In December 2018, the IRS released Notice 2018-99 to clarify the taxation of parking expenses Under § 274(a)(4) and § 512(a)(7) of the Internal Revenue Code.
The notice reaffirmed that the amounts paid to a 3rd party for employee parking spots by a taxpayer or exempt organization are subject to tax.
The majority of the notice focused on how taxpayers or exempt organizations should handle owned and leased parking facilities. The authors recommend a multi-step approach to determining the taxability of costs related to owned and leased parking facilities. Those steps are summarized below:
- Determine the total number of parking spots.
- Subtract spots reserved for employees from the total number of spots (these reserved spots will always be taxed, however, because of the delay in guidance on this subject, taxpayers have until March 31, 2019 to remove any such signs for the IRS to consider the spots as non-reserved for all of 2018).
- Determine the primary use of the remaining spots. This applies to normal business hours on a typical work day. Use a reasonable method to make this determination including estimate or actual usage.
If the primary use (over 50%) of the remaining spots is for the general public’s use (including customers, consumers, and visitors), then the non-reserved spots would not be subject to any tax. If less than 50% of the remaining spots are for the general public’s use, the expenses incurred related to those spots will be subject to tax at the proportion of employee use to public use.
The notice stated that the following non-inclusive list of expenses is subject to tax:
- Maintenance costs
- Property taxes
- Snow and ice removal
- Leaf removal
- Trash removal
- Landscape costs
- Parking lot attendant expenses
- Rent or lease payments or a portion of a rent or lease payment (if parking is not broken out in the lease)
The notice specified that depreciation expense on the parking lot is not subject to tax.
The notice provides many examples covering different situations your organization may face and is linked below. However, the notice did not provide guidance on how a lessee should determine what percentage of the lease expense is attributable to parking, if not separately identified in the lease. If your organization’s lease includes parking spaces, but does not specifically break out the cost of the parking, we can help you determine a reasonable allocation method to ensure your organization’s compliance.