Does your business need to worry about the ‘parking lot tax?’
By John Juntunen
The Tax Cuts and Jobs Act of 2017 (TCJA) has been lauded for reducing the U.S. corporate income tax rate from 35 percent to 21 percent. But the new tax law also included provisions that weren’t entirely business friendly. One such provision takes away a long-enjoyed deduction: employee parking costs. Now, all employers—regardless of industry or entity type—may lose business tax deductions on parking provided to employees.
Could your business be affected?
The provision specifically applies to employers who pay a third party to provide parking for employees or who own a parking facility, such as a parking lot or parking garage. Parking is considered a qualified transportation fringe (QTF) benefit, along with any commuting expense or transit pass. Under Section 274(a)(4) of the TCJA, QTF benefits are no longer completely deductible as compensation to the employee.
To determine how much tax you owe on employee parking, you must first calculate your parking expenses.
Own a parking lot or garage? Follow this four-step process to determine your parking expenses.
If you own a parking facility, you must calculate your disallowance (i.e., the amount that cannot be deducted) by following these four steps:
- Identify the number of spots reserved for employees. Determine the percentage of employee-reserved spots in relation to total parking spots. Multiply the percentage of employee-reserved spots by the total parking expense to determine your disallowance.
- Determine the primary use (greater than 50% of actual or estimated use) of the remaining spots. Empty spots that are available to the public are considered public parking. If a parking spot is available to the general public, its related expenses are deductible.
- If the remaining spots, or a portion of the remaining spots, are reserved for nonemployees (customers, visitors, partners, and 2% shareholders of S corporations), determine the percentage of nonemployee-reserved spots and multiply this by the parking expense. This amount is deductible. However, these individuals must include the value of the parking expense on their W-2s.
- Reasonably determine the employee use of the remaining parking spots and expenses allocable to employee parking spots (similar to Step 1). The remaining spots and related expenses must be carefully allocated to determine what’s deductible and what’s not.
Per the TCJA, total parking expenses include repairs, maintenance, utilities, insurance, property taxes, interest, snow removal, leaf removal, trash removal, cleaning, landscaping, lot attendants, expenses, security, and rent. The TCJA does not include depreciation as a parking expense.
If you pay a third party for employee parking…
If you pay a third party for employee parking, you can consider anything over $265 per employee per month (for 2018 it was $260 per employee per month) as deductible compensation to the employee. So, if you paid $300 per month per employee, you would be able to deduct $35 per month per employee for QTF parking expenses and the employee would be required to recognize the excess over $265 on their W-2s.
Furthermore, the provision states that the disallowance (i.e., the amount that cannot be deducted) is the lesser of $265 per employee per month or the amount paid to the third party. So, if you paid $200 per employee per month, you wouldn’t be able to deduct any of it.
Are you parked in compliance?
Although the IRS has issued guidance clarifying the provision, the four-step parking-expense calculation remains fairly complicated, as you can see. If you’re unsure of how the provision applies to your business, we recommend taking action as soon as possible to avoid the potential for noncompliance—and penalties. We’re here to answer any questions you have, or to help you calculate the disallowance. We can also walk you through the pros and cons of making a change to your parking situation. Contact the AEM team today.