Sikich Series on Tax Reform: Impact of the IRS Guidance for Businesses Providing Employee Parking Benefits

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Changes made to parking benefits provided by employers

The adage goes “there is no such thing as a free lunch.” Perhaps this could be expanded now to be “there’s no such thing as free parking.” The recently enacted “Tax Cuts and Jobs Act” (TCJA) heralded sizable tax cuts and enhanced CapEx deductions. There were several relatively minor provisions; however, that received little attention initially but are now creating confusion for businesses. One such provision relates to parking benefits provided by employers to their employees. This parking issue had drawn much focus this past year as there was uncertainty on how the IRS would enforce these changes. The IRS issued advice on December 10, 2018 with Notice 2018-99 (please click here for a copy of this Notice) which offered explanations and guidance.


The TCJA made changes related to “Qualified Transportation Fringes” (QTFs) by disallowing the deduction for QTFs that a company provides to its employees. This change applies beginning in 2018, and the following items should be noted:

  • The TCJA change generally disallows a deduction for expenses for QTFs provided by companies to their employees. The QTF drawing the most attention is for parking benefits provided to employees;
  • The TCJA does not address how companies determine the amount of the QTF expense that is non-deductible;
  • It should be noted that with this TCJA change, there generally is no impact to the employee receiving the QTF. For instance, the employees are not subject to additional income tax for the parking fringe benefit they receive. There is an exception, however; if the amount the company pays to a third-party for an employee’s parking exceeds a monthly limitation, which is $260 per month for 2018 (this amount is adjusted annually by the IRS and rises to $265 for 2019). The company must treat any excess amount over $260 as taxable wages to the employee;
  • Further, Notice 2018-99 indicates that partners (regardless of their ownership), two-percent or greater shareholders of S Corporations, sole proprietors, and independent contractors are not employees for purposes of this new limitation. Thus, these allocated expenses are generally deductible;
  • Please note that TCJA also made changes to parking benefits provided by tax-exempt organizations for their employees. To the extent of the parking costs for employees, the tax-exempt organizations generate Unrelated Business Taxable Income (UBTI). The tax impact to tax-exempt organizations was also addressed by the IRS in Notice 2018-99, and we addressed these matters in an earlier Sikich Tax Insights (please click here to view this article).

Again, this was a minor provision in TCJA that has now received major fanfare. Businesses struggle with how they calculate this parking adjustment applicable to their employees. There was some speculation whether there would be any exceptions or de minimis relief, and many of these questions were dealt with by the IRS in Notice 2018-99.

IRS Guidance Issued

Employee Parking BenefitsNotice 2018-99 indicated that the IRS will issue proposed regulations addressing disallowed deductions for businesses. The IRS further stated that until these regulations are issued, that taxpayers that own or lease parking facilities where their employees park may use any “reasonable method” (as spelled out in Notice 2018-99) to determine the amount of non-deductible expenses.

Notice 2018-99 explains how a business determines the amount of QTF expenses that are disallowed. The following guidelines were contained in this IRS guidance:

  • Taxpayer Pays a Third-Party to Provide Employee Parking. Notice 2018-99 states that if the company pays a third-party to provide parking for its employees, the disallowed deduction is generally calculated as the total annual cost of employee parking paid to that third-party. The company should know this cost and thus, it should be readily able to determine this disallowed expense.
  • Taxpayer Owns or Leases All or a Portion of a Parking Facility – Total Parking Expenses. Notice 2018-99 further defines total parking expenses as costs that include but are not 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). A deduction for an allowance for depreciation on a parking structure owned by a taxpayer and used for parking by the taxpayer’s employees is an allowance for the exhaustion, wear and tear, and obsolescence of property, and not a parking expense for purposes of this notice.”
  • Taxpayer Owns or Leases All or a Portion of a Parking Facility – Reasonable Method. It also specifies that until further guidance is issued, if a taxpayer owns or leases all or a portion of one or more parking facilities where its employees park, the amount disallowed “may be calculated using any reasonable method.” Notice 2018-99 also describes reasonable method and provides some useful examples regarding the deductibility of parking expenses.
  • Unreasonable Methods. While the IRS permits a reasonable method to be used to determine the QTF amounts, it also indicates some methods are not reasonable. For instance, the notice states that using the value of employee parking to determine expenses allocable to employee parking is not considered a reasonable method.
  • Transition Relief for Unreasonable Method for Reserved Employee Parking. The notice also covers another unreasonable method if the taxpayer’s method fails to allocate expenses to reserved employee spots. Notice 2018-99 provides a special transition rule that if companies change their employee reserved parking spot designations by March 31, 2019, this would be treated as applying retroactively for all of 2018.


