Employers have provided employees with parking at the workplace for many years without a tax cost. It has been considered a non-taxable fringe benefit and rightly so. Now under recent IRS guidance in Notice 2018-99, most every employer, including tax-exempt organizations, will have tax consequences to consider related to providing employee parking.
The 2017 Tax Cuts and Jobs Act changed the law related to employee parking, but most thought this would be an issue if an employer was paying a third-party for employee parking. Under the new law, effective for parking expenses paid or incurred after December 31, 2017, a for-profit employer is not allowed to deduct expenses related to providing employee parking and tax-exempt organization employers must treat the amount paid for employee parking expenses as unrelated business taxable income (UBTI) and will pay an income tax if the amount of employee parking expenses exceeds $1,000.
Fiscal year for for-profit filers for tax returns filed for years ending in 2018 should consider the amount of employee parking expenses paid or incurred after 12/31/2017. Tax-exempt filers for years ending in 2018 should consider the amount of parking expenses paid or incurred after 12/31/2017 as unrelated business income.
There are two notable exceptions to the disallowance rule. The first is if the parking benefit is included in the taxable wages of the employees. The second is if that parking is primarily for the general public and not primarily for employees.
There is an ongoing effort to repeal this tax provision, but passage of repeal faces a number of political hurdles.
What is considered parking expenses?
Parking expenses are not just what is paid to a third party for parking spaces, but expenses an employer incurs for a parking lot owned by an employer or leased by an employer. Parking expenses included a portion of rent or lease payments allocated to parking if not broken out separately, repairs, real estate taxes, insurance among other expenses.
Other expenses related to parking are also to be considered, but depreciation of any costs related to the parking lot or facility is not to be considered.
After identifying all parking expenses, an allocation of those expenses to employee parking must be determined. Typically, an employer will designate parking spaces for visitors and certain others that effect the determination of the amount that is not deductible or is to be considered UBTI by a tax-exempt organization. Additionally, reserved spaces for employees have expenses allocated in a manner different than general parking for employees. Lastly, if parking is primarily used by the general public, rather than employees, then these rules do not apply at all.
The IRS also issued Notice 2018-100, which provides for a waiver of penalties, in certain circumstances, for the failure by tax-exempt employers to make quarterly estimated income tax payments otherwise required to be made on or before December 17, 2018. The penalty relief is available only to tax-exempt employers that were not previously required to file Form 990-T and that underpaid their estimated income tax due to the parking expenses being included in UBTI.
This penalty relief applies only in case of underpayment of quarterly estimates. Tax-exempt employers that fail to timely file Form 990-T or that fail to pay taxes by the original due date are not eligible for the relief. To claim the waiver, the tax-exempt organization must write 'Notice 2018-100' on the top of its Form 990-T.
Employer who pays a third party for parking spots.
If an employer pays a third party an amount so that its employees may park at the third party's parking lot or garage, the disallowance generally is calculated as the employer's total annual cost of employee parking paid to the third party. However, if the amount the taxpayer pays to a third party for an employee's parking exceeds a monthly limitation, which for 2018 is $260 per employee, that excess amount must be treated by the taxpayer as compensation and wages to the employee.
Employer who owns or leases all or a portion of a parking lot or facility.
Until further guidance is issued, if a taxpayer owns or leases all or a portion of one or more parking lots or facilities where its employees park, the deduction disallowance and UBTI amount may be calculated using any reasonable method.
Using the "value" of employee parking, rather than an allocation of actual parking expenses, to determine expenses allocable to employee parking in a parking lot or facility owned or leased by the taxpayer is not considered a reasonable method. The IRS guidance provides the following four step methodology that is deemed to be a reasonable method.
- Calculate the disallowance for reserved employee spots.
- Determine the primary use of the remaining spots (for the general public (over 50 percent) or for employees).
- Calculate the allowance for reserved nonemployee spots.
- Determine the remaining use and allocable expenses.
Please contact us about your specific situation so we can assist you to comply with these requirements. We have developed an approach to determine what a reasonable approach to allocate expenses to employee parking. We will keep you informed of possible changes to this parking tax.