Employee Benefits-IRS Provides Interim Guidance On Tax Treatment Of Parking Expenses Treated As Qualified Transportation Fringe Benefits (Part 1)

In Notice 2018-99 (the “Notice”), the Internal Revenue Service (the “IRS”) provides interim guidance: (1) for taxpayers to determine the amount of parking expenses, which are treated as qualified transportation fringes (“QTFs”) (under Code section 132(f); generally being “qualified parking” for these purposes), and which are nondeductible under § 274(a)(4) of the Internal Revenue Code (the “Code”) and (2) for tax-exempt organizations to determine the corresponding increase in the amount of unrelated business taxable income (“UBTI”) under § 512(a)(7) of the Code attributable to the nondeductible parking expenses.  The Notice provides interim guidance on how to determine the amounts described in (1) and (2) above.  The IRS intends to issue governing regulations in the future.

Changes To The Law.  Sections 274 and 512 were amended by the Tax Cuts and Jobs Act (2017) (the “Act”), effective for amounts paid or incurred after December 31, 2017.

Determining The Nondeductible Amount Of Parking Expenses.  Under the Notice, the method of determining this amount depends on whether the taxpayer pays a third party to provide parking for its employees, or the taxpayer owns or leases a parking facility where its employees park.

Paying A Third Party–  If a taxpayer pays a third party an amount so that its employees may park at the third party’s parking lot or garage, the § 274(a)(4) disallowance generally is calculated as the taxpayer’s total annual cost of employee parking paid to the third party.  However, if the monthly amount the taxpayer pays to a third party for an employee’s parking exceeds the § 132(f)(2) monthly exclusion limit, which for 2018 is $260 per employee, that excess amount must be treated by the taxpayer as compensation and wages to the employee (amounts below that limit are not taxable to the employee per § 132(a)(5)).  As a result, the total of the monthly amount in excess of $260 that is treated as compensation and wages is excepted from the taxpayer’s § 274(a) disallowance amount by § 274(e)(2).

The Taxpayer Owns Or Leases The Parking Facility-  If a taxpayer owns or leases all or a portion of one or more parking facilities where its employees park, the § 274(a)(4) disallowance may be calculated using any reasonable method.  The methodology described in Steps 1-4 below is deemed to be a reasonable method.  Using the value of employee parking to determine expenses allocable to employee parking in a parking facility owned or leased by the taxpayer is not a reasonable method, because § 274(a)(4) disallows a deduction for the expense of providing a QTF, regardless of its value.  Furthermore, for taxable years beginning on or after January 1, 2019, a method that fails to allocate expenses to reserved employee spots (within the meaning of step 1 below) cannot be a reasonable method; however, see the rule later in this notice providing that changes in employee reserved spot designations made by March 31, 2019, may be treated as applying retroactively for purposes of this Notice.

Step 1.  Calculate The Disallowance For Reserved Employee Spots.  A taxpayer that owns or leases all or a portion of one or more parking facilities must identify the number of spots in the parking facility, or the taxpayer’s portion thereof, exclusively reserved for the taxpayer’s employees (“Reserved Employee Spots”).  Employee spots in the parking facility, or portion thereof, may be exclusively reserved for employees by a variety of methods, including, but not limited to, specific signage (for example, “Employee Parking Only”) or a separate facility or portion of a facility segregated by a barrier to entry or limited by terms of access.

The taxpayer 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.  The product is the amount of the deduction for total parking expenses that is disallowed under § 274(a)(4) for Reserved Employee Spots.  Until March 31, 2019, taxpayers that have Reserved Employee Spots may change their parking arrangements (changing signage, access, etc.) to decrease or eliminate their Reserved Employee Spots and treat those parking spots as not Reserved Employee Spots retroactively to January 1, 2018.

Step 2. Determine The Primary Use Of Remaining Spots (the “Primary Use Test”).  The taxpayer may identify the remaining parking spots in the parking facility and determine whether their primary use is to provide parking to the general public.  If so, then the remaining total parking expenses for the parking facility are excepted from the § 274(a) disallowance by the general public exception under § 274(e)(7).

For purposes of § 274(a)(4) and this Notice, “primary use” means greater than 50 percent of actual or estimated usage of the parking spots in the parking facility, other than the Reserved Employee Spots.  Primary use of the parking spots is tested during normal business hours on a typical business day, or in the case of an exempt organization during the normal hours of the exempt organization’s activities on a typical day.  Non-reserved parking spots that are available to the general public but empty during normal business hours on a typical business day, or in the case of an exempt organization, during the normal hours of the exempt organization’s activities on a typical day, are treated as provided to the general public.  In addition, if the actual or estimated usage of the parking spots varies significantly between days of the week or times of the year, the taxpayer may use any reasonable method to determine the average actual or estimated usage.

For purposes of § 274(a)(4) and this Notice, the “general public” consists of any individuals other than employees, partners or independent contractors of the taxpayer.

Step 3. Calculate The Allowance For Reserved Nonemployee Spots.  If the primary use of a taxpayer’s remaining parking spots is not to provide parking to the general public, the taxpayer may identify the number of spots in the parking facility, or the taxpayer’s portion thereof, exclusively reserved for nonemployees (“Reserved Nonemployee Spots”).  For example, Reserved Nonemployee Spots include spots reserved for visitors and customers, as well as spots reserved for partners, sole proprietors, and 2-percent shareholders of S Corporations.

The number of Reserved Nonemployee Spots in the parking facility, or portion thereof, may be exclusively reserved for nonemployees by a variety of methods, including, but not limited to, specific signage (for example, “Customer Parking Only”) or a separate facility or portion of a facility segregated by a barrier to entry or limited by terms of access.  A taxpayer that has no Reserved Nonemployee spots may go to Step 4.

If the taxpayer has Reserved Nonemployee Spots, it may determine the percentage of Reserved Nonemployee Spots in relation to the remaining total parking spots (that is, total parking spots less the Reserved Employee Spots), and multiply that percentage by the taxpayer’s remaining total parking expenses. The product is the amount of the deduction for remaining total parking expenses that is not disallowed under § 274(a)(4).

Step 4. Determine Remaining Use And Allocable Expenses.  If the taxpayer completes Steps 1-3 in the methodology above and has any remaining parking expenses not specifically categorized as deductible or nondeductible, the taxpayer must reasonably determine the employee use of the remaining parking spots during normal business hours on a typical business day (or, in the case of an exempt organization, during the normal hours of the exempt organization’s activities on a typical day) and the related expenses allocable to employee parking spots.  Methods to determine employee use of the remaining parking spots may include specifically identifying the number of employee spots based on actual or estimated usage.  Actual or estimated usage may be based on the number of spots, the number of employees, the hours of use, or other measures.

The Notice has examples of how to apply the foregoing guidance.  Tomorrow’s blog will discuss how tax-exempt organizations may determine the corresponding increase in the amount of unrelated business taxable income (“UBTI”) attributable to of parking expenses treated as QTFs.