Tax Reform Makes Some Parking Related Expenses Non-Deductible
One of the more obscure provisions of the Tax Cuts and Jobs Act relates to the treatment of parking-related benefits for employees and the associated tax deductions for employers. Until recently, we believed that this provision would only impact those institutions that separately leased individual parking spots for employees or reimbursed employees for parking expenses near the office.
Recent interim guidance released by the IRS has provided further clarification and it is now clear that in some cases portions of maintenance and other expenses paid for parking lots a business owns can also be considered non-deductible starting for amounts paid in 2018.
Though the amount of parking expenses disallowed in many cases may be small, each institution should review their parking locations annually, prepare the necessary calculations, and document for their tax files the amount of any disallowance as the IRS may review the reasonableness of employer parking expenses upon examination.
Employee Treatment
Qualified parking for tax purposes is parking provided to an employee on or near the business premises of their employer or on or near a location from which the employee commutes to work such as a parking lot near a public transportation station. The cost of qualified parking is not includible in an employee’s W2 wages as long as the monthly cost of providing the parking is $260 or less. If the cost of parking is more than $260 per month, the excess should be reported on the employee’s W2 as taxable wages.
Employer Treatment: Individually Leased Parking Spots
For employers that lease individual parking spots or reimburse employees for the cost, the amount paid up to $260 per month is not tax deductible beginning in 2018. Any excess over the $260 monthly limit would be tax deductible since the amount is also taxable as wages to the employee.
Employer Treatment: Reserved Parking Spots
For employers that own their parking facilities or lease their facilities as part of their overall building lease, it will be necessary to review the total number of spots available and determine whether any of the spots are reserved for employee use only.
Employee spots could be reserved in a variety of manners including signage (such as “Employee Parking Only” or “Bank President Only”) or by a barrier limiting access to a certain portion of the parking lot.
Employers must then determine the percentage of reserved employee spots in relation to total parking spots and multiply that percentage by their total parking expenses for the facility (not including depreciation) to calculate the non-deductible amount.
For example, say an employer has a parking lot they own with 50 spots and 2 of the spots are reserved for the bank President and CFO and the total cost to maintain and operate the lot for the year is $5,000. In that case, 4% of the total expenses or $200 would be non-deductible in the current year.
If employers currently have reserved parking spots for employees, the IRS is providing a transition period. Employers can remove signage or other restrictions by March 31, 2019 and not have to treat any of the spots as reserved for purposes of their 2018 tax calculations.
Employer Treatment: General Parking Spots
Many financial institutions have an open parking lots that are available for use by employees, customers, and visitors as needed. But under the new rules, this does not guarantee that all of your parking related costs will be tax deductible.
Under the IRS guidance, employers are required to analyze their parking facilities during normal business hours on a typical business day and determine if the primary use of the parking lot is for the general public. To do this analysis, employers need to perform the following calculation:
Number of Spots Used by Employees on a Typical Day
/(Total Spots in the Lot – Employee Reserved Spots)
= Percentage of Employee Use
If the percentage of employee use is greater than 50%, then the facility is not considered to be primarily for the general public and a portion of the parking expenses paid during the year will be non-deductible.
For example, say an employer has a parking lot they own with 50 spots and on a typical day there are 35 employees that work at the branch and park there. The annual cost to maintain and operate the lot for the year is $10,000. In this case, 70% of the lot is for employee use and 70% of the costs would be non-deductible for a total of $7,000.
If the percentage of employee use is less than 50%, then the entire cost associated with the general parking is tax deductible.
Next Steps
The documentation required to comply with this new rule can be tedious particularly for employers with multiple locations. Employers should make their best efforts to document their parking facilities for 2018 and in some cases it may be necessary to estimate costs if detailed records are not available.
CLA is here to assist you in reviewing the interim guidance and analyzing your facilities. Please contact us.
Amanda Garnett is a principal in the financial institutions practice of CliftonLarsonAllen (CLA) from Peoria, Illinois. She currently leads the firm’s Midwest financial institution tax team and serves institutions ranging in size from $15 million to $3.5 billion in total assets. In addition to tax compliance, Amanda assists clients in the areas of tax consulting, mergers and acquisitions, and regulatory reporting. She also routinely teaches courses for banking associations across the country.
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