IRS releases guidance on parking lot rules

The IRS recently provided guidance in the form of proposed Treasury regulations (Proposed Regulations), which address the disallowance of employer deductions for the cost of providing commuting and parking benefits to employees. As you may recall, following the Tax Cuts and Jobs Act (TCJA) of 2017, the IRS provided complex, yet incomplete, guidance on how to calculate disallowed parking expenses. The Proposed Regulations provide some significant updates to simplify the process of calculating the disallowed deduction. While many of these changes are favorable to taxpayers, some may have unfavorable impacts.

Background

The TCJA disallowed a deduction for the expense of any qualified transportation fringe benefit (QTFB) provided by taxpayers to their employees for expenses paid or incurred after Dec. 31, 2017. These benefits can still be excluded from an employee’s income, but an employer no longer gets a corresponding tax deduction if the amounts are not included in the employee’s income. Note, however, the disallowed deduction relates to the expense of providing a QTFB, not its value, and the determination of an expense is not always straightforward, especially for the cost of employee parking.

In 2018, the IRS provided interim guidance for taxpayers to determine the amount of parking expenses that is nondeductible. The interim guidance created as many questions as it answered, and the Proposed Regulations attempt to address some of these more glaring issues by clarifying the statutory requirements. In particular, they address QTFBs paid or incurred by an employer and transportation and commuting expenses paid or incurred by an employer.

Disallowance of deductions for certain qualified transportation fringe expenditures

The Proposed Regulations define relevant terms and modify previous guidance by providing a general rule and three simplified methodologies to determine the amount of nondeductible parking expenses when a parking facility is owned or leased by the taxpayer. Taxpayers may choose to apply the general rule or one of the three simplified methods for each taxable year and for each parking facility.

• General rule. The general rule in the Proposed Regulations allows taxpayers to calculate the disallowance based on a reasonable interpretation of the statute subject to a few requirements (using actual expenses paid or incurred, allocating expenses to reserved parking spots, and properly applying the exception for parking made to the public).
• Primary use method. This method is largely based on the safe-harbor method in the 2018 guidance. Special rules for allocating certain mixed parking expenses and aggregating parking spaces by geographic location may be used. The proposed regulations also include new definitions for geographic location, inventory/unusable spaces, available parking spaces, peak demand period and mixed parking expense.
• Qualified parking limit method. Under this method, taxpayers calculate the disallowance by multiplying the total number of spaces used by employees during the peak demand period or, alternatively, the total number of the taxpayer’s employees, by the monthly per employee limitation on exclusion for qualified parking ($270), for each month in the taxable year.
• Cost-per-space method. This method allows taxpayers to calculate the disallowance by multiplying the cost per parking space by the number of available parking spaces to be used by employees during the peak demand period. Cost per space is calculated by dividing total parking expenses (including expenses for inventory/unusable spaces) by total parking spaces (including inventory/unusable spaces). Special rules for allocating certain mixed parking expenses and aggregating parking spaces by geographic location may be used with the cost-per-space methodology.

Payments to third parties. The Proposed Regulations provide that if the taxpayer pays a third party for its employee’s QTFB, the amount of the deduction disallowed is generally the taxpayer’s total annual cost of the QTFB paid to the third party.

New definitions. This Alert will not provide all definitions listed in the Proposed Regulations, but instead, draws attention to newly defined terms and resulting impact.

• Geographic locations. The Notice provided that if a taxpayer owns or leases more than one parking facility in a single geographic location, the taxpayer may aggregate the number of spaces in those parking facilities. It was unclear, however, what constituted a “geographic location.” The Proposed Regulations define the term to mean contiguous tracts or parcels of land owned or leased by the taxpayer. Two or more tracts or parcels of land are contiguous if they share common boundaries or would share common boundaries but for the interposition of a road, street, railroad, stream or similar property. Tracts or parcels of land which touch only at a common corner are not contiguous.
• Reserved nonemployee spaces means the spaces in the parking facility, or the taxpayer's portion thereof, exclusively reserved for nonemployees. For example, such parking spaces may include, but are not limited to, spaces reserved exclusively for visitors, customers, partners, sole proprietors, 2-percent shareholders of S corporations, vendor deliveries and passenger loading/unloading. Nonemployee spaces in the parking facility, or portion thereof, may be exclusively reserved for nonemployees by a variety of methods, including, but not limited to, specific signage (for example, “Customer Parking Only”) or a separate facility, or portion of a facility, segregated by a barrier to entry or limited by terms of access. It was unclear in the Notice whether this included handicap spaces. The Proposed Regulations state that since these parking spaces could be used by employees, handicap parking spaces are not reserved nonemployee spaces.
• Inventory/Unusable spaces include parking spaces used for inventoried vehicles, qualified nonpersonal use vehicles, other fleet vehicles used in a taxpayer’s trade or business, or otherwise not usable for parking by employees. These spaces specifically excluded from the definitions of “available parking spaces” and “reserved nonemployee spaces” under the primary use method the Proposed Regulations exclude inventory/unusable spaces because those spaces are generally not available to employees or the general public but are instead used for other purposes. However, inventory/unusable spaces are included in total parking spaces under the cost-per-space methodology because taxpayers do incur costs in maintaining the spaces.
• Mixed parking expense is defined as an amount paid or incurred by a taxpayer for both a parking facility and nonparking facility property that a taxpayer owns or leases. Such expenses for parking and nonparking property may include rent or lease payments, repairs, maintenance, utility costs, insurance, property taxes, interest, snow or ice removal, and security. For purposes of determining total parking expenses, a taxpayer may use any reasonable method to allocate the applicable portion of mixed parking expenses to a parking facility. If using the primary use method or cost-per-space method, a taxpayer may choose to allocate 5% of the following mixed parking expenses to a parking facility: lease or rental agreement expenses, property taxes, interest expense, and expenses for utilities and insurance.

Multitenant parking. If a taxpayer owns or leases space in a multitenant building, employees, partners, 2-percent shareholders of S corporations, sole proprietors, independent contractors or customers of unrelated tenants in the building are included in the definition of general public. Consequently, the Proposed Regulations appear favorable to taxpayers.

Disallowance of deductions for certain transportation and commuting benefit expenditures

The Proposed Regulations also address the disallowance of deductions for amounts paid or incurred after Dec. 31, 2017, for any expense incurred to provide any transportation, or any payment or reimbursement, to an employee of the taxpayer in connection with travel between the employee’s residence and place of employment, except as necessary for ensuring the safety of the employee. Travel between the employee’s residence and place of employment includes travel that originates at a transportation hub near the employee’s residence or place of employment. For example, an employee who commutes to work by airplane from an airport near the employee’s residence to an airport near the employee’s place of employment is traveling between the residence and place of employment.

Please reach out to your Baker Tilly tax advisor to discuss how these changes may affect your tax situation.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.