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Steer around roadblocks for tax-free parking perks

by on
in Employee Benefits Program,Human Resources,Small Business Tax,Small Business Tax Deduction Strategies

If parking space is at a premium near your building, you may pay for employees to park their cars in a nearby garage or lot.

If you set up a qualified fringe benefit plan, your company can deduct those parking costs, and the benefit is tax-free to the employees. Unfortunately, your company may pay a pretty penny for its local parking privileges.

Strategy: Shift the onus to employees by using a salary reduction plan. As long as the plan meets the tax-law requirements, the parking benefits remain tax-free to the employees. As a result, your employees come out ahead on the deal, and your company saves thousands in parking fees!

A new private letter ruling from the IRS provides a road map for setting up such a tax-free salary reduction plan. (IRS private ruling 200347003)

Parking perk capped at $195/month

First, a little background: As a general rule, your company can offer certain transportation fringe benefits to employees, including "qualified parking," on a tax-free basis. The parking benefit must be provided to employees on or near the business or near a location where an employee commutes to work.

For 2004, the maximum tax-free benefit for each eligible employee is limited to $195 per month (up from $190 per month for 2003).

Read new IRS road map

In the new IRS ruling, a company leased office space from its landlord, including the use of space in an adjoining parking lot. The company let employees park in the lot if they chose to participate in a payroll deduction plan. In effect, participating employees elected to reduce their salary by $150 a month for the parking privilege.

Some specifics: That paycheck reduction must be made prior to the month for which it applies. Once the election is made, it is irrevocable for the entire month. And the election automatically renews each month unless the employee opts out of the plan.

The IRS said this setup qualifies as a tax-free plan. Reason: It gives employees the option to choose, in writing, between a fixed dollar amount of taxable compensation or a fixed tax-free transportation fringe benefit allowance. Also, the plan satisfies all the other requirements for a tax-free fringe benefit plan, including timing issues, irrevocability, no-refund opportunity and the limits on the monthly reduction. (IRS Reg. Section 1.132-9)

Note: The compensation reduction for this particular plan—$150 per month—falls well below the $195 tax law limit. So participating employees don't have to deal with any income tax or payroll tax withholding on the reduction.

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