Employer Costs for Employee Parking – Are They Deductible?

Katie Rivers (Feb, 2020)

Many companies provide parking for their employees. While it is easy to assume that the expenses related to parking would be a typical operating expense that could be deducted for tax purposes, this is not always the case. The Tax Cuts and Jobs Act ("TCJA") brought many changes to the tax law, including amending Code Section 274 to disallow the business deduction of Qualified Transportation Fringe benefits, including parking expenses, provided to employees. 

While many of us are thankful that Qualified Transportation Fringe benefits are not usually included in our wages, business owners will be displeased to know that these expenses are no longer always 100% deductible.  The IRS has released Notice 2018-99 which helps a business determine if a portion, or even all, of parking expenses incurred can be deducted.

The method for determining the nondeductible amount depends on whether the business pays a third party to provide parking for its employees or the business owns or leases a parking facility where its employees park.

Payments to a Third Party for Parking

If a business pays a third party to provide employee parking, the nondeductible parking expense is typically the total annual cost paid to the third party.  However, Code Section 132(f) limits the nondeductible portion per employee parking spot to $265 for 2019 and $270 for 2020. In the event that the monthly rate paid per parking spot exceeds the limit, the excess is considered compensation to the employee and the business is allowed a corresponding deduction.

For example, assume a business pays a monthly parking expenses of $300 in 2020 for an employee. The amount in excess of the monthly limitation is $30 ($300-$270), and such excess must be included in the employee’s compensation. Although the employer has paid $300, only $30 will be deductible.

Employer Leases or Owns a Parking Facility

If a business does not pay a third party for parking, but instead owns or leases a parking facility, any reasonable method may be used to determine nondeductible parking costs. Notice 2018-99 provides a four-step process that is considered to be a reasonable method and may be relied upon until final regulations are published.  These steps are as follows:

1)      Determine parking expenses related to reserved employee spots - Businesses should identify the percentage of spots in the parking lot exclusively reserved for employees. Then, multiply this percentage by the total parking costs paid; the result is the nondeductible portion of parking for reserved parking spots.

2)      Determine the primary use of any remaining spots in the lot - The business must now determine the primary use of any spots not reserved for employees.  The primary use is determined by how the spots are used during normal business hours, on a typical business day. 

If employees use less than 50% of the unreserved spots on a normal business day, the business has met the primary use exclusion and can continue to deduct all related parking expenses. 

If employees use more than 50% of the unreserved spots, the business will have to allocate parking expenses between spots used by the public and by employees.

3)      Determine the expenses related to reserved guest parking spots - Companies should then consider if there are any reserved spots in the lot for the general public, visitors, guests, or customers. Since the TCJA only disallows expenses for employee parking, the portion of parking expenses directly related to reserved guest parking spots are fully deductible.

4)      Determine the use of the remaining parking spots in the facility - If there are still remaining parking spots left in the lot after completing steps 1-3, the business must determine the primary use of these spots. If the primary use of the spot is for employees, no deduction is allowed. If the primary use is for customers, the parking can be deducted.

To help illustrate these provisions, assume a business has 100 parking spots that are used by its employees and customers, there are no spots reserved for employee parking, and the business has approximately 20 employees using the lot during normal business hours on a typical day. The primary use of the lot is to provide parking to the general public under Notice 2018-99 because 80% (80/100) is available for use by the public. Since employee use is less than 50%, all parking expenses are deductible by the business.

Alternatively, assume the employees use 60 of the parking spots during normal business hours. Because the employees’ use is 60% (60/100), the primary use is not to provide parking to the general public. Accordingly, 60% of parking expenses are not deductible by the business.

Although the deductibility of parking expenses has been complicated due to changes made during the TCJA, the deduction is not always lost.  By using the above steps, some businesses can continue to deduct all, or a portion of their parking expenses. It is important to note that "total parking expenses" includes repairs, maintenance, utility costs, insurance, property taxes, interest, snow and leaf removal, trash removal, cleaning, landscaping, and security related to parking.  If you have any questions or concerns about employer costs for employee parking, please do not hesitate to contact your tax advisor.

 

The information reflected in this article was current at the time of publication.  This information will not be modified or updated for any subsequent tax law changes, if any.

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