How do you Calculate Non-Deductible Parking Expenses?February 17, 2020
The Tax Cuts and Jobs Act disallows a tax deduction for qualified transportation fringe benefits (QTFs) which includes employee parking. Learn how to calculate the expense here.
Attention employers: Do you provide parking for your employees? The Tax Cuts and Jobs Act (TCJA) disallows a tax deduction for qualified transportation fringe benefits (QTFs). Learn more about how this might impact your business.
What is the tax deduction for QTFs?
Check out our blog, Is My Parking Free? QTF Parking Benefits Under the TCJA.
Essentially, prior to 2018, under Sec. 274(a)(4), QTFs provided by an employer to an employee were excludable from the employee’s gross income (up to certain limits). QTFs include transportation in a commuter highway vehicle between one’s residence and place of employment, any transit pass and qualified parking (parking provided on/near the place of employment).
The TCJA amended Sec. 274(a)(4) to provide that expenses paid or incurred by employers after December 31, 2017 to provide employee parking are (generally) no longer deductible. The amount of QTFs is still excludible from the employee’s gross income in an amount up to $265 per month (up from $260 per month in 2018).
How do you calculate qualified parking expenses?
While amounts paid for transportation in a commuter highway vehicle and transit passes are easily identifiable, the calculation for qualified parking expenses is going to require a calculation and some additional information.
The IRS issued Notice 2018-99 to help define parking expenses as a QTF and methods for determining the disallowance under sec 274. Qualified parking includes indoor and outdoor garages and other structures, parking lots, and other areas where employees may park.
There are two exceptions where these expenses would be allowable as a deduction:
- Expenses are allowed as a deduction if they are treated as compensation to its employees
- Expenses for goods, services, and facilities made available to the general public
Two Methods for Determining Disallowed Expenses:
- Method 1 – Taxpayer Pays a Third Party for Employee Parking Spots- Disallowance is calculated as the annual cost of employee parking paid to a third party. If the amount exceeds the 132(f)(2) monthly limitation ($265 per employee) the excess amount must be treated as compensation. Since the excess is treated as compensation that amount would be excepted from disallowance under 274.
- Method 2 – Taxpayer Owns or Leases All or a Portion of a Parking Facility- Calculate the total parking expenses. Examples of these types of expenses would include repairs, maintenance, utilities, insurance, property tax, interest, snow removal, landscaping, leaf or trash removal, cleaning, parking attendant expenses, security, rent or lease payments (or a portion of rent or lease payments if not broken out separately)
Parking expenses do not include depreciation on a parking structure or expenses paid for items not located on or in the parking facility, including items related to property next to the parking facility, such as landscaping or lighting.
What portion of the expenses is allocable to the employees and therefore disallowed?
There is a 4 step method to determine this:
- Calculate the disallowance for reserved employee spots- Find the percentage of the number of reserved employee spots to the total spots and apply that to the total parking expenses. This amount will be fully disallowed.
- Determine the primary use of the remaining spots (primary use test)- If greater than 50 percent of the parking spots in the facility are to provide parking to the general public, then the remaining parking expenses would be excepted from disallowance.
- Calculate the allowance for reserved nonemployee spots- If the primary use test isn’t met, find the percentage of reserved nonemployee spots. These include spots for visitors/customers, partners, sole proprietors, and 2-percent shareholders of an S Corp. Amounts allocated to these spots would be excepted from disallowance under 274.
- Determine remaining use and allocable expenses- Determine the employee use of the remaining parking spots during normal business hours on a typical business day. Look to actual or estimated usage based on number of spots, number of employees, hours of use, or other measures. These remaining expenses allocable to employees would be disallowed.
Questions? Contact us.