Many employers subsidize employees parking and other transit expenses (up to the IRS limit) which would be tax free to the employee and tax deductible by the employer. Sounds like a good deal for both sides!
Well all good things come to an end :(
As part of the Tax Cuts and Jobs Act (TCJA) there was a little known change made to the rules related to employers who subsidize employee parking "qualified transportation fringe benefits". It's a pretty BIG change from previous rules! As soon as the TCJA became law in an instant the employer who once was able to deduct this tax free benefit provided to employees is no longer allowed to do so starting on 01/01/18!
Other items considered "qualified transportation fringe benefits" include items such as van pools, transit passes and bicycle commuting! These items will also be nondeductible to the employer who provides them to employees!
I am guessing that many business owners do not know about this change and if they have a significant workforce "qualified transportation fringe benefits" such as parking are paid on their behalf they could be in for an unexpected increase in their tax bill at year end due to these expenses being disallowed under current law!
Now looking at the parking example a in a bit more detail it is a bit more far reaching than you may think. Some people may think that it may only apply to parking expense paid to third parties like a parking garage but the Taxman doesn't stop there because he is HUNGRY and wants more revenue. Under the new law even parking lots employers own and let employees use to park in are now subject to these rules and are nondeductible!
The straight forward example of this new law in action would be if an employer pays for monthly parking to a third party garage on behalf of its employees which costs $260 per employee per month. Now $260 may not seem like much but if you multiply that by 100 employees a relatively small business would see a jump in taxable income of $26,000! If that $26,000 is taxed at a rate of 37% that would mean a tax increase of over $9,000!
Some employers may think that because they own a parking lot and do not directly pay a third party for "Parking" that there cost of the parking lot is not subject to these rules. They are WRONG! Again the Taxman is far reaching and says that if you own a parking lot you need to apply this law also but the kicker is that it is not completely clear on how much of your parking lot expense is nondeductible! The IRS says that until guidance is issued (who knows when that would happen haha) employers must use any reasonable method to calculate the nondeductible parking expense of its owned lot used for parking.
The IRS does give a bit of guidance on what a reasonable method is in its 4 step method: (see below)
(1) Calculate the dis allowance for reserved employee spots.
(2) Determine the primary use of the remaining spots (for the general public (over 50 percent) or for employees).
(3) Calculate the allowance for reserved non-employee spots.
(4) Determine the remaining use and allocable expenses.
As you can see many people are likely to interpret these rules in various ways leading to inconsistent treatment and often stretching the deductions to favor the taxpayer so they have more deductible expenses. If a taxpayer has a large parking lot used for employee parking this could be a place where an auditor would look to assert that you did not apply a reasonable method and increase your nondeductible portion!
Now what are some options that businesses have to keep their parking expense deductible?
One option is to include the value of the benefit in employees taxable compensation which is likely to be a very unpopular choice as employees would be PISSED!
Another option would be to set up what is called a "Qualified Transportation Compensation Reduction Plan". Under this type of plan would require employees to "pay" for their parking and then elect to participate in the employers plan. Employees compensation is increased by the cost of the parking and then the employer deducts pre-tax from the employees paycheck and forwards the parking cost directly to the garage/parking lot. Under this plan the employer gets the deduction in the form of the increased compensation and the employee pays no additional tax on that compensation because they have elected to participate in the plan which allows pre-tax payments to be made to the garage for parking. This type of arrangement is complicated and could be challenged by the IRS as they indicate in Publication 15-B that the costs are not allowed even if under this arrangement. Even though publications are not law it shows what stance the IRS will most likely take if you are audited on this issue.
In summary the disallowance of employer paid parking is just one of the many overlooked provisions in the TCJA that could negatively impact your businesses bottom line. It also just makes a business owners life more complicated with one more thing to track. In my opinion as tax season has started the promise of simplifying the tax code is not correct, if anything the code has become more complicated than ever for business owners with sections 199A and 163(j) which are two very complex areas of the code that impact many businesses.
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This article is for informational purposes only and should not be considered legal, tax, accounting or financial advice. The new tax laws are extremely complex and changing rapidly. Before you make any business decisions please consult a tax adviser.