Businesses that provide on-site parking for their employees may no longer be eligible for a tax deduction for the management or maintenance of their parking lots, according to new guidance issued late last year by the IRS. So while some businesses are enjoying a significant cut in the corporate tax rate (from 35% to 21%) or a new 20% qualified business deduction for partnerships and S corporations resulting from the 2017 Tax Cuts and Jobs Act (TCJA), this is one tax deduction that may now go away.
While this guidance is only considered “interim” from the IRS, businesses should start preparing now to determine if there will be an increase in their 2018 tax burden and year-end tax provisions from elimination of deductions for employee parking. Whether the parking expenses are treated as nondeductible depends on several factors specific to each business.
The cost of paying a third party for employees to park at their facility also may be no longer deductible. For businesses that pay for their employees to use a third party’s parking facility, there is a disallowance of any cost up to the maximum monthly exclusion amount of $260 per employee per month in 2018, $265 for 2019. For example:
A business with 200 employees pays a parking garage owner for 100 of its employees to park in the garage. If the business paid $100 per employee per month, $120,000 would be nondeductible by year-end. If the business paid $300 per employee per month in 2018, the nondeductible portion will be $312,000. The remaining $48,000 in this second situation would be taxable to the employees, and thus deductible to the employer.
Businesses that provide on-site parking for employees may calculate the nondeductible amounts using any reasonable method. The IRS notice has provided a safe-harbor four-part test, regardless of the size of the lot. Parking expenses must be allocated to various spots in the parking area or facility using these steps. The types of parking expenses that are no longer tax deductible are numerous—they include repairs, maintenance, utility costs, insurance, property taxes, interest, snow/ice removal, leaf removal, trash removal, cleaning, landscaping costs, attendant expenses, security, and rent/lease payments.
The steps issued by the IRS are as follows: Step 1) Parking spots specifically reserved for employees are entirely nondeductible. This includes areas of the parking facility that have specific signage, such as “Employee Parking Only,” or that require special access such as a key card. Step 2) If 50% or more of the lot is regularly occupied by employees (as opposed to the general public), the proportion of expenses of maintaining or servicing the parking facility, not attributable to the portion used by the general public, will no longer be tax deductible. If less than 50% is regularly occupied by employees, expenses may be deductible.
For example, if a business owns a parking lot that has 500 spaces and 400 (80%) of those spaces are reserved for or regularly used by employees, 80% of the expenses for the upkeep and security of that lot are now nondeductible.
Step 3) is only applicable if, under Step 2, 50% or more is determined to be used by employees of the business. This step allows a deduction for any parking spots that are specifically reserved for nonemployees; an example of this would be spots marked “visitor” in a manufacturing company’s parking lot. Step 4) is also only applicable in situations where there are remaining unallocated parking spots after going through Steps 1-3 that need to be allocated between employee and nonemployee spots.
One way for businesses to reduce the amount of this nondeductible expense is an option available only through March 31, 2019—simply reserve fewer spaces for employee usage. Since parking expenses related to spots or areas specifically reserved for employees are automatically nondeductible under Step 1 above, this kind of change could potentially keep a portion of the expenses deductible retroactively to January 1, 2018. This may also require changing signage and properly notifying employees of the change, so businesses wishing to take advantage of this retroactive opportunity need to make sure they do it the right way.
Again, given the major reduction in taxes that some businesses are experiencing as a result of the TCJA, this loss of deduction may be considered less serious for them than, say, organizations in the tax-exempt non-profit world, who received no such tax benefit and may now need to actually pay tax. However, it is better for businesses to be aware of this potential increase in their tax burden, and the retroactive election available, than to be surprised come tax filing time.
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