One of the lesser known tax laws of the Tax Cuts and Jobs Act (TCJA) is that taxpayers may no longer deduct their qualified parking expenses paid for their employees' benefit. This new law became effective on January 1, 2018 and necessitates that employers review their current parking agreements and fringe benefits provided to employees. Additionally, the nondeductible portion of parking expenses for tax-exempt entities may create Unrelated Business Taxable Income (UBTI) that could cause an unexpected tax bill.
Qualified parking is "parking provided to an employee on or near business premises of the employer or on or near a location from which the employee commutes to work." The IRS disallows the total parking expenses paid or incurred to provide parking as an employee benefit. The total parking expenses include items such as insurance, maintenance, property tax, rent or lease payments, repairs and utilities. A portion of your rent that covers your office space and parking must be allocated as parking even if it is not separately broken out in the lease. Though the deduction is disallowed for employers, the benefit is still generally excluded from the employee's gross income if it doesn't exceed $260 per month in 2018 and $265 per month in 2019.
Methods for Disallowing
Notice 2018-99provided two methodologies for determining nondeductible parking expenses. The first method applies when an employer pays a third party for parking spots. The total annual cost must be calculated. The second method applies for employers who own or lease all or a portion of a parking facility. A reasonable method must be used to determine total actual costs allocable to employees' parking. The IRS provides a four-step safe harbor methodology as guidance for a reasonable method.
These new laws apply to tax-exempt entities. The disallowed deduction calculated using the above methods will increase UBTI. All tax-exempt organizations with UBTI less than $1,000 are not required to file a Form 990-T. Certain tax-exempt entities are at risk of a large tax bill if they have a significant disallowed deduction and/or other UBTI.
What Should You Do?
We suggest you determine the portion of your parking expenses that will be disallowed. You should also review your parking contracts and/or leases to determine if a modification is necessary. Taxpayers have until March 31, 2019 to change their parking arrangements to decrease or eliminate reserved employee spots to counter this disallowed deduction. These changes will be retroactive to January 1, 2018. Furthermore, there are some exceptions to avoiding the disallowance of some parking expenses if certain conditions are met. This is a complex law, and we believe it requires your attention. We encourage you to contact us if you have any questions.