What Employers Need to Know About Qualified Transportation Fringe Benefits
On December 10, 2018, the IRS issued Notice 2018-99 that provides interim guidance for calculating the nondeductible portion of parking expenses provided to employees. This new requirement is a result of changes made as part of the Tax Cuts and Jobs Act (TCJA).
These rules will affect any taxpayer providing qualified transportation fringe benefits to their employees including reimbursing or paying a third party for parking or providing parking for its employees in a “facility” owned or leased by the taxpayer. To understand the impact of these rule changes on tax-exempt organizations, please reference the article “New Guidance Will Require More Nonprofits to Pay UBIT.”
What Employers Need to Know
To determine the impact of the new parking rules, taxpayers will need to determine the associated costs of “parking facilities” provided to their employees and will need to separate them out between amounts paid to third parties and amounts owned or leased by the taxpayer.
The parking expenses that need to be included in the calculation include, but are not limited to, property taxes, repairs, maintenance, utilities, insurance, security, and other expenses directly related to the lot. Depreciation is not considered a parking expense for the purposes of these rules.
Parking facilities include indoor and outdoor garages as well as other parking lots and areas where employees can park on or near the premises of the employer or a location from which the employees commute. If parking facilities are located in a single geographic location, the expenses can be combined for purposes of the fringe benefit calculations. The nondeductible expenses for parking in different geographical locations must be calculated separately.
The notice provides that any reasonable method can be used for determining the disallowed parking fringe benefit for employer-provided parking. The notice provides a safe harbor to follow for determining the amount as outlined below.
Qualified Transportation Fringe (QTF) Parking Examples and Calculations
If you pay a third party for employee parking, you generally calculate the disallowed expense as the aggregate amount paid to the third party for all employee parking. However, if the amount you pay is over $260 per employee—for 2018, the IRC Section 132(f)(2) fringe benefit limitation—the excess will need to be reported as part of employee wages and compensation. Any amount reported as taxable compensation to the employee will not be treated as a disallowed expense by the taxpayer.
If you own or lease all or part of a parking facility, you may calculate the disallowed expense using “any reasonable method.” Notice 2018-99 outlines a four-step process that will be treated as a reasonable method if used by the taxpayer.
- Calculate the disallowance by multiplying the percent of spaces reserved for employees—as denoted by signage or limited access—by the total amount you paid for those spots in relation to the facility. Also, if you want to retroactively modify the number of reserved employee spots as of January 1st of 2019, you can do so through March 31st of 2019.
- Determine the primary use of the remaining, unreserved spots. If the primary use (more than 50% of the use during normal business hours, on normal business days) is to provide parking to the general public, then the remaining parking expenses are not subject to the disallowed expense rules. The “general public” includes customers, clients, students, visitors, patients, et al., but does not include partners, employees, or contractors in service of the employer.
- If, on the other hand, fewer than 50% of the remaining spots meet the above general public exception, the employer should calculate any expenses that go toward reserved nonemployee use and deduct them.
- To the extent that there are additional, unaccounted for parking expenses after the first three steps the employer must reasonably determine the allocation of deductible and nondeductible expenses.
For example, a manufacturing company’s employees park in a facility during normal business hours and they typically use 70% of the parking spots. The total parking facility expenses for the year are $10,000. It would be reasonable to multiply 70% by $10,000 and conclude that $7,000 of their total parking expenses would be disallowed.