Tax Reform: Are Your Parking Expenses Deductible?

A recent notice from the Internal Revenue Service has provided additional guidance regarding changes that the Tax Cuts and Jobs Act (TCJA) made to the tax treatment of parking fringe benefits. Previously, employers could generally deduct expenses related to “qualified transportation fringe benefits” that they provided to employees, including parking. The new law disallowed this deduction.

Calculating the Cost of Parking

The notice spells out a process for calculating the expense amount attributable to employee parking provided in a variety of scenarios. It makes clear that the calculation is focused on the cost of the parking provided, not the value received by the employee. This distinction means that any employer that makes parking spaces available to employees needs to evaluate whether it now has a nondeductible parking expense.

The methods for determining the applicable parking expense amount are the same for both tax-exempt and for-profit employers. Consider the following scenarios:

• If an employer pays a third party so that its employees can use the third party’s lot or garage, the amount of disallowed parking expense is simply the entity’s total annual cost paid to the third party.
• If an employer leases a property that includes both a building and a parking facility, the business will have to allocate a portion of the lease payments to the parking area. If the portion of the lease expense that is tied to the parking lot amount is not specified in the lease agreement, the entity can use “any reasonable method” to determine it. The IRS has yet to issue guidance on what that reasonable methodology could entail.
• If an employer owns a property that includes a building and a parking facility, the business apportions the real property costs of parking similar to the lease scenario above. However, owners are more likely to incur additional costs that should be allocated to parking. Per the IRS notice, expenses for parking can include repairs, utilities, trash removal, insurance, property tax, interest, and security, among other items. The notice specifically excludes depreciation related to the parking facility from this calculation. Again, employers should use a “reasonable method” for determining the portion that should be allocated to parking.

Once an employer has a figure for total parking costs, the next step is to calculate the portion of the total that is attributable to employee parking. The notice outlines a four-step process:

1. Calculate the percentage of total parking spots that are “employee-only.” Multiply this percentage by the total parking expenses for the facility. The product is the amount of expense that is disallowed.
2. Determine the primary use of the remaining spots. Who uses the unreserved spots? If greater than 50 percent of the remaining spots are used by the general public (including customers, clients, visitors, deliveries, etc.) during normal hours on a typical business day, then the expenses attributable to those spots are not disallowed under the TCJA’s transportation fringe benefits rules.
3. Calculate the allowance for reserved nonemployee spots. If some of the remaining spots described in the second step are designated for nonemployees, expenses allocable to those spaces are excepted from the transportation fringe disallowance rules.
4. Determine remaining use and allocable expenses. If there are any parking expenses not classified as allowed or disallowed after the previous steps, the employer “must reasonably determine the employee use of the remaining spots during normal business hours on a typical day” and allocate expenses accordingly.

Unrelated Business Income for Tax-Exempt Organizations

The TCJA went a step farther in applying this rule to tax-exempt organizations. Once the amount allocated to non-deductible parking has been determined, the TCJA requires tax-exempt organizations to treat this as unrelated business taxable income (UBTI).

This means that if the organization shows a net positive UBTI on its tax return, it may now owe federal taxes.

Steps to Take Now

The good news is that not all parking expenses are automatically disallowed. The bad news is that calculating the parking expense and figuring out what is and is not deductible will be much more time consuming than just identifying an expense line item on the financial statements. By comparison, however, the actual amount of expense that becomes non-deductible (or taxable) could be quite small, especially if your organization doesn’t perform much upkeep on the parking structure.

One bright spot in the guidance allows employers to treat any change made to their parking arrangements before March 31, 2019 as if it had been made on January 1, 2018. Employers can act quickly to reduce the number of reserved employee spots before March 31, 2019, and use the revised percentage when calculating the disallowance for 2018 returns.

Here are several actions you should take now:

• Talk to owners of parking lots to come up with a reasonable amount of lease expense that should be allocable to the parking portion of the facility.
• Reconsider the practice of restricting access or designating any parking spaces as “employees only” before March 31, 2019.
• For entities owning their own lots, start considering the allocation of utilities and other shared expenses that cover not only your building, but also your parking lots. Start tracking the number of employees using parking spots along with total parking spots.

Learn more about the impact of the TCJA here. We will be watching for any additional IRS clarifications relevant to healthcare entities and will issue more tax reform articles as needed. Consult with your HORNE LLP tax advisor on how these proposed regulations will affect you.