What New ‘Parking Lot Tax’ Regulations Could Mean for Your Business
By John Juntunen, CPA
Last year, thanks to a provision in the Tax Cuts and Jobs Act (TCJA), employers found themselves missing a longstanding tax deduction for the qualified transportation fringe benefits they provided to employees. By definition, qualified transportation fringe (QTF) benefits include commuter vehicle transportation, transit passes, and employee parking. While few businesses cover employees’ transit or commuting expenses, many provide free employee parking. By doing away with the tax deduction for employee parking expenses, the TJCA created what became known as the “parking lot tax.”
Unfortunately, the IRS guidance surrounding this disallowed deduction —particularly around certain definitions and methodologies for calculating the amount that cannot be deducted—were unclear. As a result, many employers weren’t 100% sure how this change would affect them.
To alleviate confusion, the IRS recently issued final regulations that clarify certain aspects of the previous guidance. Here’s what you need to know.
First, does this apply to your organization?
The provision specifically applies to employers who:
- Lease a parking lot along with your office space
- Own a parking lot or garage
- Pay a third party for parking spaces
In our experience, most businesses provide free parking for their employees through one of the arrangements listed above, which could lead to nondeductible parking/transportation expenses.
How do you determine your disallowed deduction?
If you own or lease a parking facility…
Previously, employers who own or lease a parking facility, such as a parking lot or garage, were required to follow a single four-step methodology to calculate their parking expenses and disallowed deduction.
Thanks to the IRS’ final regulations, these employers can now choose from a total of four methodologies. Each methodology will arrive at a different amount of disallowed parking expense. So, the method you choose can significantly impact your year-end tax bill.
Additionally, the final regulations state that when a single amount is paid for parking and non-parking expenses, such is the case in a parking lot and building lease, the taxpayer may choose a safe harbor to allocate 5% of the expenses toward parking.
If you pay a third party for employee parking…
If you pay a third party for employee parking, anything over $270 per employee per month (for 2019 it was $265 per employee per month) is considered employee compensation. As such, the amount should be added to your payroll, then deducted by your company. For example, if you paid $300 per employee per month, you would add $30 to each employees’ wages. So, $270 per employee each month would be considered non-deductible; $30 would be deductible as QTF parking expenses.
Furthermore, the provision states the disallowance (i.e., the amount that cannot be deducted) is the lesser of $270 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 sought to clarify the so-called “parking lot tax,” calculating the disallowed deduction can still be confusing. If you’re unsure of how the provision applies to your business, especially given the final regulations, we recommend taking action as soon as possible to avoid the potential for noncompliance—and penalties.
What should you do next?
Consider these tax planning opportunities:
- Re-evaluate your parking arrangements or lease arrangements.
- Eliminate reserved parking spaces.
- Capitalize as many costs as possible (i.e., large repairs, landscaping, etc.), since depreciation is still an allowed parking expense.
- Adopt a carpooling or ridesharing incentive program to reduce parking expenses and the amount of parking spaces required.
- Contact AEM to make the calculation under each methodology to determine the least amount of non-deductible expenses.
We’re here to answer any questions you have and 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.
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