Disallowance of Deduction Related to Qualified Transportation Fringe

PrintMailRate-it

Rödl & Partner Tax Matters Vol 2019 – 3, published in February 2019

 

The Tax Cuts and Jobs Act (“TCJA”) of 2017 added Internal Revenue Code (“IRC”) section 274(a)(4) which disallows a deduction for an employer’s expenses associated with providing qualified transportation fringe to its employees. The new rule is effective for amounts paid or incurred after December 31, 2017.


For the employee, the inflation-adjusted amount of such fringe benefit that is excludible from gross income is equal to $260 per month for 2018 under IRC section 132(f)(2). For the employer however, the total cost of providing such fringe benefits may have just gotten much more expensive. 


Qualified transportation fringe includes:

  • Transportation in a commuter highway vehicle in connection with travel between the employee’s residence and place of employment
  • Any transit pass
  • Qualified parking
  • Any qualified bicycle commuting reimbursement*
  • Cash reimbursement for any of the benefits listed above

*The exclusion from gross income for qualified bicycle commuting reimbursements is suspended by the TCJA for tax years beginning after 12/31/17 and before 1/1/2026.


Qualified parking is defined as parking provided to an employee on or near the business premises of the employer or on or near a location from which the employee commutes to work. It includes arrangements in which the employer pays a third party to provide parking to its employees, as well as situations in which the employer owns or leases a parking facility where its employees park.


In December 2018, the IRS issued Notice 2018-99 which contains guidance for determining the amount of parking expenses for qualified transportation fringe that is nondeductible under the new provision. The notice also applies to a tax-exempt organization that must determine its unrelated business taxable income in connection with qualified transportation expenses disallowed under IRC section 274.


The methodology used to determine the nondeductible amount differs based on whether the taxpayer uses a third party to provide parking to its employees or owns or leases the parking facility directly.


Employer Pays a Third Party for Employee Parking

If the employer pays a third party for its employees to park at the third party’s parking lot or garage, the amount disallowed under section 274 is generally equal to the total amount paid by the employer. If the employer’s total cost for such parking exceeds the $260 per employee per month gross income exclusion, the excess is treated as taxable compensation to the employee.


The amount included in the employees’ income is not subject to disallowance under section 274(a)(4), although the statutory exclusion amount of $260 per employee per month is still nondeductible.


Employer Owns or Leases a Parking Facility Where Its Employees Park

If the employer owns or leases its own parking facility in which its employees park, it may use any reasonable method to determine the nondeductible amount until further guidance is issued. The term “parking facility” includes both indoor and outdoor garages and other structures, as well as parking lots and other areas, where employees may park on or near the business premises of the employer or on or near a location from which the employee commutes to work.


The employer must first determine its total parking expenses that are subject to disallowance. In determining this amount, the taxpayer must consider repairs, maintenance, utilities, insurance, property taxes, interest, snow and ice removal, leaf removal, trash removal, cleaning, landscaping, parking lot attendant costs, security and rent or lease payments related to the parking facility. Depreciation is not included.


Once the taxpayer determines total parking expenses, the Notice provides a 4-step methodology which is deemed to be a reasonable method for determining the nondeductible amount:

 

1. Calculate the disallowance for reserved employee spots

Determine the percentage of total parking spots that are exclusively reserved for the taxpayer’s employees. Apply such percentage to the total parking costs to determine the nondeductible amount. Taxpayers with reserved employee spots have until March 31, 2019 to change their parking arrangements with retroactive effect to January 1, 2018.
 

2. Determine the primary use of remaining spots

If the primary use of the remaining parking spots is for the general public, expenses associated with such spots are not subject to the disallowance rules of section 274(a)(4). Primary use means greater than 50% actual or estimated usage tested during normal business hours on a typical business day.
 

3. Calculate the allowance for reserved non-employee spots

If the primary use of the remaining parking spots is not to provide parking for the general public, identify the number of spots exclusively reserved for non-employees. Spots reserved for partners, sole proprietors and 2% S corporation shareholders are considered non-employee spots. Determine the percentage of total parking spots that are exclusively reserved for non-employees. Apply such percentage to the total parking costs to determine the amount of expenses that are not subject to the disallowance rules of section 274(a)(4).
 

