Interim IRS Guidance Addressing Taxation Impact of Transportation and Parking Fringe Benefits Creates Planning Opportunities for Employers


In Notice 2018-99, the Internal Revenue Service sets forth interim guidance for taxpayers to determine parking expenses for qualified transportation fringes (QTFs) that are nondeductible and for tax-exempt organizations to determine the increase in unrelated business taxable income (UBTI) attributable to nondeductible parking expenses.  The Tax Cuts and Jobs Act (Act) amended these tax provisions effective for amounts paid or incurred after December 31, 2017.

Background

As you may already know, the Act changed the tax law to disallow a deduction for expenses regarding QTFs, which are pre-tax benefits, provided to employees for transportation in commuter highway vehicles, transit passes, and qualified parking.  Because tax-exempt organizations do not take deductions for QTFs, the Act also increases a tax-exempt employer’s UBTI by the QTF expense that is not deductible – in an effort to put taxable and tax-exempt employers on equal footing.  The Notice explains how employers can determine the portion of the QTF expense that is not deductible or is treated as an increase in UBTI.

Determination of Nondeductible Parking Expense or Increase in UBTI

The method used to determine the nondeductible amount depends on whether the employer pays a third party to provide the parking facility, or leases or owns the parking facility.

Pays a Third Party – If the employer pays a third party to provide parking for the employer’s employees, the amount disallowed as a deduction under Section 274 of the tax code generally is the employer’s total annual cost of employee parking paid to the third party.

For example, if an employer pays a third party $300 per month for each parking spot it uses for employees, the annual amount disallowed normally would be $300 x 12 months for each spot.  But because this exceeds the monthly limitation by $35 (the excess of $300 over $265 for 2019), the $35 must be included in the employee’s taxable wages and is deductible by the employer.  The amount disallowed to the employer under Section 274 is limited to $265 per month.

Owns or Leases Parking Facility – If the employer owns or leases the parking facility where its employees park, the disallowance may be calculated by using any reasonable method.  The Notice then describes a four-step process the IRS deems is a reasonable method.

Step 1 – Calculate disallowance for reserved spots. 

The employer must identify the number of spots reserved for employees and determine the percentage of reserved spots as compared to total spots.  The employer then multiplies this percentage by the employer’s parking expense for the facility – this is the disallowed deduction amount.

Step 2 – Determine the primary use of remaining spots. 

If the primary use of the remaining spots is for use by the general public, the remaining expenses may be deducted.  “Primary use” means greater than 50% of the estimated or actual usage of the parking.  The general public includes, but is not limited to, customers, clients, visitors, patients, and students.

Step 3 – Calculate allowance for reserved nonemployee spots. 

If the primary use of remaining spots is not to provide parking to the general public, the employer may identify the number of spots reserved for nonemployees (e.g., visitors, customers, partners, sole proprietors).  These spots might be reserved with signage (“Customer Parking Only”), barriers, or a separate entrance.  An employer then may determine the ratio of reserved nonemployee spots in relation to total parking spots and multiply this percentage by the total remaining parking expenses to determine the amount that is not disallowed.

Step 4 – Determine the remaining use and allocable expenses

The Notice provides a final step to allocate remaining parking expenses to employee or nonemployee use.

Employer Takeaway – If an employer provides parking to its employees, it should review the information in the Notice carefully.  If practical, it may want to eliminate reserved spots for employees and make over 50% of the spots available to the general public.


Jackson Lewis P.C. © 2025
National Law Review, Volume IX, Number 35