The Final Word on Nondeductible Parking Expenses

Tom Ochsenschlager, J.D., CPA

The Tax Cuts and Jobs Act of 2017 enacted a new Section 274(a)(4) that generally eliminates the deduction for qualified transportation fringe benefits. The final regulations in TD 9939 provide the information necessary for the application of this section. This guidance is effective for tax years beginning on or after Dec. 22, 2020.

The regulations discuss a variety of “transportation” fringe benefits. However, this blog will only address the situation where an employer provides parking for its employees. Generally, where an employer incurs costs to provide parking for its employees, that cost is not deductible by the employer.

Exceptions Where the Cost is Deductible

Special Rule if Employer Reimburses Employee

The amount an employer reimburses an employee for parking expense is generally not deductible by the employer except to the extent it exceeds the monthly reimbursement limitation for fringe benefits, currently $270. If that amount is exceeded, the excess is deductible by the employer and added to the employee’s taxable compensation reported on Form W-2.

For example, if the cost of providing a parking space for an employee is $290, the $20 in excess of $270 is added to the employee’s W-2 and deductible by the employer.

Parking Space Available to the General Public

A special rule applies to an employer located in, say, a strip shopping center or a multi-tenant building and a portion of its lease payment covers the cost of the parking spaces. If more than 50% of the actual or estimated use of the parking is by the general public, then, except for spaces reserved for the employees, the employer is entitled to a deduction for the full amount of the lease and is not required to allocate any portion of the cost of the lease to the taxable income of its employees. If use by the general public is less than 50%, the nondeductible amount is the employees’ use percentage times the cost of the lease. For this purpose, the term “general public” includes residents or employees of other employers in a multi-tenant building, customers, clients, visitors and vehicles used to deliver goods or services. 

Parking Expense Proportional to Owners

The cost an employer incurs to provide parking for 2% S-corporation shareholders, partners, sole proprietors and independent contractors is deductible by the employer because under Section 132, those taxpayers must include the value of the parking on their tax returns.

Determining the “Cost” of Parking Spaces

Employer’s Property Lease Includes Parking Spaces

Where the employer’s property lease does not break out the portion of the cost attributable to the parking space, the regulations permit the employer to use a “reasonable method” or use a 5% safe harbor provided in the regulations. Using the safe harbor involves multiplying 5% times the total lease expense that includes expenses for property tax, interest, insurance and utilities.

 

Qualified Transportation Fringe, Transportation and Commuting Expenses Under Section 274

Final rules govern disallowed transportation fringe benefits - Journal of Accountancy