Employee Parking – Not Just Finding a Space Anymore
Tax Implications of Employer-Provided Parking
Originally published on December 5, 2019
Updated on October 1, 2020
Forty-five years ago, when I was just starting my accounting career, I would park in the parking lot of Lawrence-Dumont Stadium in downtown Wichita and walk six or eight blocks to the offices of my employer. It was free, I was young, and other than during a downpour, it wasn’t that bad… even on the coldest of winter days. I would have parked closer if free parking had been available, but since that wasn’t the case, I walked.
Because of new rules from the IRS, walking may become more popular! Free employee parking, in some cases, is becoming a thing of the past. Yes, you read that right. The IRS has taken away or at least attached a price tag to one of the most basic employee benefits.
Enter the TCJA Abyss
The Tax Cuts and Jobs Act of 2017 (TCJA) and ensuing guidance made employer-provided or employer-paid employee parking a perk that has a potential tax impact on both for-profit and non-profit entities as well as, in certain cases, their employees.
In short, unless 51 % of the parking spaces for your business are available for customer or public use, the portion of the costs associated with providing that parking to your employees becomes:
- A non-deductible expense, or,
- In the case of a non-profit entity, an addition to Unrelated Business Income (UBI) if the expenses are directly connected with an unrelated trade or business conducted by the exempt organization.
In addition, if specific parking spaces are reserved for specific employees, the value of the parking in excess of IRS published amounts ($270 for 2020) must be added to the employee’s W-2 (grossed up for applicable FICA taxes). In this case, the amount becomes deductible to the employer as compensation expense.
Even if 51% of the parking spaces are “available” for customers or public use, if employees routinely utilize enough parking spaces such that 50% or less are actually available for customer or public use, the exemption is lost. Therefore, the cost of employee parking must be calculated and reclassified as a non-deductible expense or added to UBI if an unrelated trade or business is conducted by an exempt organization.
Costs Included in Employee Parking
The cost of employer-provided employee parking is straightforward when the employer leases only parking spaces from an unrelated entity. The ambiguity comes where the parking is included as part of the rent for office space. As of this writing, please refer to Notice 2018-99 and Prop. Regs. Sec. 1.274-13 & -14 for approved methods for allocating rent to the employer-provided parking.
In the case of employer-owned parking lots/facilities, the costs of the parking area include such things as insurance, property taxes, interest, utility costs, repairs and maintenance, cleaning, removal of snow, ice, leaves and trash, parking lot attendant expenses and security costs. Notably absent from this list is depreciation because it is not an actual “paid” expense, but rather a recovery of the initial investment. Also, expenses paid for items not located on or in the parking facility are not included. Such items would include those located on property next to the parking facility like landscaping or lighting.
Four Steps to Determine the Amount of Disallowance or Addition to UBI if an unrelated trade or business is conducted by an exempt organization
The IRS has outlined a four-step process to determine the amount of disallowance or addition to UBI as follows:
- Determine the percentage of parking spots reserved for employee use.This calculation yields the amount disallowed or added to UBI.
- Determine the primary use of remaining, unreserved spots.If the primary use during normal business hours on a typical workday is NOT for employee parking (that is greater than 50%), the remaining costs are deductible.
- Determine the percentage of parking spots reserved for non-employee use.If the primary use of the parking facility is not for the general public, the percentage of parking expenses attributed to spots reserved exclusively for non-employee is deductible.
- Determine a reasonable allocation of remaining parking spots allocable expenses.To properly allocate expenses, employers must reasonably determine employee use of any remaining parking that is not specifically categorized as deductible or nondeductible based on the steps above.
So, What’s Next?
While most retailers will probably not be impacted by this provision of the TCJA, manufacturers and those in businesses in office complexes may have a more difficult time escaping the reach of this provision. Since this rule went into effect for tax years beginning after December, 31 2017, now is a great time to work with your Adams Brown tax advisor to determine the impact this may have on your situation and identify a strategy to move forward.
Don Grossardt, CPA, recently retired from full-time employment after a 45-year career, the vast majority of which was as a CPA in public accounting. He continues to be associated with Adams Brown on an as-needed, project-specific basis.
Robert W. Decker, CPA is a Principal with the firm. He started his career in public accounting in early 1976.