Another annoying TCJA task: Figuring the cost of parking benefits

As you fight your way into the mall parking lot, consider that mall stores (and you, too, if employees drive to work and park in a lot at your office building) must now, thanks to the Tax Cuts and Jobs Act, figure the cost of employer-provided parking so it can be disallowed on their corporate returns. We say humbug!

Similarly, nonprofits must include the cost of parking in unrelated business taxable income and pay unrelated business income tax on it.

Break: You have until March 31, 2019, to reassign reserved employee parking spots to nonreserved spots, or to remove restrictive parking signs or barriers, to minimize your tax exposure for the 2018 tax year. Changes to parking arrangements will be retroactive to the beginning of this year.

Downside: Someone (hopefully not you) must be assigned the unenviable task of explaining to employees where their reserved parking went.

The crux of the IRS’ guidance involves a rather complicated process of slotting parking spaces into deductible and nondeductible categories. There’s a lot to digest, so we suggest grabbing a cup of egg nog and settling in.

Cost vs. value

The guidance makes clear that the deduction disallowance/UBIT apply to the cost of parking, not the value to employees. Even if the value to employees is $0, you’re still incurring costs to maintain the lot. If you own or lease a parking lot, a nonexclusive list of costs includes:

  • Costs for repairs, landscaping, cleaning and maintenance
  • Costs for utilities, insurance, property taxes and interest
  • Costs for snow, ice, leaf and trash removal
  • Costs for parking lot attendants and security
  • Rent/lease payments or a portion of a rent/lease payment (if not broken out separately).

Costs don’t include depreciation or expenses paid for items not located on or in the lot, including items related to property next to the lot, like landscaping or lighting.

When cost = value

If you pick up employees’ parking costs, the deduction disallowance/UBIT is the value of the fringe benefit—up to $265 a month. If you’re shelling out more, the excess is taxable wages to employees (that hasn’t changed) and isn’t disallowed on your 1120/ or subject to UBIT. You’re taking a salary deduction, instead.

When cost ≠ value

Cost doesn’t equal value when you own or lease a lot. The key to minimizing your deduction disallowance/UBIT is opening up the parking to the general public. To the extent that spots are public parking, there’s no deduction disallowance/UBIT.

That may work if you’re a retailer. It’s harder to achieve with office buildings. In that situation, the IRS has developed a four-factor safe harbor for figuring the disallowance/UBIT. If you don’t like the IRS’ method, you can use any reasonable method for making this calculation.

Step 1: Calculate the disallowance for reserved employee spots by determining the percentage of reserved spots in relation to total spots. Then multiply that percentage by total parking expenses. The result is the deduction disallowance/UBIT for reserved spots.

Warning: If you post an employee-only parking or no trespassing sign at the entrance to your lot, the entire lot could be considered reserved and your disallowance/UBIT would be based on 100% of the spots.

Step 2: Define the primary use of remaining spots by determining whether the primary use (i.e., greater than 50%) is to provide parking to the general public during normal business hours on typical business days. If it is, the remaining total parking costs are deductible/not subject to UBIT.

If, say, you have a 500-space lot and employees park in 50 unreserved spots, you’ll pass the primary use test because 450 spots are left for the general public. All of your parking costs will be deductible/not subject to UBIT

If you have no reserved nonemployee spots, skip to Step 4.

Step 3: Calculate the allowance for reserved nonemployee spots. You need to undertake this analysis only if you flunk Step. 2. If the primary use of the remaining spots isn’t to provide parking to the general public, identify the spots in the lot, or your portion of the lot, which are reserved for nonemployees (e.g., visitors). Determine the percentage of reserved nonemployee spots in relation to the remaining total parking spots and multiply that percentage by your remaining total parking expenses. The result is the amount you may continue to deduct for nonreserved spots/not subject to UBIT.

Step 4: Determine spots’ remaining use and allocable costs. For remaining spots that aren’t categorized as deductible or nondeductible, you must reasonably determine employees’ use of those spots during normal business hours on a typical business day and the related costs allocable to those spots.

You could, for example, identify the number of employee spots based on actual or estimated use. Actual or estimated use may be based on the number of spots, the number of employees, the hours of use or something else.

Example

Speedy Accountants leases a parking lot adjacent to its office building and it incurs $10,000 in parking costs. The lot has 100 spots, which are used by clients and its 60 employees.

Step 1: Because none of Speedy’s spots are exclusively reserved for employees, nothing is specifically allocated to reserved employee spots.

Step 2: The primary use of Speedy’s lot isn’t to provide parking to the general public, since employees use 60% (60/100) of the spots. Upshot: Speedy can’t use the general public exception.

Step 3: Because none of Speedy’s spots are exclusively reserved for nonemployees, there’s no amount that’s specifically allocated to reserved nonemployee spots.

Step 4: Speedy must reasonably determine the use of the spots and the related expenses allocable to employee parking. Since employees use 60% of the spots, Speedy reasonably determines that $6,000 ($10,000 × 60%) of its parking expenses is disallowed.

Special considerations for nonprofits

Separately, the IRS announced that it will provide estimated tax penalty relief in 2018 to nonprofits that offer parking benefits and weren’t required to file Form 990-T last filing season. To claim the waiver, write Notice 2018-100 on the top of Form 990-T.

Additionally, some nonprofits won’t exceed the $1,000 threshold below which an organization isn’t required to file Form 990-T or pay UBIT.

A note to our loyal readers: This is our last blog post of 2018. Have a happy holiday season and New Year and thanks for your support.