QTFs are excludible by employees (subject to detailed restrictions and dollar limitations) and have generally been deductible by the employer. This new disallowance raises many issues, especially when it comes to “qualified parking.”
How do we determine the employer’s disallowed expense for qualified parking? In December 2018, the IRS issued Notice 2018-99 (2018-52, IRB 1067), which taxpayers may rely on until further guidance is issued. It indicates that “Section 274(a)(4) disallows a deduction for expenses incurred for QTFs regardless of whether the benefit is provided by the employer in-kind, through a bona fide cash reimbursement arrangement, or through a compensation reduction agreement.”
This may be easy enough if the employer simply pays a fee to a third-party garage. The disallowed expense is generally the amount paid. But to the extent the payment for an employee’s parking exceeds the monthly limit on the employee’s exclusion, which is $260 for 2018 and $265 for 2019, the excess is includible by the employee as wages and is not disallowed to the employer.
What about the expense if the employer wholly or partly owns or leases the parking facility and employees, customers, and other nonemployees might park in it? According to Notice 2018-99, the disallowance may be calculated using any reasonable method. The method must be based on the expense, not the value. And if the method fails to allocate expenses to reserved employee spots, it isn’t reasonable.
According to the notice, “a ‘parking facility’ includes indoor and outdoor garages and other structures, as well as parking lots and other areas, where employees may park on or near the business premises of the employer or on or near a location from which the employee commutes to work. The term does not include any parking on or near property used by the employee for residential purposes.”
The notice also indicates that “total parking expenses” include but aren’t limited to “repairs, maintenance, utility costs, insurance, property taxes, interest, snow and ice removal, leaf removal, trash removal, cleaning, landscape costs, parking lot attendant expenses, security, and rent or lease payments or a portion of a rent or lease payment (if not broken out separately).” But there’s no guidance on how to allocate service department costs and other expenses partly applicable to the parking facility. Management accountants will see all kinds of opportunities in determining those allocations, which can make a very big difference in the disallowed amount.
Oddly, and much to the taxpayer’s favor, the notice concludes that depreciation isn’t a parking expense for this purpose. Also favorable to the taxpayer, the notice says, “expenses paid for items not located on or in the parking facility, including items related to property next to the parking facility, such as landscaping or lighting, also are not included.”
The notice includes a four-step process that is deemed to be reasonable:
Step 1. Calculate the disallowance for reserved employee spots. Identify the number of spots reserved for employees, such as through signage like “employee parking only” or with barriers. Determine what percentage of the total spots those spots comprise and disallow that portion of the total parking expenses. Thus, if you have no reserved employee spots, nothing is disallowed under this step. And note this opportunity: “Until March 31, 2019, taxpayers that have reserved employee spots as defined in this notice may change their parking arrangements (changing signage, access, etc.) to decrease or eliminate their reserved employee spots and treat those parking spots as not reserved employee spots for purposes of this notice retroactively to January 1, 2018.”
Step 2. Determine the primary use of remaining spots (the primary use test). Under the general public exception to IRC §274, if the primary use is to provide parking to the general public, nothing further is disallowed. “‘Primary use’ means greater than 50 percent of actual or estimated usage of the parking spots in the parking facility…tested during normal business hours on a typical business day, or in the case of an exempt organization during the normal hours of the exempt organization’s activities on a typical day.” So, for example, a big-box retailer whose spaces are used primarily by customers, with only a small portion used by employees and none reserved for them, would have no disallowance.
For multiple parking facilities in a single geographic location, the notice allows the taxpayer to aggregate the number of parking spots in doing these computations. That choice could make a big difference under the primary use test and would be an important management accounting decision.
Step 3. Calculate the allowance for reserved nonemployee spots. If the primary use of the remaining spots isn’t to provide parking to the general public, identify the number of spots exclusively reserved for nonemployees (for example, “customer parking only”). Compute the percentage of reserved nonemployee spots to remaining total spots, then multiply that percentage times the remaining total parking expenses. The resulting amount is deductible, not disallowed.
Step 4. Determine the remaining use and allocable expenses. If there are “any remaining parking expenses not specifically categorized as deductible or nondeductible, the taxpayer must reasonably determine the employee use of the remaining parking spots during normal business hours on a typical business day (or, in the case of an exempt organization, during the normal hours of the exempt organization’s activities on a typical day) and the related expenses allocable to employee parking spots.” The notice suggests methods to determine employee use, and management accounting skills should help in developing a method.
The notice provides more details and extensive examples along with information on how this integrates with UBTI and related filing requirements. This offers an interesting opportunity for management accountants and tax people to work together toward a favorable result.
© 2019 A.P. Curatola