Legitimate business expenses – including parking expenses – that have always been deductible may now be nondeductible. There has been an increasingly large uproar about these nondeductible expenses since the regulations were released in December 2018 (Notice 2018-99). The regulations were billed as describing the process for nonprofits, but when you read them, they apply to all entities. The IRS accepted public comments about the parking expense regulations through February 22, 2019. The hope is that this will be repealed, but until that happens, here are the current regulations.
The regulations apply to all entities, regardless of whether the entity is nonprofit or for-profit and regardless of whether it is paid or unpaid parking. All entities need to evaluate nondeductible parking expenses.
The regulations are straightforward when determining if the taxpayer pays a third party, such as a local parking garage, for employee parking spots. The payment from the taxpayer to the third party that is not included as taxable income on the employee’s W-2 is the amount of “nondeductible parking expenses.” Many people have tried to devise ways for the payments to be included in an employee’s W-2 as taxable wages to prevent the entity from being taxed. In general, that is a challenging task as qualified parking is a qualified transportation fringe and therefore non-taxable, up to certain dollar amounts. Talk to your payroll professional before making any changes.
The difficulty comes into play when a taxpayer owns or leases all or a portion of a parking facility or lot. The regulation is applicable anytime a lease gives the lessee access to the parking facilities as part of the lease, whether listed separately or not. Some calculations are required under the regulations. The order listed below is not the order in the regulations, but is a more efficient order in which to do the steps.
- Determine if the entity has any employee reserved spots. If the answer is yes, the rest of the calculations must be done. However, the regulations
do allow an entity to change their reserved employee parking until March 31, 2019, and treat the change as if it was made on January 1, 2018. For
every employee reserved parking spot, a proportionate amount of the parking lot expenses will be allocated to the spot and will be considered nondeductible
For example, there are ten reserved employee spots and 100 total spots. If the reserved employee spots are unreserved by March 31, 2019, then 0% (0/100) of the parking lot expenses will be nondeductible under this step. If on March 31, 2019, ten spots are still reserved, then 10% (10/100) of the total parking lot expenses will be nondeductible.
- Determine the primary use of the remaining parking lot spots. Primary use means greater than 50%. On any regular business day, this is the percentage
of those remaining parking spots used by the general public. Note that spots that are typically empty during business hours are considered used
by the general public.
For example, we have the same 100 spots from above. The entity chose not to change the reserved employee spots, so there are ten reserved employee spots. That means that there are 90 (100-10) remaining parking spots. If greater than 50% are for the general public (non-employees), the primary use test says the general public is the primary user. So if 46 ((90 spots x 50%) + 1) are used by the general public (i.e., non-employee spots), the primary purpose is the general public, and none of those 90 spots will have nondeductible expenses.
- If you have no employee reserved spots (by March 31, 2019) and the primary use of the parking lot is for the general public, you are done. Otherwise,
you have to calculate what the parking expenses are. This includes costs for repairs and maintenance of the parking lot, utilities related to the
parking lot (such as lights), insurance for the parking lot, property taxes related to the parking lot, interest related to the parking lot, snow
and ice removal, leaf removal, trash removal, cleaning, landscape costs, parking lot attendant expenses and security. It also includes rent or
lease payments for the parking lot. If the lot is not separately listed in the rent or lease payment of a building, then the allocable portion
of the building rent that relates to the parking lot, and anything else that might be a parking lot expense, is included. The one exception is
that depreciation of the lot is not considered a parking expense. The IRS has not given any guidance as to a reasonable methodology to allocate
these expenses between the parking lot and the non-parking lot, other than to say that the reasonable allocation methods are allowable.
The implications of this guidance appear to be the most challenging portion of the entire calculation.
- Next, determine the deductible expenses that relate to reserved non-employee spots such as visitor or customer spots. Going back to our previous example,
assume that there are ten visitor reserved spots. We will also assume that the total parking expenses are $1,000. In the first step, we said 10%
went to reserved employee parking, so $100 is nondeductible. We have 10 out of 90 remaining spots that are visitor reserved which is 11%. We have
$900 to allocate among the remaining spots. 11% of $900 is $100, which is deductible.
- Finally, take all the remaining unreserved spots and allocate costs based on typical usage 100c. So we have $800 and 80 spots remaining to be allocated.
If employees typically used 45 spots, then 45/80 * $800 = $450 is nondeductible for unreserved spots. Add the nondeductible reserved spots of $100
plus the nondeductible unreserved spots of $450 to get total taxable (nondeductible) expenditures of $550.
The nondeductible expenses are then, essentially, increasing taxable income for the entity. Therefore, in our example, if the entity previously had taxable income, the $550 would increase that taxable income, resulting in $115.50 more of income tax paid at a corporate level using the 21% rate. Pass-through entities would instead pass on that $550 of additional taxable income to the individual owners who would pay tax at their individual tax rate. If instead, the entity had a taxable loss before the $550, the $550 would decrease the amount of the taxable loss, thus reducing the net operating loss carryforwards allowed for corporations and reducing the tax losses to the individual owners in pass-through entities.
We do not know what the revised guidance issued by the IRS will contain. If the first two steps of the process indicate your entity will have no nondeductible parking expenses, and there are no other nondeductible qualified transportation fringes, complete your tax filing as usual. If instead, this would result in nondeductible expenses, you will need to determine how to proceed.
If you can extend the tax return and wait to file, that may be the most efficient way to deal with this uncertainty. You could always file either with the nondeductible expenses or without the nondeductible expenses and amend the return at a later date if the IRS does not issue revised regulations to match the manner in which you have filed. However, that results in additional preparation fees for amended returns and, if no tax was initially paid, penalties and interest for the late filing.
Also consider whether changes to reserved employee parking should be made now or wait until closer to March 31, 2019, in case the regulations change.
This area of tax law may be a moving target, but these are the current regulations. Talk with your tax return preparer for further information.