This article was originally published in September 2019 and will not be updated, but please contact us if you have specific questions regarding the information in this article.
Since the Tax Cuts and Jobs Act went into effect in 2018, landlords and clients alike have come to us with questions about how this will impact parking deductions and tax benefits.
To answer this question, we turned to our friend and tax guru Brad Gold who is an attorney in Austin and a faculty member in #1 The University of Texas’ Masters of Professional Accounting program.
Qualified Transportation Fringe (“QTF”) benefits are small items in the universe of tax deductions that many accountants and businesses and taxpayers have come to take for granted, but a closer look at the recent changes to the taxes around parking and QTF benefits reveals a new and shifting landscape.
Historically, employers and employees could enjoy mutual benefits from the tax landscape around QTFs for parking. Employees did not have to include the value of parking benefits in their income, while employers were generally allowed to deduct the cost of providing that benefit to employees. It was a “best of both worlds” situation.
Therefore, for example, an employer could offer transit passes to its employees as a QTF benefit, employers could deduct the cost of the passes, employees were under no obligation to report the value of the passes as income, and it looked like everyone won in a mutually beneficial tax landscape.
How the Tax Cuts and Jobs Act Affects Parking Expenses
The Tax Cuts and Jobs Act (“TCJA”), which went into effect in 2018, significantly changed this situation.
How the Tax Cuts and Jobs Act Affects Employees
From the employee perspective, it is still possible to receive parking or transportation benefits (like a transit pass), but these are limited to a maximum of $265 per month in parking benefits or other transportation-type benefits like a transit pass. Although employees may have to set up a special account to set aside pre-tax income for use of the benefit and have lost some bicycle-related reimbursement benefits within the new landscape of the TCJA, most employees nonetheless continue to be poised to enjoy QTF transportation benefits at a level that ought to cover typical monthly parking expenses. So aside from folks that ride their bike to work or work in an extraordinarily expensive parking market, most employees will not notice much difference with the TCJA changes.
How the Tax Cuts and Jobs Act Affects Employers
Unfortunately, the situation for employers did not remain so beneficial or unchanged following the enactment of the TCJA.
The big shift is that employers are generally no longer able to deduct expenses paid or incurred to provide employee parking.
For example, imagine you own a business and pay a third party to use their parking garage for your 10 employees. You pay $100 per month for each of your employees to park in their garage amounting to $12,000 per year ($100 x 10 employees) x 12 months = $12,000. The $100 per month that you pay for each employee for parking is excluded under § 132(a)(5). None of the § 274(e) exceptions apply and the entire $12,000 is subject to the § 274(a)(4) disallowance. In this case, the employer cannot deduct any parking expenses.
But not all is lost. IRS Notice 2018-99 clarifies that employer deductions related to the expense of parking benefits are disallowed, however, an employer may continue to deduct expenses related to the value of offering parking benefits.
While value and expense may be identical in some situations, that is not always the case, especially when we begin to look at the variety of ways that businesses, employees, and parking lot owners interact.
So, if an employer offers to pay for an employee to park their car somewhere, only some situations give rise to a difference between the expense of the benefit, and the value of the benefit. In the example above, there is no notable difference between the value and the expense of the parking benefit. But in other scenarios, there could be a difference…
When an employer directly reimburses an employee for parking in a public lot, the expense and the value are the same from both the perspective of the employer and the employee. We have no distinction between value and expense to work with.
However, if an employer owns parking spaces in a garage, rents spaces in a lot that it owns, or has its own surface parking facility, there may be value that exists aside from the straightforward expense of giving an employee a place to park. For example, a surface parking lot equipped with electric vehicle charging stations has a value that is partially distinct from the expense dollars related to a car using a parking spot for an hour or a day. There may also be a mix of value and expenses that can get caught up in the QTF analysis when contiguous pavement allows for traffic aside from employee parking, such as a loading dock, visitor parking, public parking, or public event space. Even a public basketball hoop at the edge of a parking lot could create the type of value sought for this analysis.
