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No parking: It's a brave new world for qualified parking


With the Tax Cuts and Jobs Act of 2017 (the “Act”), Congress turned the age-old employer deduction for qualified parking on its head: this benefit is non-deductible going forward. (Note: employees can still exclude qualified transportation benefits, including qualified parking, from taxable income).

Clearly, this was one of the many ‘revenue raisers’ in the Act meant to offset the cost of the corporate and individual tax cuts. However, in their haste to pass the Act, Congress failed to address many nuances regarding the deduction for parking benefits with the result that it’s now unclear how far the new rule extends.

For many years, employer provided qualified parking benefits have been a non-taxable fringe benefit (within limits) under Internal Revenue Code (“Code”) Section 132(f). Qualified parking is defined in Section 132 as:

Qualified parking. The term “qualified parking” means parking provided to an employee on or near the business premises of the employer or on or near a location from which the employee commutes to work by transportation described in subparagraph (A), in a commuter highway vehicle, or by carpool. Such term shall not include any parking on or near property used by the employee for residential purposes.

The Act added new Section 274(a)(4) to the Code which reads as follows:

No deduction shall be allowed under this chapter for the expense of any qualified transportation fringe (as defined in section 132(f)) provided to an employee of the taxpayer (emphasis added)

Qualified parking is a component of qualified transportation fringe benefits. The new language is effective for amounts paid or incurred after December 31, 2017. Thus, it applies for all of 2018 for all employers, regardless of their year-end for tax purposes.

The new loss of deduction rule clearly applies to employer provided parking benefits (such as an employer’s direct reimbursement of an employee or direct payment for that employee’s parking expenses). Parking is generally considered employer-provided if:

  • It is on property the employer either owns or leases;
  • The employer pays someone else (such as their landlord or a parking lot/garage owner) for the parking, or;
  • The employer reimburses the employee for parking expenses.

Clarity needed

What about employees making pre-tax salary deferral parking payments under a Section 132(f) plan? While it is not clear that the new law applies to such cases, the Internal Revenue Service (“IRS”) has indicated that it believes it does. Earlier this year the IRS added a “Tip” to its Publication 15-B which states the following:

…no deduction is allowed for qualified transportation benefits (whether provided directly by you, through a bona fide reimbursement arrangement, or through a compensation reduction agreement) incurred or paid after December 31, 2017.

While a ‘Tip’ published by the IRS in one of its informational publications is not binding authority, it does indicate where the IRS stands on the matter. Thus, from the IRS’ viewpoint, pre-tax parking salary reduction benefits will be tax-free for employees but the employer will lose its tax deduction for such benefits. This is still an area where formal guidance would be welcome.

Another area of confusion: what type of parking benefits are affected. For example, let’s say an employer’s building lease includes use of a large parking lot where employees are allowed to park free-of-charge. Does the new loss-of-deduction rule apply here to some of the employer’s lease payments related to the cost of parking? This is unclear, as Congress did not define what it means by “amounts paid or incurred.”

Employer groups have petitioned Congress and the IRS to provide guidance on the question of indirect costs and/or for a moratorium on enforcement until guidance is issued but nothing has been done yet. For now, the conservative tax position is that any direct or indirect expense related to the provision of qualified parking to employees on a tax-free basis is non-deductible.

Impact on not-for-profit entities

At first glance, it would appear that the new qualified parking loss-of-deduction rule would leave not-for-profit (NFP) entities unscathed, as tax deductions are generally unimportant to such entities. However, Congress has extended the new rule to such entities by turning such expenses into unrelated business taxable income subject to tax (UBTI).

The Act added new language to Code Section 512 [Unrelated business taxable income] indicating that amounts denied a deduction under Section 274 related to qualified transportation fringe benefits, including qualified parking, would increase a NFP organization’s UBTI for the year. Along with the Act’s tax rate changes, this generally means that tax-free qualified parking expenses provided by an NFP employer will be taxed as UBTI at a flat rate of 21%. This could hit some NFP entities very hard. We know of multiple cases where NFP entities are providing tax-free parking benefits valued in the hundreds of thousands of dollars.

Here again, the issue arises: What type of indirect parking expenses are in play? No one knows.

What are your options?

There really aren’t any solutions that will make everyone happy. Someone—either the employer, employees, or both—is going to bear the cost of the new nondeduction rule for qualified parking. Clearly, an employer can avoid the loss of deduction (or imposition of UBTI) by providing employees with a taxable bonus they then use to pay for parking on an after-tax basis. This methodology results in the employer and employees sharing the cost. Other employers are simply taking the position that pre-tax and/or tax-free parking benefits are dead for now. Still others are leaving their pre-tax salary reduction plans in place at least until formal guidance is issued.

The best thing you can do is be aware of the change and to speak with your tax advisor as to the best course to take until further guidance is issued.