Do you provide on-site parking for your employees, pay a third party for employee parking or reimburse employees for off-site parking? The 2017 Tax Cuts and Jobs Act requires new calculations for determining the deductibility of expenses related to employee-parking beginning in 2018. This not only impacts for-profit organizations, it has caused nonprofits to incur taxes resulting from the nondeductible employee parking expenses being categorized as unrelated business taxable income (UBTI).
1) Employer pays a third party for employee parking
As an employer, if you play an unrelated third party for employee parking and/or their transit passes, then your calculated parking expense is the amount paid to the third party. You may NOT deduct the first $265 per month (per employee) for 2019, which represents the exclusion under IRC 132(f). The first $265 per month (per employee) continues to be a nontaxable benefit to the employee. Any excess third party parking expense you pay is deductible by your business but is taxable to the employee via W-2 wages. There has been no change to the deductibility of parking your business pays for others. You continue to fully deduct any parking or transportation expenses for any NON-employee(s).
2) Employer owns or leases parking spaces
If you own or lease property that includes an employee parking area, a reasonable method should be used to calculate nondeductible employee parking expenses. IRS Notice 2018-99 established a safe harbor to determine the nondeductible amount of your parking expenses. The following information must be determined and provided to your tax preparer in order to accurately calculate your business’ nondeductible parking expenses, or your nonprofit organization’s UBTI:
- Total number of parking spots
- Total number of spots reserved for employee parking. Signage or a fenced in restricted area may be used to designate the spots as “reserved – for employees only”. Expenses related to these spots are nondeductible.
- Estimated number of employees who park in non-reserved parking spots during normal work hours on a typical work day
- Total number of spots reserved for non-employees. Expenses related to these spots are fully deductible. Signage or a fenced in restricted area may be used to designate spots as “reserved – guests and visitors only”
- Total number of spots available for the general public on a normal workday. If more than 50% of the spots are available to the general public on a normal workday (whether occupied or not), all expenses attributable to those spots are deductible. If less than 50% of the spots are available to the general public, then additional allocations are required.
- Total expenses associated with the parking spots attributable to “employee only parking” areas are non-deductible. These expenses include, but are not limited to, maintenance, repairs, snow & ice removal, utilities, landscaping, lease payments, trash removal, security, interest, property taxes, insurance, etc. allocated to employee parking areas. Depreciation is not included in the expenses for the parking benefit.
Note that expenses that are not specifically allocated to reserved employee, or reserved non-employee parking will be allocated between nondeductible employee use and deductible general public use based on general occupancy on a normal business day.
Although the nondeductible parking is included in UBTI of a nonprofit organization, if the organization’s total receipts are below $1,000, Form 990-T is not required and no tax is due. If the gross receipts are $1,000 or more, there is a Specific Deduction, generally $1,000, allowed against UBTI.
For more information about how adjusted parking deductions should be calculated, please contact us at 401-331-0800.