Tax Reform: Nondeductible Parking Expenses and Their Impact on Your Business
The Tax Cuts and Jobs Act (TCJA) provides that expenses for qualified transportation fringe benefits are nondeductible. The IRS recently released interim guidance via Notice 2018-99 clarifying that a portion of taxpayers’ “parking expenses” is considered nondeductible as qualified transportation fringes. Thus, Notice 2018-99 has significantly expanded the number of taxpayers that will need to calculate the nondeductible portion of their parking expenses. Now, all employers that own or lease a parking lot where their employees park will need to consider if an add-back to taxable income is required. This provision impacts the preparation of 2018 tax returns as it applies to expenses incurred or paid after Dec. 31, 2017.
The guidance provides that total parking expenses include, but are not limited to:
- Repairs and maintenance
- Utility costs, insurance, property taxes, and interest
- Snow and ice removal, leaf removal, trash removal, cleaning, and landscape costs
- Parking lot attendant expenses and security
- Rent or lease payments or, if it’s not specific in your agreement, a portion of a rent or lease payment
Depreciation is not included in the definition of parking expenses and will remain fully deductible.
The guidance discusses how to calculate the disallowed expenses in two situations: (1) paying a third party for employee parking spots, and (2) owning or leasing a parking facility (or portion of it). The guidance defines parking facilities as “indoor and outdoor garages and other structures, as well as parking lots and other areas, where employees may park on or near the business premises of the employer or on or near a location from which the employee commutes to work.”
The first situation is fairly straightforward. If a taxpayer pays a fee to a third party for its employees’ parking spots, then that amount is nondeductible. The key question here is whether or not all the spots are for employees, or if some are for customers or the general public. The expenses paid for employee spots are now nondeductible.
If a taxpayer owns or leases a parking facility, it is permitted to use any reasonable method to calculate the nondeductible portion. However, the guidance has provided a four-step calculation that can be used to determine a reasonable allocation of parking expenses. Your KSM representative can assist in the preparation of this calculation. The key variables needed to allocate parking expenses between deductible and nondeductible amounts are:
- Total parking expenses
- Total parking spots in the parking facility available to the taxpayer for employees and nonemployees
- Number of parking spots exclusively reserved for the taxpayer’s employees
- Number of parking spots exclusively reserved for nonemployees
- Number of spots used by employees on a typical business day (excluding those employees parking in the reserved spots)
If the unreserved parking spots are primarily used by the general public, then all parking expenses will be deductible except for the portion attributable to spots exclusively reserved for employees. Primary use is defined as greater than 50 percent of actual or estimated usage during normal business hours on a typical business day. The general public includes, but is not limited to, customers, clients, visitors, individuals delivering goods or services to the taxpayer, patients of a healthcare facility, students of an educational institution, and congregants of a religious organization.
The guidance gives taxpayers until March 31, 2019, to reclassify, decrease, or even eliminate their reserved employee parking. Only parking spots that are reserved as of April 1, 2019, will be counted as reserved during 2018. Thus, any decrease in the number of reserved employee spots made by April 1, 2019, will retroactively apply back to Jan. 1, 2018.
The IRS is accepting public comments for further guidance through Feb. 22, 2019. The IRS also intends to issue regulations regarding how to determine the nondeductible portion of parking expenses. Thus, there is a chance these rules could change, but until then, taxpayers must make an effort to comply with the current guidance provided by Notice 2018-99.
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