Guest view: New IRS guidelines could make parking a taxing ordeal

Employers that provide parking to their employees may be in for a nasty surprise this tax season.

Depending on how you are providing parking to your employees, you may have taxable consequences related to the costs of that parking – subjecting you to what some are calling the parking lot tax.

The parking lot tax refers to a provision of the Tax Cuts and Jobs Act (TCJA) that disallows parking expenses incurred by employers that provide parking to their employees.

That means some businesses and nonprofits may find themselves owing taxes on parking provided to workers instead of being able to deduct the expense.

Employers will be subject to the “Parking Lot Tax” if they meet either or both of the following conditions:

  • The employer has parking spots specifically reserved for employee use
  • The employer has a parking facility whose primary use – at least 50 percent of the spaces – is for employee parking

The IRS provides one piece of good news related to reserved employee spots: Employers have until March 31 to unreserve those spots, and it will apply retroactively to Jan. 1, 2018.

Determining if you owe

Without exception, reserved spots will be taxable, from a space set aside for a church’s pastor to one awarded to the employee of the month.

Businesses and nonprofits can continue deducting parking-related expenses if they meet the primary use safe harbor of having more than 50 percent of the spots publicly available. This is measured by the estimated usage of the parking spots in the parking facility during normal business hours on a typical business day. You also must consider:

Sole proprietors, partners, independent contractors and 2 percent shareholders: Parking used by any of the above is not considered employee parking. However, it is not considered publicly available either. If you fail the safe harbor and are subject to the parking lot tax, you do not have to include spots used by these workers in what you owe.

Empty parking spots: If spots are typically empty on an average business day and they are available to the public, they will count as general public parking.

Suppose you have a 50-spot lot and, on an average business day, 30 of those spots are used by employees and the other 20 are empty but available for anyone. You will have taxable consequences related to your parking costs because 60 percent of your parking (30 out of 50 spots) is provided for employee use.

Businesses and nonprofits can continue deducting parking-related expenses if they meet the primary use safe harbor of having more than 50 percent of the spots publicly available. This is measured by the estimated usage of the parking spots in the parking facility during normal business hours on a typical business day. You also must consider:

Calculating what you owe

Determining your tax liability starts by totaling the lot’s annual costs, including: repairs; maintenance; utilities; insurance; property taxes, interest; snow, ice and leaf removal; landscaping; trash removal; and lot attendant or security expenses.

If the annual cost for all 50 spots in the example above equals $10,000, we have $6,000 in nondeductible parking expenses (60 percent of $10,000).

For partnerships and S corporations, the $6,000 of nondeductible parking expenses increases the taxable income that is distributed to the shareholders. The shareholders will then consider the tax consequences on their individual returns. For C-Corporations and nonprofits, the nondeductible expense will be multiplied by the flat corporate tax rate of 21 percent.

A nonprofit would file IRS Form 990-T, listing the parking as an increase to their Unrelated Business Taxable Income. In our example, that would mean a tax liability of $1,260 (21 percent of $6,000).

If an employer pays a third party to lease spots for employee use, the associated costs are now nondeductible to the extent not included in employee compensation.

Bottom line

Remember, you can potentially avoid any tax liability if, by March 31, you remove reserved employee spots. Because of the complexity of the calculation and the widespread application, there has been an outcry to repeal this provision. At this point, however, every employer that provides parking to their employees will have to face the complexity of its application.

There are still unanswered questions with the IRS guidance on the parking lot tax. Both the calculation of the safe harbor, as well as the calculation of the disallowed expenses are complex. It would be prudent to consult with your tax adviser to ensure that these items are being considered correctly.

Brian J. Kutz is a tax supervisor with Boyer & Ritter LLC, an accounting firm with offices in Camp Hill, Carlisle, Chambersburg and State College. He can be reached at 717-761-7210 or bkutz@cpabr.com.

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