Internal Revenue Code Section §274(a)(4), is one of the many provisions that were amended under the Tax Cuts & Jobs Act ("TCJA"). Notably, this revision created a cavity in the dispensation for employers to deduct “qualified parking.” The IRS has since released Notice 2018-99 to help employers determine the extent of allowable expenses. While the deduction of parking lot expenses still exist, it will be a headache for companies to calculate and safeguard a portion of their original benefit. Fortunately, the Notice provides a four-step method to help employers stay between the lines.
What is qualified parking?
Qualified parking may be provided through a third-party parking garage or a parking lot that the organization owns or leases. It may also operate by reimbursing employees. See Treas. Reg. Section 1.132-9(b), Q&A 4(d). The value of employer-provided parking is determined based on the amount an individual would have to pay for the parking in an arm's-length transaction.
How is the available deduction determined?
When an employer pays a fee to a third-party garage, the computation used to determine the allowable expense is rather simple. The expense is allowable only when the employer’s cost is more than the employee’s exclusion, which is $260 for 2018 and $265 for 2019. Any cost in excess of these thresholds, is available to be deducted by an employer as a qualified parking expense. In turn, this would be taxable to employees as additional compensation.
However, determining the available deduction gets trickier when the employer owns the parking facility. A few questions must be asked: which costs could be added to into the allowable cost bucket? Is the lot used by both nonemployees and employees? Are there any reserved some of the parking spots reserved for employees?
Notice 2018-99 details many costs, including but not limited to “repairs, maintenance, utility costs, insurance, property taxes, interest, snow and ice removal, leaf removal, trash removal, cleaning, landscape costs, parking lot attendant expenses, security and a portion of a rent or lease payment (if not broken out separately).” However, the guidance is silent on how to properly allocate expenses that are partly applicable to the parking facility.
Companies may benefit from various opportunities of shifting these shared costs. This could make a sizable impact on the total deduction allowed.
Additionally, there is conflicting guidance regarding whether depreciation expense could be considered an allowable cost of the parking facility. The Notice expressly states that depreciation is not an expense, and only includes “an allowance for exhaustion, wear and tear, and obsolescence of the parking facility.” The Joint Committee’s “bluebook” strays from the Notice and interprets this language to be inclusive of depreciation expense as a part of the wear and tear cost of providing parking. A technical correction may be necessary to clarify this rule. Generally, a four-step method should be used.
Four step method for expense allocation.
Step 1: Disallowance for reserved employee spots
If an employer incurs total expenses of $12,000 for an entire parking facility that has 300 parking spots, 30 of which are reserved for employees, 10%, or $1,200 would be the disallowed cost portion. The remaining $10,800 would be available for deduction but subject to step two.
Step 2: Primary-use test
Next, the company must evaluate the remaining spots to determine whether their primary use –– greater than 50% – is for the general public. This analysis is based on routine usage during the company’s normal business hours. Therefore, in the above example, if at least 136 of the remaining 270 spots are non-designated and available to the general public, the company would pass this test.
Step 3: Subtract parking reserved for nonemployees
If the company fails the above primary use test, because greater than 50% was unavailable to the general public, it can still retain some deduction using a third test. If the company reserves parking spaces for nonemployees such as visitors, customers, partners, sole proprietors, or 2 percent shareholders of S corporations, the costs of those spots would be deductible. In our example, if the public-use exception was not met, $10,800 in costs and 270 spots still remain unallocated. If 100 spots are reserved for visitors, $4,000 ($10,800 x 100/270) of cost allocable to those spots are preserved from disallowance. The remaining $6,800 in cost and 170 spots carry over to the final step.
Step 4: Allocation of remaining costs based on typical usage
Any remaining costs ($6,800) are allocable based on typical usage. If employees use 25% or 42 of the remaining 170 spots while leaving 75% or 128 spots unoccupied, then $5,100 of the available $6,800 would be deductible.
To ensure that your organization is effectively following the guidance outlined in IRC §274(a)(4), contact Joseph Klein.