4. Determine remaining use and allocable expenses

If after applying steps 1 through 3 there are any remaining uncategorized expenses associated with uncategorized spots, the taxpayer must reasonably determine the employee use of such spots during normal business hours on a typical business day and the related nondeductible expenses.

 

The taxpayer cannot use the value of the employee parking to determine the nondeductible amount because the disallowance applies to the expense associated with providing a qualified transportation fringe, regardless of its value.


The Notice contains several examples on how to apply the disallowance rules to various situations involving employee parking. Some of these examples are included below.


Notice Example 2

Taxpayer A pays B, a third party who owns a parking garage across the street from A, $300 per month for 12 months for each of 10 employees, or $36,000 per year (($300 x 10) x 12 = $36,000). Of the $300 per month paid for parking for each employee, $260 is excludible from each employee’s gross income under §132(a)(5) and none of the §274(e) exceptions apply to this amount. Thus, $31,200 (($260 x 10) x 12 = $31,200) is subject to the § 274(a)(4) disallowance. The excess amount of $40 per employee per month is not excludible from the employees’ gross income under § 132(a)(5) and is treated as taxable compensation and wages. As a result, the §274(e)(2) exception applies to this amount. Thus, $4,800 ($36,000 – $31,200 = $4,800) is not subject to the § 274(a)(4) disallowance and remains deductible.


Notice Example 5

Taxpayer E, a manufacturer, owns a surface parking lot adjacent to its plant. E incurs $10,000 of total parking expenses. E’s parking lot has 500 spots that are used by its visitors and employees. E has 50 spots reserved for management and has approximately 400 employees parking in the lot in non-reserved spots during normal business hours on a typical business day. Additionally, E has 10 reserved nonemployee spots for visitors.
  • STEP 1. Because E has 50 reserved spots for management, $1,000 ((50/500) x $10,000 = $1,000) is the amount of total parking expenses that is nondeductible for reserved employee spots under §274(a)(4).
  • STEP 2. The primary use of the remainder of E’s parking lot is not to provide parking to the general public because 89% (400/450 = 89%) of the remaining parking spots in the lot are used by its employees. Thus, expenses allocable to these spots are not excepted from the §274(a) disallowance by §274(e)(7) under the primary use test.
  • STEP 3. Because 2% (10/450 = 2.22%) of E’s remaining parking lot spots are reserved nonemployee spots, the $200 allocable to those spots ($10,000 x 2%)) is not subject to the § 274(a)(4) disallowance and continues to be deductible.
  • STEP 4. E must reasonably determine the employee use of the remaining parking spots during normal business hours on a typical business day and the expenses allocable to employee parking spots.

 

If you have any questions, please contact your Rödl & Partner representative.

 

 

This publication contains general information and is not intended to be comprehensive or to provide legal, tax or other professional advice or services. This publication is not a substitute for such professional advice or services, and it should not be acted on or relied upon or used as a basis for any decision or action that may affect you or your business. Consult your advisor.

We have made reasonable efforts to ensure the accuracy of the information contained in this publication, however this cannot be guaranteed. Neither Rödl Langford de Kock LP nor any of its subsidiaries nor any affiliate thereof or other related entity shall have any liability to any person or entity which relies on the information contained in this publication, including incidental or consequential damages arising from errors or omissions. Any such reliance is solely at user's risk.

Any tax and/or accounting advice contained herein is based on our understanding of the facts, assumptions we have been asked to make, and on the tax laws and/or accounting principles in effect as of the date of this advice. No assurance is given that the conclusions would be the same if the facts or assumptions change, or are not as we understand them, or that the tax laws and/or accounting principles will not change subsequent to the issuance of these conclusions. In addition, we do not undertake any continuing obligation to advise on future changes in the tax laws and/or accounting principles, or of the impact on the conclusions herein.

No part of this document may be reproduced, retransmitted or otherwise redistributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Rödl Langford de Kock LP.

Copyright © August 2018 Rödl Langford de Kock LP
All rights reserved.

We use cookies to personalise the website and offer you the greatest added value. They are, among other purposes, used to analyse visitor usage in order to improve the website for you. By using this website, you agree to their use. Further information can be found in our data privacy statement.
Deutschland Weltweit Search Menu