The IRS has issued guidance detailing the deduction disallowance provisions of Section 274(a)(4), explaining how to determine the nondeductible portion of employee parking expenses. For tax-exempt organizations these amounts are unrelated business taxable income (“UBTI”). The new rules set forth a reasonable way to determine the amount of parking expenses that are no longer tax deductible, but allow you to use any reasonable method until further guidance is issued. However, using the value of the employee parking is not a reasonable method for determining cost. In addition, beginning in 2019, any method you use will need to allocate expenses to reserved employee spots. Taxpayers have until March 31, 2019, to change employee reserved spot designations, effective retroactively to January 1, 2018.
Since this guidance comes late in the year, you may already have a system in place to determine the amount of nondeductible employee parking expenses for facilities you lease or own. As long as this method is reasonable, you can continue to use it. However, if the method outlined in IRS Notice 2018-99 decreases the amount of disallowed expense, it would be better to revise your method to that in the Notice.
If the parking spaces are leased, the nondeductible amount is the amount paid to the third party for a space to the extent it does not exceed the qualified transportation fringe benefit exclusion amount for an employee ($260 in 2018). Amounts in excess of the qualified transportation fringe benefit excludible amount are taxable to employees and deductible by the employer as compensation expense.
If the facilities are owned or leased, nondeductible costs include repairs, maintenance, utilities, insurance, property taxes, interest, snow, trash and leaf removal, cleaning, landscaping in the facility (but not adjacent to it), the cost of parking lot attendants, security and lease costs (or an allocable portion of if parking facility costs are not separately stated). Depreciation is not considered a cost that is disallowed.
Once the facility costs are determined, the next step is to determine what portion of the costs are allocated to employees and what portion are for use by others. To do this, you must first disallow parking provided exclusively to employees, perhaps by way of reserved parking spaces or controlled entry to certain portions of a facility. After eliminating this reserved portion of the facility as used exclusively by employees, you must then determine if the facility is primarily used by employees or primarily available to customers and the public. This is done by looking to the total remaining number of spaces used by employees and used by others on a typical day. For this purpose, the public does not include partners, sole proprietors or more than two-percent S corporation shareholders. If use of the facility during different days of the week is different, you may be required to perform an additional calculation for each type of typical day. If the spaces used by nonemployees exceed 50 percent of the total spaces, the facility’s primary use is for the public and no additional amount is disallowed. If the spaces used by nonemployees are 50 percent or less, then costs are apportioned between the spaces for use by employees and others, on a typical business day (or days if usage is different on different days). This apportionment requires that cost be allocated to reserved nonemployee spaces (including those used by partners, sole proprietors and more than two-percent S corporation shareholders) first, with the remaining portion allocated to employees.
You could change this allocation by modifying signage for specified employee spaces. Creating specified employee spaces will decrease the employee spaces included in the calculation used to determine whether a space is used primarily by employees or the public, while disallowing the deduction for these costs. Eliminating specified employee spaces will likely be more beneficial as it will decrease the amount of costs specifically allocated to employees, even though it increases the portion of the facility used by employees for the 50 percent primarily used-by-employees test.
Tax exempt organizations use the same procedure as taxable entities for determining the costs taxed as unrelated business tax. The nondeductible amount for some tax-exempt organizations will not exceed the $1,000 threshold below which an organization is not required to file a Form 990-T or pay tax. Others will be required to pay the tax, but are relieved from estimated tax penalties for 2018 if the entity was not required to file a Form 990-T last filing season.
To further understand what this means to you and how you might want to adjust your reserved parking, please feel free to reach out to one of us at Cherry Bekaert. A professional from our tax department is happy to discuss what the best options are for your specific needs.
