Internal Revenue Code (IRC) Section 132 excludes certain amounts of employer-provided “qualified transportation fringes” – generally, transit passes, qualified parking, and transportation in a “commuter highway vehicle” between work and home – from an employee’s taxable compensation. However, under the Tax Cuts and Jobs Act of 2017, effective for 2018 and after, Section 274(a)(4) denies the employer a deduction for providing employees with these fringes (unless the expenses are treated as taxable compensation to the employees who receive them, in which case they may be deductible as compensation under Section 162; or unless they are incurred as necessary for ensuring the safety of employees under Section 274(l)).
In 2018, the IRS issued Notice 2018-99 (the Notice) to provide a methodology for employers to use to determine the amount of nondeductible expenses for employer-provided employee parking until proposed regulations are issued. See our prior Insight for a detailed discussion of that methodology.
Having just ended the second calendar year in which this provision has been in effect, we wanted to remind affected employers of the non-deductibility of non-taxable employer-provided employee parking expenses, and to provide examples of calculations of nondeductible employee parking expenses under the multistep methodology provided under the Notice.
An employer owns a surface parking lot adjacent to its office and incurs $10,000 of total parking expenses. The parking lot has 500 spaces that are used by its customers and employees. There are usually 50 employees parking in unreserved parking spaces during normal working hours on a typical business day. The employer usually has approximately 300 unreserved spots that are empty during normal business hours on a typical business day.
Step 1: The employer has no parking spaces that are exclusively reserved for its employees.
Step 2: Is the parking lot used primarily for the general public?
- 50 of the employer’s employees park in 500 spaces
- 50 / 500 = 10% employee use.
- Because only 10% of the employer’s parking lot is used for employee parking, the lot is primarily used for the general public (90%). The “greater than 50%” test under the Notice is passed, and there is no need to move on to Step 3.
An employer owns a surface parking lot adjacent to its office and incurs $10,000 of total parking expenses. The parking lot has 500 spaces that are used by the employer’s customers and employees. Fifty of the employer’s officers park in the lot in reserved spaces, and an additional 150 of the employer’s employees park in unreserved spaces during normal working hours on a typical business day. The employer usually has approximately 300 unreserved spaces that are empty during normal business hours on a typical business day.
Step 1: The employer has 50 spaces that are exclusively reserved for its employees.
- 50 / 500 = 10% employee use
- 10% X $10,000 parking expenses = $1,000 of nondeductible parking expense.
Step 2: Is the remainder of the parking lot used primarily for the general public?
- 500 spaces less 50 reserved spaces = 450 remaining spaces
- 150 of the employer’s employees park in the remaining 450 spaces
- 150 / 450 = 33% employee use
- Since only 33% of the employer’s parking lot is used for employee parking, the lot is primarily used for the general public (67%). The “greater than 50%” test is passed, and there is no need to move on to Step 3.
- The total amount of nondeductible parking expense is $1,000, taken from Step 1.
*Example from IRS Notice 18-99.
What Does CohnReznick Think?
We anticipate greater detail when proposed regulations are provided. Until such time, employers should continue to work with the rules provided under the Notice, including, as applicable, the use of its multistep approach. The Notice specifies that the Treasury Department and the IRS have determined that the taxable compensation deduction exception under Section 274(e)(2) does apply to employer-provided employee parking (i.e., an employer that treats an employee’s parking expense as taxable to the employee can deduct the expense); however, the Notice does not provide any amplification regarding the Section 274(l) deduction exception for employer-provided employee commuter benefits “necessary for ensuring the safety of the employee.” We continue to await additional guidance regarding the Section 274(l) exception.
Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
InsightNew regulations proposed for post-2019 income tax withholding, with guidance for new W-4Dana FriedEffective for 2020, there are new proposed regulations for income tax withholding on employee wages, including a new W-4. Here’s what to know.
InsightIRS Form 1023, application for exempt status, now must be filed electronicallyLori Rothe Yokobosky, Glenn SheltonAs of Jan. 31, 2020, organizations seeking exempt status under IRC Section 501(c)(3) are required to file Form 1023 electronically. Here’s what to know.
InsightSpending act adjusts excise tax rate on certain private foundations’ net investment incomeLori Rothe Yokobosky, Thomas Lanning, Dan MascielloThe latest federal rules mean more NII excise tax for some private foundations and less for others, but all will save the time and cost of determining which rate to pay.
Press ReleaseCohnReznick forms Exempt Organizations Tax practice, appoints Yokobosky Practice LeaderCohnReznick LLP, one of the leading advisory, assurance, and tax firms in the United States, has reorganized its not-for-profit tax professionals into the new Exempt Organizations Tax Services practice, which is now part of the firm’s National Tax practice.
InsightInterest expense limitations to trigger changes in financing private equity dealsIn an article for Bloomberg Tax, CohnReznick’s Jeremy Swan discusses how private equity firms can address new business interest expense limitations under IRC Section 163(j).
InsightNew Jersey enacts elective pass-through entity tax as workaround to federal SALT capHarry Golematis, Corey RosenthalNew Jersey is offering relief to taxpayers affected by the Tax Cuts and Jobs Act’s $10,000 cap on state and local tax deductions. Click to learn more.
InsightIRS issues proposed regulations on TCJA changes to Section 162(m) $1M compensation deduction limitDana FriedHere’s what to know about definition of “covered employee”; “publicly held corporation” or “predecessor corporation” status; and more related to the expansion of IRC Sec. 162(m).