The Internal Revenue Service (IRS) recently released a notice (2018-99) that provides helpful guidance and needed clarification for the purposes of determining the amount of parking expenses that will be treated as non-deductible and for tax-exempt organizations the increase in unrelated business taxable income.
As a part of the Tax Cuts and Jobs Act (TCJA), Congress amended the rules that apply to qualified transportation fringe benefits (QTF) and in general eliminated the tax deduction for employee-provided QTFs. QTFs include transit passes, commuter van or buses, and employee parking. With respect to tax-exempt organizations the new law increases their unrelated business taxable income (UBTI) by the amount of the nondeductible QTF expense. By increasing tax-exempt organizations’ UBTI by the amount of the disallowed QTF deduction, Congress is attempting to level the playing field between taxable and tax-exempt entities since the elimination of the tax deduction without a corresponding and equal increase in UBTI would have only impacted taxable entities.
An open question with respect to the amended rules around QTFs was how to determine the amount of the nondeductible expense as well as the amount of the increase in UBTI. Notice 2018-99 attempts to answer this question.
Guidance on Employee Parking
The Notice provides detailed interim guidance for employers on how to determine the amount of the nondeductible parking expense, and for tax-exempt organizations, the increase in UBTI. A point of emphasis in the Notice is that the determination of the nondeductible amount is based on the expense and not the value of the parking.
The method for determining the amount of the nondeductible parking expenses depends on whether the employer pays a third party for the employee parking or the employer owns or leases all or a portion of a parking facility or lot where employees park.
Employer pays a third party for employee parking
In this scenario the amount of the tax deduction disallowance and additional UBTI is the total annual employer cost of the employee parking paid to the third party. However, any amount paid in excess of the monthly IRS employee income exclusion limitation ($260 a month per employee in 2018) will be treated as taxable compensation to the employee and deductible to the employer as well as excluded from UBTI.
Employer owns or leases all or a portion of a parking facility
When the employer owns or leases the parking facility the analysis is more complicated. The Notice starts out by stating that the amount of the deduction disallowance may be calculated using any reasonable method, and then goes on to explain that using the four-step methodology provided in the Notice is deemed a reasonable method. In other words, if you use the four-step method your analysis will likely be respected if it later scrutinized and challenged. For the purposes of this analysis, expenses include utilities, repairs, maintenance, insurance, taxes, upkeep, security, attendant costs, lease payments – but not depreciation. The four-step method to follow in order to meet the deemed reasonableness test is as follows:
- Determine the percentage of the parking space reserved for employees. The expenses associated with these spaces are not deductible or added to UBTI.
- For parking spaces not reserved for employees, determine if the primary use (greater tan 50 percent) of these remaining spots is for parking for the general public. If it is, the expense is deductible and there's no increase in UBTI.
- Calculate the spaces reserved for non-employee use. The answer is the same as in Step 2 for expenses allocable to these non-employee reserved spots.
- If after completing steps 1-3 there are any remaining parking spaces, the employer must make a reasonable determination of employee usage of the remaining space and the related expense.
Interestingly, the Notice provides that an employer that has reserved employee parking spots may decrease or eliminate their reserved spots designations and if this action is taken by March 31, 2019, the change will have retroactive effect back to January 1, 2018. If employees are, however, primarily using the parking spots eliminating the designation of parking spots will offer little benefit to employers.
Regulations on these rules will be published, although there is not a date certain. Until regulations are issued employers may rely on the guidance in the Notice. Finally, for tax-exempt entities that were not required to file a form 990T with the IRS reporting their UBTI for their tax year ending after December 31, 2017, the IRS has provided relief from penalties for failure to make estimated tax payments, provided they timely file a 990T and pay the amount of tax owed for the year.
How should employers respond?
Beyond following the guidance in the Notice for 2018, an employer’s response to the Notice should depend on their individual facts such as the amount of the parking expense, the degree to which employees use the parking spots, market practice, financial resources and the employer’s rewards philosophy. Measures can be taken to minimize or eliminate the potential adverse financial impact of these rules such as changing your fringe benefit policy, however, before taking any action employers should weigh the potential impact to employees and assess the degree of disruption it may cause.
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