To make this subtle determination between value and expense, it was possible in 2018 to use “any reasonable method” to calculate the §274(a)(4) disallowance (i.e. expenses that can not be deducted). However, heading into 2019, Notice 2018-99 suggests that using the method below is prudent. Regardless of whether a taxpaying business owns a parking lot or rents/leases parking facilities from another owner, the following analysis may be used.
This is a four-step methodology to determine total parking expenses and the §274(a)(4) disallowance:
- Calculate the disallowance for reserved employee spots
- Determine the primary use of remaining spots (the “primary use test”)
- Calculate the allowance for reserved nonemployee spots
- Determine the remaining use and allocable expenses (for those uses)
What This Means
From a landlord’s perspective, this might mean that it makes more sense to roll your parking expenses into your asking rental rate, rather than charge separately for parking. Landlords may also consider other alternative rent, lease, or ownership structures where the use of parking for their tenants, guests, and possibly also the public, are all included in one monthly cost. It also means that landlords need to look closely at creating mixed uses for parking areas that are already owned.
From an employer’s perspective, things get a little more complex. Under this new landscape, existing IRS guidance indicates it is clear that the expense of paying for a dedicated employee parking spot at a third-party surface lot or garage would be disallowed as a deduction.
However, if an employer rents or buys a block of parking spaces that is primarily for public use, and a few (statistically significant minority) employees also park there, the employer could continue to deduct (at least some of) those parking-related costs and give employees a place to park. This is an example of the “value” that the IRS wants to remain deductible for business. Interestingly, this seems to indicate that reserved spots are being frowned upon, while mixed-use egalitarian parking is being encouraged.
Given this new tax landscape around parking benefits, businesses paying for parking or otherwise owning parking facilities may wish to redefine their business relationships and parking lot rules.
For example, an office building tenant may currently use ten dedicated parking spots in the building’s garage for a fee of $2,000 per month on top of rent. Working with our analysis set forth above, merely the first step in that analysis tells us that parking spots reserved exclusively for employees are now nondeductible expenses under §274(a)(4), effectively making this parking benefit even more expensive for the tenant. Therefore, the tenant may look to reduce expenses by seeking out a parking arrangement that is less expensive or embraces more mixed-use or public use to increase the likelihood that some parking expenses can remain deductible for 2019 and beyond through the “value” that exists outside of parking expenses.
As another example, many businesses own surface parking lots that are available to the public and also employees. Increasingly, these surface parking lots have specialty spaces dedicated to charging electric vehicles, security equipment, and ticketing equipment. Putting money into parking lots can make good business sense, but lot owners must be wary of making this decision and not be able to deduct the expenses if the lot is set up exclusively for employees. To improve the chances that a business can continue to deduct parking-related expenditures, lot owners (or renters) may need to consider:
- Reducing or eliminating reserved employee parking spots
- Reducing or eliminating other types of reserved parking spots
- Encourage more public parking, both during business hours and non-business hours
- Consider other available uses for parking lots and structures
Regarding the last suggestion, here in Austin, we have an entrepreneurial spirit and creativity abounds when it comes to finding hidden value in a parking facility. Parking facilities in South Austin have been known to host morning yoga with baby goats and live-action sword-fighting. Parking lots all over the city turn into farmers’ markets and craft markets pretty much every weekend. Also, it’s hard to find a better place to play street hockey or teach motorcycle lessons than a wide-open parking facility.
So the next time you see something going on at a parking lot besides cars being parked there, you can imagine that somewhere a happy accountant is about to help a business, keep Austin weird, and conduct a §274(a)(4) QTF parking benefit analysis to make it all happen.
Disclaimer: This article does not constitute tax or legal advice. We always recommend consulting your legal team or accounting professionals for advice on your specific situation.
Still have questions about your parking situation? We’d love to chat. Schedule a consultation today to discuss your questions with one of our commercial real estate experts.