The Tax Cuts and Jobs Act of 2017 (tax reform) resulted in many changes designed to make the tax code easier to understand, compliance less complex and reduce overall business taxes. When passed it resulted in the immediate decrease of the corporate tax rate to 21%, temporarily allowed for 100% expensing of certain business assets, changed certain asset depreciation limits and even altered the deduction for business meals and entertainment. While most are familiar with these, there is one that many are just learning about; changes to the deductibility of qualified transportation fringe benefits. More specifically, the disallowance of the deduction for qualifying employer parking expenses. In late December, the IRS issued IRS Notice 2018-99 outlining how to determine the amount of the disallowed deduction. Below is a summary of the key information provided.
Determining the Disallowance
To determine the deduction disallowance a company must identify all expenses which are now considered disallowed. Typically, the IRS will publish a set of regulations that dictate calculation, but since this information has yet to be provided companies are permitted to use “any reasonable method” available. The Notice did provide some useful examples companies can use. The two examples included when a third party is paid for providing employee parking services and when a company owns/leases the facility itself.
- Third Party Parking Provider – In this situation the process is straightforward. The entire amount paid to the provider for employee parking services is nondeductible. However, if the amount the company pays for the employee’s parking exceeds the monthly limitation per parking spot (exceeding $260 per month), then the company can treat the difference as compensation and take a tax deduction for the amount, subject to W-2 reporting and employment tax withholding.
- 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 did provide a four-step process that companies can use when making the determination which companies may elect to follow. The steps include:
- Calculate nondeductible expenses for reserved employee parking spots;
- Determine the primary use of the remaining spots (primary use test) to identify if expenses can be allocated between deductible and non-deductible expenses.
- Calculate the expenses related to reserved non-employee parking spots that are deductible, and;
- Determine the use of remaining parking spots and expenses allocated to employee and non-employee spots.
What is the Primary Use Test?
This test allows a company with more parking spaces, including those reserved for employees, to determine if they can still deduct qualifying parking expenses. In this situation, a company must use less than 50% of the available parking spots and make the balance of the space available for general public use (customers, etc.) on a typical business day during regular hours. If a company meets these criteria, then all expenses related to employee parking are deductible.
The disallowance of the employee parking expense deduction may have an unexpected impact on tax liability. It’s important to carefully review parking expenses to ensure qualifying expenses are captured. If you have questions about parking expenses deductions or need assistance with an audit or other tax concern, Hanson & Co can help. For additional information call us at 303-388-1010 or click here to contact us. We look forward to speaking with you soon.