Guide to Employee Parking Expense Deductibility

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Hot Take:

Hot Take

The disallowance of the employee parking expense deduction may have an unexpected impact on tax liability. Employers should carefully review parking expenses to ensure qualifying expenses are captured and reasonably allocated between deductible and nondeductible amounts.

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In December 2018, the IRS issued Notice 2018-99 providing interim guidance for taxpayers to determine the amount of parking expenses that may no longer be deductible under Section 274(a)(4) of the Internal Revenue Code. As outlined in the Notice, taxpayers will need to determine the expenses paid or incurred to provide employee parking and use a reasonable method to calculate the nondeductible portion of these expenses. As provided in Section 512(a)(7), tax-exempt organizations are required to increase their unrelated business taxable income (UBTI) by the amount of nondeductible employee parking expenses.

Qualified Parking Expenses

As provided in the Notice, total parking expenses include, but are not limited, to repairs, maintenance, utilities, insurance, property tax, interest, snow removal, leaf or trash removal, cleaning, landscaping, parking attendant expenses, security, and rent or lease payments or a portion of rent and lease payments (if not separately broken out). The Notice explicitly states that depreciation on a parking structure and expenses paid for items not located on or in the parking facility, such as landscaping or lighting, should not be included as part of the total parking expense.

Determining Nondeductible Portion of Parking Expenses

  • Third-Party Parking Provider – the entire amount paid to the third party for employee parking services is nondeductible. However, if the amount exceeds the monthly qualified parking exclusion under Section 132 of $260 per employee in 2018, then the company should treat the excess as compensation and take a tax deduction for the reported compensation.
  • Leased Parking Facility – in this situation, a company can use any reasonable method to calculate the disallowance until further guidance is provided. In the Notice, the IRS provides four-step process companies can use when making the determination. The steps include:
      1. Calculate nondeductible expenses for reserved employee parking spots – Reserved employee parking may be designated by signage or through a segregated area accessible only to employees. The nondeductible expense is calculated as the percentage of reserved employee parking spots in relation to total available parking spots multiplied by the total parking expense.
      1. Determine the primary use of remaining parking spots – If the primary use (greater than 50 percent) of the remaining parking spots is to provide parking to the general public, then the remaining total parking expenses are deductible. The general public is defined to include 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. The taxpayer should proceed to Step 3 if the primary use of the remaining parking spots is not to provide parking to the general public.
      1. Calculate the expenses related to reserved nonemployee parking spots that are deductible – Determine the number of parking spots that are exclusively reserved for nonemployees, such as spots reserved for visitors and customers, partners, sole proprietors, and 2-percent shareholders of S Corporations. The parking expenses associated with reserved nonemployee parking spots are deductible.
      1. Determine the use of remaining parking spots and expenses allocated to employee and nonemployee spots – If the taxpayer has remaining parking spots that don’t fall into the categories described above, then the taxpayer must reasonably determine the employee use of remaining parking spots during normal business hours and disallow the related parking expense under Section 274(a)(4).

The Notice includes ten examples that describe different scenarios of the use of a parking facility and calculate the disallowed expense under Section 274(a)(4). Going forward, employers should review their parking expenses and take steps to minimize their exposure to the disallowance provisions of Section 274(a)(4). Certain employers might benefit from cost-segregation studies that will help them separate the cost of the parking space from the overall cost of the office space and other amenities. Other taxpayers might need to work with their accountants and payroll personnel to implement appropriate reporting of parking expenses and their associated tax treatment for both the employer and the employees.