Do you provide parking for your employees? If you are like most employers, the answer is probably yes. The IRS deems you as providing parking fringe benefits to your employees if you are paying a third party for parking, leasing a building or suite that includes parking, or if you own the parking facility. Did you know that the Tax Cuts and Jobs Act (TCJA) has made this parking benefits a non-deductible fringe benefit? Yes, a nondeductible fringe benefit. Now, you can still pay for this benefit and your employees will surely be thankful that you provide them a place to park, you just will not be able to deduct the expense. How will this affect you and is there any way out of this? Well, there is no easy answer to this question. The truth is, every business will have to evaluate, calculate and determine the impact of these new rules. The following is a summarized breakdown of the possible outcomes.
Owning or Leasing a Parking Facility. In this situation, the IRS requires you to determine the total parking expenses for the facility and use a reasonable method to determine the amount of those expenses that are disallowed. The IRS will find your method reasonable if you complete the following four steps:
- Employee Reserved Spaces – You determine the percentage of parking spaces reserved for employees and multiply that by the total parking expenses for the facility. The expenses allocated to reserved employee parking spaces are fully nondeductible.
- General Public – The primary use of the remainder of the parking spaces is identified to determine whether they are parking provided to the general public (customers or potential customers). If the remaining spaces are open to the general public, no further disallowance is required. (Primary use means more than 50% of actual or estimated use.)
- Nonemployee Reserved Spaces – The percentage of remaining parking spaces reserved for nonemployees (visitors, partners, more-than-2% S corporation shareholders) is determined and multiplied by the remaining parking expenses. The expense allocated to spaces reserved for nonemployees is not subject to disallowance.
- All other parking – If any parking expenses have not been categorized as deductible or nondeductible in Steps 1–3, a reasonable determination of the employee use of the remaining parking spaces on a typical business day is determined. The remaining parking expense allocated to employee usage is disallowed.
Example 1:
Business A spends $10,000 a year to provide and maintain a parking lot with 100 spaces, 10 of which are reserved for managers and 35 are designated for customer parking only. On a normal day of business, employees typically occupy 50 of the non-reserved spaces, while the remaining spaces are normally occupied by customers or the general public, or go unused.
Step 1: Ten percent (10 out of 100) of the spaces are reserved for employees; therefore, 10 percent of Business A’s are nondeductible ($1,000).
Step 2: The remaining spots are deemed not to be primarily for public use because the majority (50 out of 90) of the remaining spaces are generally used by employees. So the general public use exclusion does not apply.
Step 3: Thirty-five percent (35 out of 100) of the spaces are reserved for customer parking only. The expenses associated with these parking spaces are deductible. ($3,500)
Step 4: Because 5 percent (5 out of 100) of the unmarked spaces are normally occupied by customers or the general public, or go unused, expenses incurred are deductible. ($500)
As a result of this 4-step process, Business A would only be able to deduct $4,000 ($3,500 from Step 3 plus $500 from Step 4) of the total parking expenses incurred during the year. The remaining $6,000 would be a nondeductible expense.
Paying a Third Party for Parking. If you pay a third party for parking spaces for your employees, the amount disallowed as a deduction is generally the total annual amount paid to the third party. The disallowed amount, however, is capped at an exclusion amount per employee ($265 per month for 2019) multiplied by the number of employees who received the exclusion. Any amount paid in excess of that amount is treated as compensation to the employee and reported as wages on Form W-2 (and deducted by you as compensation expense).
Example 2:
Business A has 20 employees. Business A pays Parking Garage LLC, a third party that owns a parking garage across the street from Business A, $100 per month for each employee to park in the garage.
$24,000 per year (($100 x 20) x 12 = $24,000)
The $100 per month paid for each employee for parking is excludable from the employee’s wages as a nontaxable fringe benefit and the entire $24,000 will be nondeductible by Business A as a nondeductible fringe benefit.
Example 3:
Take the same example above and assume the monthly change was $300 a month per parking spot.
$72,000 per year (($300 x 20) x 12 = $72,000)
From the $300 a month paid per employee, $265 would be excludable from the employee’s wages and $35 would be taxable to the employee and included on their Form W-2. Business A would have $8,400 (($35 x 20) x 12) deductible as employee wages and $63,600 (($265 x 20) x 12) would be a nondeductible fringe benefit.
The above are only examples that help you understand the new tax law. The TCJA will affect all those who are providing parking benefits to their employees. Every business and every taxpayer’s situation is different. If you would like to know how this new tax law will impact your particular business, please contact us. We are here to help.
