Happy New Year!
Everyone’s looking forward to filing their tax returns for 2018 and seeing finally just how much we all saved in taxes, right?
Well, not so fast … in December, the IRS dropped an end of year communication bomb on both for-profit companies and exempt organizations where they clarified the new rules surrounding qualified transportation fringes (QTFs) contained within the Tax Cut and Jobs Act (TCJA).
First for some background.
The TCJA added a provision that disallows any deduction paid or incurred after December 31, 2017 for the expense of a QTF provided by a taxpayer to its employees. The definition of QTF includes (a) transportation in a commuter highway vehicle between the employee’s residence and place of employment, (b) any transit pass, and (c) qualified parking. Qualified parking is defined as parking provided to an employee on or near the business premises of the employer or on or near a location from which the employee commutes to work. It’s here that we run into trouble. When the TCJA was signed, no one thought that your office parking lot would be considered to be qualified parking – I mean – the IRS isn’t going to make you pay tax on expenses related to your parking lot, right? Even crazier – the IRS isn’t going to make not-for-profit organizations subject to UBIT for their parking lots, right?
Turns out everyone was wrong. The way this communication reads, it looks like all employers that own or lease a parking lot where their employees park will need to calculate some sort of add back to taxable income, and all exempt organizations with their own parking for employees will be subject to UBIT.
Here are the details.
If you pay a third party for parking spots, your total annual cost of employee parking is nondeductible for tax or subject to UBIT. If this amount is more than $260 per month per employee, the excess needs to be included in the employees’ income, and the excess would then be deductible as wages.
If you own or lease all or a portion of a parking facility (i.e. you own or lease space for your business that also gives you access to a parking lot), you can use any reasonable method to calculate the disallowance or UBIT amount. Note that any method that does not determine the cost, but rather the value to the employee (which we could all argue is minimal or zero), cannot be a reasonable method. Further, after January 1, 2019, any method that does not allocate expenses for parking spots reserved for employees will not be deemed to be reasonable.
Parking expenses include, but are not limited to, repairs, maintenance, utility costs, insurance, property taxes, interest, snow and ice removal, leaf removal, trash removal, cleaning, landscape costs, parking lot attendant expenses, security, and rent or lease payments or a portion of a rent or lease payment (if not broken out separately). Note that depreciation is NOT included in the list above, and is NOT considered to be a parking expense.
The IRS was kind enough to offer a suggestion for a reasonable method via the following four steps:
- Calculate the disallowance/UBIT amount for reserved employee spots.
- Identify the number of spots exclusively reserved for the taxpayer’s employees as designated by signage, physical separation, or any other indication.
- Determine percentage of reserved employee spots to total parking spots.
- Multiply the percentage from C by the company’s total parking expenses to determine the disallowed amount/UBIT amount.
- Determine the primary use of remaining spots.
- If the primary use of parking spots not reserved for employee use is to provide parking to the general public, the remaining parking expenses not disallowed in Step 1 are deductible.
- Primary use means greater than 50% of actual or estimated usage of the parking spots as tested during normal business hours on a typical business day, or in the case of an exempt organization during the normal hours of the exempt organization’s activities on a typical day.
- The “general public” includes, but is not limited to, customers, clients, visitors, individuals delivering goods or services to the taxpayer, patients of a health care facility, students of an educational institution, and congregants of a religious organization.
- Calculate the allowance for reserved nonemployee spots.
- Identify parking spots reserved for nonemployees – Including clients, visitors, and business owners.
- If none, go to step 4.
- The number of these spots as a % of the total spots not identified in steps 1 or 2 is multiplied by the remaining parking expenses not disallowed in step 1, and that amount is neither disallowed nor subject to UBIT.
- Determine remaining use and allocable expenses.
- For any remaining spots, you must reasonably determine the employee use of the remaining parking spots during normal business hours on a typical business day (or, in the case of an exempt organization, during the normal hours of the exempt organization’s activities on a typical day) and the related expenses allocable to employee parking spots. Methods to determine employee use of the remaining parking spots may include specifically identifying the number of employee spots based on actual or estimated usage. Actual or estimated usage may be based on the number of spots, the number of employees, the hours of use, or other measures.
Now that we have all this information, what do we do?
First opportunity is to consider whether or not you really need that sign out front that says “Parking for Employees and Customers Only.” If you don’t, you can pull up that sign today (or any time prior to March 31, 2019), and the IRS is letting you make that retroactive back to January 1, 2018. Remember – if you have a sign up, you (by definition) have zero spots available to the general public. So your only recourse is to determine how many spots are regularly used by customers, and the rest are (again … by definition) exclusively reserved for employees. If you pull up that sign, and you have 50 spots and 20 employees, you have a good chance of getting to step 4 and determining that most of your spots are not being used by employees, and are instead available to the general public.
Second is to get a handle on how much this is actually going to cost. If you have a simple parking lot that you get resealed and lines painted every five years, and you have to have plowed 4 times a year, the parking expenses that need to be considered may not be a huge number. Thus, the tax impact of determining whether or not 25% or 40% of your parking expenses should be disallowed may be minimal, and not worth an extensive calculation.
Finally, if you rent, you need to determine how much of your rent is for the parking lot. If it’s not specifically identified, you need to allocate an amount using a reasonable method. It’s yet to be determined if amending the lease to say that you’re leasing the parking lot for $1 a year will fly with the IRS.
As always, we’d love to discuss with you. Please contact us!