top of page

Sign Up for
News & 

Thanks for subscribing!

The Problem with Parking (and other Fringe Benefits) Under Tax Reform

It may be time to renegotiate your office lease. Here is why - the 2017 Tax Cuts and Jobs Act¹ broadly disallows employer deductions for “qualified transportation fringe benefits” such as employer paid parking. In addition, it requires certain tax-exempt employers to treat specified fringe benefits, including employer paid parking and other qualified transportation benefits² as being subject to “unrelated business income tax” (“UBIT”) resulting in a tax on the organization (generally at a 21% rate).


Prior to 2018, employer paid parking was not a “hot topic.” For profit employers were generally able to deduct parking expenses for their employees under Code Section 274 and employees were generally able to exclude “qualified transportation benefits” such as employer paid parking or mass transit passes from their taxable income under Code Section 132. That Code Section also allowed (and still allows) employees to pay for their own parking on a pre-tax basis via a salary reduction election.

Beginning on January 1, 2018, the Tax Cuts and Jobs Act completely changed the tax rules for employer paid parking. Now, for tax-exempt and other employers, (especially those located in a major metropolitan area such as downtown Los Angeles, where most employees drive to work and free parking is virtually non-existent), the tax consequences of employer paid parking are a big deal.

Changes Under the Tax Cuts and Jobs Act

The Tax Cuts and Jobs Act makes two statutory changes that affect employer paid parking:

  1. Loss of deduction (for profit employers). Code Section 274 was amended to prohibit any deduction by an employer for “qualified parking” and other qualified transportation benefits for an employee. “Qualified parking” is defined as parking at or near the business premises of the employer (or at a park-n- ride type facility); and

  2. Unrelated Business Income Tax (certain tax-exempt employers). Code Section 512(a) was amended to subject employer paid parking and other qualified transportation benefits to the unrelated business taxable income rules. Employers subject to those rules must file a Form 990-T and pay a 21% tax³ on amounts paid or incurred for “qualified parking” or with respect to any parking facility used in connection with providing qualified parking to its employees (and may have related obligations to make estimated tax payments).

What can Employers do?

Employers do have some choices, although further guidance from the Internal Revenue Service will be needed to clarify the tax treatment of certain approaches:

  1. Stop paying for employee parking/start charging employees for parking or mass transit/treat amounts paid for parking/mass transit as wages and reporton Form W-2. This approach will not work for many employers. First, this may not be possible where local laws require an employer to provide “qualified transportation benefits.” Second, it may not be tenable for employers fighting for talent in today’s tight labor market. And, even if permitted under local law, and in the employer’s best interest, employers will still want to check employee handbooks and employment agreements before eliminating an expected benefit.

  2. Establish a “qualified transportation plan.”This type of plan allows employees to pay for their own parking on a pre-tax basis through a salary reduction election. Even with a salary reduction plan, the employer may still lose its income tax deduction and a tax-exempt employer may still be subject to UBIT. This is because under a salary reduction arrangement, the employer agrees toforgo paying salary, and instead pays for parking. See Treas. Reg. Section 1.132-9, Q&A-11 and Revenue Ruling 2004-98.⁴ Note – the regulation that allows these types of salary reduction arrangements was issued under the same Code Section that is referenced in Code Section 274 to define the disallowed deduction.

The good news is that under current guidance, with this type of salary reduction plan, and even if the employer’s income tax deduction is lost, the employees should still avoid income tax and amounts paid through the plan for parking should not be subject to FICA and FUTA taxes. These plans are subject to monthly dollar limits and other restrictions, so employers should be sure the plan is compliant with the regulations under Code Section 132. Hopefully, the IRS issues some guidance on these plans sooner rather than later. Employers considering this approach will need to weigh their options - one of the other approaches may make better financial sense, especially if guidance clarifies that parking paid for through a salary reduction is still employer paid parking and subject to the new restrictions and/or UBIT.

3. Renegotiate the lease/move to new space. Absent additional guidance, for-profit employers who own their own buildings or who lease space that offers free parking should not be affected by the loss of a deduction under Code Section 274.

Employers who currently pay for parking may be able to renegotiate their lease and as a part of that renegotiation get “free parking.” For this approach, the facts should show that the renegotiation involved more than just reallocating the cost of parking – the renegotiation should involve other changes. For tax-exempt employers, guidance is needed - the Service was expressly given regulatory authority with respect to the allocation of depreciation and costs for “parking facilities” of affected tax-exempt employers under the new Section 512(a) rules.

Employers will want to explore their options carefully and tax-exempt employers, in particular, may need to budget for both a new tax and the costs of filing an additional tax return.

If you would like further information about this issue, please contact Sherrie Boutwell or any of the other attorneys at Boutwell Fay, LLP.


¹ P.L. No. 115-97.

² Certain athletic facilities are also included in the new tax, but a discussion of those is beyond the scope of this article.

³ The actual rate will depend on whether the organization is a corporation or a trust and excludes amounts related to an actual trade or business regularly carried on by the organization.

⁴ See also Rev. Rul. 2004-98, 2004-42 I.R.B. 664 (10/18/2004) (in a payroll deduction arrangement where parking is paid for with pre-tax salary reduction amounts, it is the employer who is paying for the parking).

© Boutwell Fay LLP 2018, All Rights Reserved. This handout is for information purposes only, and may constitute attorney advertising. It should not be construed as legal advice and does not create an attorney-client relationship. If you have questions or would like our advice with respect to any of this information, please contact us. The information contained in this article is effective as of March 2, 2018.

Download • 178KB


bottom of page