The IRS has released Notice 2018-99 to provide guidance to taxpayers on determining the amount of parking expenses for qualified transportation fringe benefits that is nondeductible and/or subject to unrelated business Income Tax (“UBIT”). Notice 2018-99 comes in the wake of the Tax Cuts and Jobs Act of 2017 (the “Act”) which revised the law concerning deductions for expenses related to qualified transportation fringe benefits by tax-exempt organizations (see below).
Background. The Act created new Internal Revenue Code Section 274(a)(4) which provides that expenses paid or incurred by employers after December 31, 2017, to provide employee parking are generally no longer deductible. The Act also created new Code Section 512(a)(7) which requires tax-exempt organizations to increase their UBIT by the amount of employee parking expenses that would be nondeductible if they were subject to the same disallowance rules as taxable entities.
Qualified Parking Cost. Notice 2018-99 requires employers to determine the total parking expenses it paid or incurred to provide the parking benefits. Specifically, the Notice provides that the deduction disallowed under Code Section 274(a)(4) involves the expense of providing parking benefits and not the value of the parking provided to employees.
Expenses related to providing parking to employees include: repairs, maintenance, utilities, insurance, property tax, interest, snow removal, parking attendant expenses, security and rent or lease payments. However, the following expenses remain deductible under Code Section 274(a)(4)):
- Expenses paid or incurred to provide parking to partners of a partnership, 2% shareholders of an S corporation, sole proprietors and independent contractors.
- Certain expenses paid or incurred to provide parking to employees when they are required to include some or all of the value of the parking benefits in their taxable income under Code Section 132.
- Expenses paid or incurred to provide parking made available to the general public.
- Depreciation on a parking structure owned by the taxpayer and used by employees.
- Expenses paid or incurred for items not located on or in the parking facility.
Determining Nondeductible Parking Costs.
Notice 2018-99 offers the following two methods for determining the disallowed deduction. The applicability of each depends on how the parking benefits are provided to employees:
- Payments to a third party for parking spots. If an employer pays a third party an amount so that its employees may park at the third party’s parking lot or garage, the Code Section 274(a)(4) disallowance generally is calculated as the taxpayer’s annual cost of employee parking paid to the third party.
- Employer-owned or leased parking facility. This method applies to taxpayers who own or lease all or a portion of a parking facility. Employers may calculate the disallowed deduction using any reasonable method, and Notice 2018-99 provides a four-step safe harbor method that is deemed reasonable. Notice 2018-99 clarifies that any method that uses the value of employee parking instead of the costs incurred will not be considered a reasonable method.
As was the case before the Act, any amount paid or incurred by the employer in excess of the amount excludable from income by the employee (in 2019, $265 per month) is treated as compensation and therefore taxable wages to the employee.
Tax-exempt Organizations and UBIT. Amounts identified as nondeductible under the methods described above serve to increase a tax-exempt organization’s UBIT for the year.
Notice 2018-99 provides an exception to this rule where any amount paid for parking expenses is directly connected to an unrelated trade or business regularly carried on by the organization. In these situations, there is no increase to the organization’s UBIT. Notwithstanding the foregoing, a deduction for the parking expenses directly connected with the unrelated trade or business is still disallowed under Code Section 274(a)(4).
Notice 2018-99 is available by clicking here.