When "Free Parking" is No Longer Free - New IRS Guidance Provides both Headache and Planning Opportunities Through March 31, 2019
The Tax Cuts and Jobs Act of 2017 made significant changes to the taxation of parking benefits for both “for profit” and tax-exempt employers and in the process raised a lot of questions about how to apply the new rules. In late 2018, the IRS issued some helpful guidance and some limited transition relief, which are summarized in this article. Note –the opportunity to make retroactive changes under the new guidance ends on March 31, 2019, so employers who want to take advantage of this opportunity will want to act quickly.
The Tax Reform and Jobs Act of 2017 denies a deduction to “for profit” employers for parking benefits provided to employees and imposes a corresponding excise tax on tax-exempt employers who provide such benefits. See our prior articles on this topic: The Problem with Parking and other Fringe Benefits Under Tax Reform and Update to The Problem with Parking.
Notice 2018-99: Guidance on How to Apply the New Parking Rules
The new law raised as many questions as it answered and Notice 2018-99 answers some (but not all of those questions). One basic question that needs to be answered is how to determine the amount of the deduction that is disallowed? Under the new guidance (which may be relied on until further guidance is issued), employers may use any reasonable method and the following method is deemed to be reasonable:
(1) For employers that pay a direct cost for parking for an employee, the disallowed deduction is the amount of that direct cost.
(2) For employers that pay indirect costs (because the employer owns the parking lot or parking is included in a lease), the IRS provides a safe harbor method of determining the indirect costs of the employer provided parking. This is where the planning opportunities come into play. The basic methodology is as follows (but check the Notice itself for nuances):
a. Determine total costs (other than capital expense, i.e., depreciation) for the parking;
b. Determine costs for any “reserved spots” for employees –these are not deductible –but employers have until March 31, 2019 to reduce or eliminate these types of spots, and if this is done by the above date, it will be deemed to be retroactive to January 1, 2018;
c. Determine the number of reserved spots for visitors;
d. Determine if the parking lot is primarily (more than 50%) for visitors and members of the general public –if so, the good news is that the entire cost of the parking is deductible,it is not subject to the disallowance at all. For example, if a retail store has 500 parking spots that are open to the public, and on a typical day 50 of those spots are used by employees, there is no limit on the deduction for that employer because only 10% of the spots are used by employees;
e. If parking is not primarily for visitors and general public, the employer must use a reasonable method to allocate the parking costs. The Notice provides that a pro rata allocation is reasonable (after considering reserved spots for employees and reserved spots for visitors –see the examples in the Notice for specific examples). So, for example, if there are no reserved spots and 60% of the parking is used for employees rather than visitors, the limit on the deduction is 60% of the costs for the parking.
For Tax-Exempt Employers
These same rules apply to determine the amount of unrelated business taxable income (“UBTI”) that will apply to employer paid parking of tax-exempt employers. Notice 2018-100 clarifies that employer paid parking expenses do count in determining whether a small tax-exempt employer is required to file a Form 990-T –such employers are not required to file if they have less than $1,000 in UBTI. Because reserved spots for employees, (even the “employee of the month”) count as employer paid parking, small tax-exempt employers may want to eliminate those types of parking spaces and find another way to reward and recognize those employees.
Note –under the new guidance “Free Parking” is no longer “free.”Although the Notice does not provide guidance on how to allocate a portion of a lease that purports to provide for “free parking” it does require that a portion of the lease be allocated to parking costs if parking is provided. Employers may use a reasonable method to allocate those costs and may want to contact their landlords for help in those calculations.
Notice 2018-100: Relief Related to Parking/Qualified Transportation Benefits of Tax-Exempt Entities
Under the new law, tax-exempt entities will be required to file returns and pay excise taxes related to QTAs provided on or after January 1, 2018 and can be subject to penalties if such taxes are not paid quarterly throughout the year. To help tax-exempt employers who may have been caught unawares of the new requirement, and need some transition time, the IRS issued Notice 2018-100.
Notice 2018-100 provides certain tax-exempt organizations with a waiver of penalties for underpayment of estimated income tax payments if the penalties resulted from the changes to the tax treatment of QTAs. The relief is limited to:
(1) tax-exempt organizations who were not previously required to file a Form 990-T, Exempt Organization Business Income Tax Return -specifically who were not required to file Form 990-T for the 2017 tax year (the taxable year preceding the organization’s first taxable year ending after December 31, 2017. For example, for a tax-exempt entity with a June 30 tax year, the organization was not required to file a Form 990-T for the year ended June 30, 2017); and
(2) Who timely file Form 990-T and timely pay the amount reported for the taxable year for which the relief is granted. To claim the relief -“Notice 2018-100” should be written on the top of the Form 990-T.
The IRS has requested comments and has stated that it plans to issue more guidance in the form of proposed regulations.
Please contact our Firm if you would like to discuss any of the foregoing information in greater detail. We would welcome the opportunity to consult with you.
© Boutwell Fay LLP 2019, 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 December 31, 2018.