United States: Free Parking Only Exists In Monopoly: New IRS Guidance Makes Employer-Provided Parking More Costly And Burdensome Than You Think


As part of its comprehensive 2017 tax reform bill, Congress repealed deductions for Qualified Transportation Fringes including for employer-provided parking, while also requiring that tax-exempt organizations increase their unrelated business taxable income by the nondeductible parking expenses. Recently released IRS Notice 2018-99 addresses some of the year-end tax filing and tax planning concerns for affected employers with rules of special interest to tax-exempt employers.


In late 2017, Congress passed the Tax Cuts and Jobs Act, which included a repeal of the employer deduction for most "expenses" associated with providing qualified transportation fringe benefits (QTFs) and also required tax-exempt employers to increase their unrelated business taxable income (UBTI) by the amount of QTF expenses that would be nondeductible by a taxable employer. Without further guidance, both taxable and tax-exempt employers struggled to determine how this new provision would work. The Internal Revenue Service (IRS) released Notice 2018-99 (Notice) on December 10, 2018 to address some of these concerns.

The Notice provides interim guidance on how to determine the amount of parking expenses that are nondeductible or must be added to UBTI until the IRS publishes proposed regulations addressing these issues. However, the interim guidance is a bit of a mixed bag, as it provides relief for "any reasonable method" for computing the deduction disallowance while at the same time expanding both the parking subject to the disallowance and the type of expenses that are disallowable. All employers, other than government employers (like the IRS), are subject to the guidance and should evaluate the resulting tax impact. Employers should also consider whether they want to take advantage of the provisions that allow for retroactive changes to parking policies in order to avoid some of the negative impacts of the guidance.

Taxable Employers

According to the Notice, an employer who owns or leases all or a portion of a parking facility for its employees may use "any reasonable method" to calculate the deduction disallowance until the IRS publishes proposed regulations. To provide certainty, the Notice includes a four-step safe harbor method that the IRS deems to be a reasonable method. The Notice also states that using the value of employee parking to determine parking expenses is not reasonable; therefore, the IRS position impacts an employer's deduction even if the employer-provided parking has no, or a de minimis, fair market value.

The safe harbor method takes into account both the number of reserved parking spaces for employees and the "total parking expense" attributable to the parking facility. Employers that provide reserved employee parking spots have until March 31, 2019 to change their parking arrangements, and any such changes will be deemed retroactive to January 1, 2018.

While helpful, the four-step safe harbor method fails to address the most administratively burdensome step for employers: determining and allocating the underlying "total parking expenses." This determination is critical because the total parking expense is applied against the ratio of employee parking (both reserved and nonreserved, if the lot is not primarily available for general public use) to determine the deduction disallowance.

Under the Notice, parking expenses include, but are not limited to, repairs, maintenance, utility costs, insurance, property taxes, interest, snow and ice removal, leaf removal, trash removal, parking lot attendant expenses, security, and rent or lease payments. Most of these items are not separately broken out from the employer's broader place of business property expenses, making it potentially burdensome and impractical to calculate. In addition to the administrative burden, the expansive interpretation of what constitutes "parking expenses" may have a disproportionately negative impact on employers that own parking lots and incur large continuing upkeep expenses (especially in areas where parking has no fair market value), as opposed to employers that pay a fixed amount to lease parking spots or have parking spots included as part of a larger lease.

Importantly, the IRS did clarify that depreciation on a parking structure that is owned by an employer and used by the employer's employees would not be considered a parking expense for purposes of the Notice.

Tax-Exempt Employers

Tax-exempt employers are not spared from this new burden. The methods for computing allocable parking costs mirror those governing taxable entities discussed above. Instead of a deduction disallowance, tax-exempt employers must increase their UBTI by the amount of the allocable "deduction disallowance." The method used to track parking expenses outlined in the four-step safe harbor method may be particularly onerous for tax-exempt employers. This is because the administrative burden of tracking and allocating the expenses far outweighs the UBTI generated and can trigger a UBTI filing for tax-exempt entities that have never previously been subject to UBTI. Therefore, the guidance set forth in the Notice will have far-reaching effects unless the proposed regulations adopt more reasonable positions.

Next Steps

All nongovernmental employers should consider some important next steps.

First, until the proposed regulations are released, taxable and tax-exempt employers should consult with their tax advisors regarding appropriate next steps to ascertain and adopt a reasonable method for calculating the disallowed deduction or increase in UBTI. Second, as solicited by the Notice, individual employers or associations should consider providing comments to the IRS (prior to February 22, 2019) seeking more easily administered rules (e.g., only allocate as parking expenses amounts that are separately broken out for parking, as opposed to the entire business premises); an exemption for parking with no, or a de minimis, fair market value; and clarification that the rules do not apply to reserved parking spaces for handicapped employees.

Employers should also consider eliminating most, if not all, reserved parking, including spots reserved by places of worship for church staff or even spots reserved for employees as a reward on a rotating basis, such as for the "employee of the month." Any changes should be made by March 31, 2019 to take advantage of the retroactive effect. Finally, employers should consider whether adopting an exemption for reserved parking for employees with special parking needs, such as handicapped parking, is a reasonable position under the Notice.

Free Parking Only Exists In Monopoly: New IRS Guidance Makes Employer-Provided Parking More Costly And Burdensome Than You Think

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