One of the changes made to the tax laws by the Tax Cuts and Jobs Act (TCJA) was to disallow a tax deduction for qualified transportation fringe benefits businesses provide to their employees. This nondeductible expense has been dubbed the “Parking Lot Tax”.
Items subject to disallowance as a Qualified Transportation Fringe benefits (QTFs) include:
- Parking expenses
- Commuter vehicle transportation between employee’s home and workplace
- Transit Passes
Based on our experience, very few businesses offer commuter vehicle transportation and transit passes to their employees. But….most businesses provide free parking spaces for their employees. IRS sees that as a problem (or an opportunity to pick up tax revenue) and wants this benefit to be included in employees’ W-2 income or nondeductible to the business.
For purposes of these new rules, employee parking includes parking provided to an employee on or near the business premises of the employer or on or near a location from which the employee commutes to work. There are a variety of methods employers use to provide tax-free parking benefits to employees. Employers may allow employees to park for free or at a reduced rate in an employer-owned or leased parking facility (for example, a parking lot or garage). Employers may pay a third party so the employer’s employees can park at the third party’s garage or lot. Alternatively, employers may reimburse employees for the cost of parking or allow employees to pay for parking on a pre-tax basis through a salary reduction arrangement.
The new rules disallow a portion of an employer’s deduction for parking expenses paid or incurred regardless of the method used by the employer to provide parking benefits.
The IRS has provided some guidance (Notice 2018-99) on determining the amount of nondeductible parking expenses. Next steps for businesses:
- Companies should re-evaluate their parking arrangements or lease agreements related to parking facilities to avoid or reduce the deduction disallowance for reserved employee parking spots.
- Employers should quantify their total parking expenses and consider opportunities to reduce those expenses.
- Employers should consider whether there are any other reasonable methods for determining the nondeductible portion of parking expenses, which may reduce the employer’s exposure to the new rules.
NOTE: Non-Profit organizations are NOT subject to this tax provision. In December 2019, Congress repealed this unpopular “parking lot tax” imposed on fringe benefits pursuant to the 2017 Tax Act. The repeal was made retroactive so that exempt organizations that actually paid the tax (i.e., as Unrelated Business Income Tax) would be entitled to a refund and those that should have paid but didn’t would be relieved of the responsibility.
Please reach out to your Wegner CPAs Tax Specialist for assistance in understanding and minimizing the tax impact of these rules.