IRS Provides Interim Guidance Regarding Determination of Employer-Provided Nondeductible Employee Parking Expenses


    The IRS recently issued Notice 2018-99 (the Notice), to provide interim guidance (until proposed regulations are issued) on the determination of the amount of nondeductible employer-provided employee parking expenses under the Tax Cuts and Jobs Act’s (TCJA) disallowance of employer income tax deductions for employer-provided qualified transportation fringes.

    In General

    Internal Revenue Code (IRC) Section 132 excludes certain amounts of employer-provided “qualified transportation fringes” (generally, transportation in a commuter highway vehicle between work and home, transit passes and qualified parking) from an employee’s compensation. However, under the TCJA, effective for 2018 and after, IRC 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 the expense may be deductible as compensation under Section 162, or deductible because the expense is necessary for ensuring the safety of employees under Section 274(l)).  In particular, there have been many questions as to how employers are to determine the amount of their nondeductible employee parking expenses.

    The Notice

    In general, the Notice provides that the determination of the nondeductible amount depends upon whether the employer pays a third party to provide parking for its employees or, alternatively, where the employer owns or leases a parking facility at which its employees park.

    • Third Party Parking - the disallowance amount is generally the total annual amount paid by the employer to the third party. However, as only a specified annual amount can be provided to employees on a tax-free basis ($260 per month for 2018), the cost per employee in excess of the limitation amount is required to be treated as taxable compensation and, to the extent that it is treated as compensation, it will provide the employer with a compensation deduction.
    • Employer Owns or Leases All or a Part of the Parking Facility - any reasonable method may be used - the Notice provides a specific 4-step method which is deemed to be reasonable for such purpose:
      • Step 1: Determine the percentage of the facility’s parking spaces which are reserved exclusively for the employer’s employees, and multiply the total parking expenses amount by this percentage to determine the nondeductible amount for those spaces.
      • Step 2:  If there are parking spaces which are not reserved exclusively for the employer’s employees that are used primarily for the use of the general public (greater than 50% of the actual or estimated usage during normal business hours on a typical business day), those spaces are excepted from the deduction exclusion.
      • Step 3: If there are parking spaces which are not reserved exclusively for the employer’s employees but that are not used primarily for the use of the general public, the employer may identify the number of parking spaces, if any, which are exclusively reserved for nonemployees (e.g., denoted by “Customer Parking Only” signs). (If there are no parking spaces exclusively reserved for nonemployees, proceed to Step 4.) If there are parking spaces exclusively reserved for nonemployees, the employer determines the percentage of those spaces out of all the remaining parking spaces, and multiplies the expenses for the remaining total parking expenses by that percentage – the product is the amount of the deduction for the remaining total parking expenses that is not disallowed.
      • Step 4: If after Steps 1 – 3, there are any remaining parking spaces, the employer must reasonably determine the employee use of the remaining spaces during normal business hours on a typical business day, and the related expenses allocable to employee parking spaces, which amount will be nondeductible. (The Notice provides that the number of employee parking spaces may be based on actual or estimated use, which in turn may be based upon the number of spaces, the number of employees, the hours of use or other measures.)

    What Does CohnReznick Think?

    As we approach year-end and employers that provide employee parking need to determine the amount of their nondeductible expenses under Section 274(a)(4) for 2018, the Notice provides guidance as to how to do so until proposed regulations are issued. It is also noteworthy that the Notice also addresses the similar calculations that must be made by tax-exempt employers that provide employee parking as a fringe benefit, for purposes of the TCJA-imposed additional UBIT provisions under Section 512(a)(7). We look forward to greater detail when proposed regulations are provided. Until such time, employers should work with the rules provided under the Notice, including the use of the 4-step approach described above, if applicable. Of interest, 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; 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.


    For more information, please contact:

    Dana Fried, Managing Director National Tax Services, (516) 417-5064.

    Subject matter expertise

    • dana fried
      Contact Dana Dana+Fried
      Dana Fried

      JD, LLM, Managing Director - National Tax Services

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