spots. Ten spots are reserved for certain employees.
During the normal hours of J’s activities on weekdays, J usually has about 50 employees parking in the lot in nonreserved spots and about 440 empty nonreserved parking spots.
During the normal hours of J’s activities on weekends, J usually has about 400 congregants parking in the lot in nonreserved spots and 20 employees parking in the lot in nonreserved spots.
Step 1. Because J has 10 reserved spots for certain employees, $200 is the amount of total parking expenses that’s nondeductible for reserved employee spots under § 274(a)(4). (10/500) x $10,000 = $200
Therefore, under § 512(a)(7), J must increase its UBTI by $200, the amount of the deduction disallowed under § 274(a)(4).
Step 2. Because usage of the parking spots varies significantly between days of the week, J uses a reasonable method to determine that the primary use of the remainder of the parking lot is to provide parking to the general public. Why? Because the public uses 90% of the spots during weekdays and 95% of the spots on weekends.
The empty, nonreserved parking spots are treated as provided to the general public. Thus, expenses allocable to these spots are excepted from the § 274(a) disallowance by § 274(e)(7) under the primary use test, and only $200 of the $10,000 is subject to the § 274(a)(4) disallowance.
Therefore, only $200 of the expenses for the provision of the QTF will result in an increase to UBTI under § 512(a)(7).
If J doesn’t have gross income from any unrelated trades or businesses of $800 or more included in computing its UBTI (to reach the $1,000 filing threshold), J isn’t required to file a Form 990-T for that year.
Example 10 from IRS Notice 2018 – 99
Tax-Exempt Organization K is a hospital. It owns a surface parking lot adjacent to its building. K incurs $10,000 of total parking expenses.
K’s parking lot has 500 spots. Patients, visitors, and employees use these spots. K reserves 50 spots for management and has about 100 employees parking in the lot in nonreserved spots during the normal operating hours of the hospital.
Step 1. Because K has 50 reserved spots for employees, $1,000 is the amount of total parking expenses that’s nondeductible for reserved employee spots under § 274(a)(4). (50/500) x $10,000 = $1,000
Therefore, under § 512(a)(7), K must increase its UBTI by $1,000, the amount of the deduction disallowed under § 274(a)(4).
Step 2. The primary use of the remainder of K’s parking lot is providing parking to the general public because 78% of the remaining spots in the lot are open to the public. 350/450 = 78%
Expenses allocable to these spots are excepted from the § 274(a) disallowance by § 274(e)(7) under the primary use test, and only $1,000 is subject to the § 274(a)(4) disallowance. So, only $1,000 of the expenses for the provision of the QTF will result in an increase in UBTI under § 512(a)(7).
K will need to add the $1,000 increase of UBTI under § 512(a)(7) to its gross income from unrelated trades or businesses. K is required to file a Form 990-T because the $1,000 increase to UBTI under § 512(a)(7) meets the filing threshold.
Retroactive changes
Please note, you have until March 31, 2019, to change your parking arrangements.
If you have reserved employee spots, you can change signage, access, etc. to decrease or get rid of your employee spots and treat those parking spots as unreserved employee spots.
You can apply these changes retroactively to Jan. 1, 2018.
This change could make a big impact on your 2018 tax return. The temporary guidance is still fairly new. Knowing your nondeductible amount of parking expenses can better prepare you for filing your 2018 tax return.
It’s also critical to know if you want to make changes to your parking arrangements to increase your deductible amount. Remember, you have until March 31, 2019, to make these changes and increase your tax savings.
Connect with your tax professional to help calculate your nondeductible amount and determine if any changes should be made to your current parking situation.
¹Qualified transportation fringes – transportation in a commuter highway vehicle between the employee’s residence and place of employment, any transit pass, and qualified parking.
²Total parking expenses – repairs, maintenance, utility costs, insurance, property taxes, interest, snow and ice removal, leaf removal, trash removal, cleaning, landscape costs, parking lot attendant expenses, security, rent or lease payments, or a portion of a rent or lease payment (if not broken out separately).
³Parking facility – Indoor and outdoor garages and other structures, parking lots and other areas.
4Employee – Any individual who is currently employed by the employer including common law employees and other statutory employees like officers or corporations. Partners, 2% shareholders of S corporation, sole proprietors and independent contractors aren’t employees.
5General public – Includes customers, clients, visitors, individuals delivering goods or services to the taxpayer, patients of a health care facility, students of an educational institution, and congregants of a religious organization. It doesn’t include employees, partners, or independent contractors of the taxpayer.
Qualified parking – parking provided to an employee on or near the business premises of the employer or on or near a location from which the employee commutes to work. It doesn’t include any parking on or near property used by the employee for residential purposes.
Have questions about your parking expenses? Let’s talk!