Further, Notice 2018-99 provides a four-step process to determine the amount of the QTF that is disallowed:

  • Step One – Calculate the disallowance for reserved employee spots. Determine the number of reserved employee spots as a percentage of total parking spaces. That percentage of the total parking cost is disallowed.
  • Step Two – Determine the primary use of remaining spots (“primary use test”). A company then looks at the remaining parking spots. If more than 50 percent of the spots can be used by the “general public” (which includes, but is not limited to customers, clients, visitors, and delivery personnel) none of the expenses attributable to the rest of the parking facility are disallowed to the company.
  • Step Three – Calculate the allowance for reserved non-employee spots. The company looks at spots reserved for customers and other non-employees (including partners, two-percent S Corporation shareholders, sole proprietors, and independent contractors). These expenses are deductible.
  • Step Four – Determine remaining use and allocable expenses (if there are spots left over after the first three steps). This step requires the company to use a reasonable method to determine employee use during normal business hours, and this allocated amount is not deductible.


In addition to these steps, the IRS offered several useful examples in Notice 2018-99 to illustrate how the four-step process works. Here are a few examples taken from Notice 2018-99:


Example 1. Taxpayer A pays B, a third-party who owns a parking garage across the street from A, with a rate of $100 per month for each of A’s 10 employees to park in B’s garage, or $12,000 per year. The $100 per month paid for each employee for parking is excludible as a tax-free fringe benefit to the employees of A. The entire $12,000 is subject to the disallowance.

Example 2. Taxpayer H, a large manufacturer, owns multiple parking lots and garages adjacent to its manufacturing plant, warehouse, and office building at its complex in the City of X. H owns parking lots and garages in other cities as well. For purposes of applying the methodology in Notice 2018-99, H chooses to aggregate the parking spots in the lots and garages at its complex in City X. H may not, however, aggregate the spots in parking lots and garages in other cities with its parking spots in City X. H incurs $50,000 of total parking expenses related to the parking lots and garages at its complex in City X. H’s parking lots and garages at its complex in City X have 10,000 spots in total that are used by its visitors and employees. H has 500 spots reserved for management and has approximately 8,000 employees parking in the garages and lots in non-reserved spots during normal business hours on a typical business day at H’s complex in City X.

Step 1. Because H has 500 reserved spots for management, $2,500 [(500/10,000) x $50,000 = $2,500] is the amount of total parking expenses that is non-deductible for reserved employee spots.

Step 2. The primary use of the remainder of H’s parking facility is not to provide parking to the general public because 84% (8,000/9,500 = 84%) of the remaining parking spots in the facility are used by its employees. Thus, expenses allocable to these spots are not excepted from the disallowance under the primary use test.

Step 3. Because none of H’s parking spots are exclusively reserved for non-employees, there is no amount to be specifically allocated to reserved nonemployee spots.

Step 4. H must reasonably determine the employee use of the remaining parking spots during normal business hours on a typical business day and the expenses allocable to employee parking spots at its complex in City X. Because 84% (8,000/9,500 = 84%) of the remaining parking spots in the lot are used by its employees during normal business hours on a typical business day, H reasonably determines that $39,900 (($50,000-$2,500) x 84% = $39,900) of H’s total parking expenses is subject to the disallowance.


Key Takeaways

Companies that offer QTFs for their employees for parking should analyze these new rules spelled out in Notice 2018-99. There may be disallowed amounts that should be included in their 2018 tax returns.

  • If a business has any reserved spots for certain employees, they might consider the special election needed by March 31, 2019 to remove the special reserved parking privileges. The provision applies for the 2018 year if made by March 31, 2019.
  • In addition, for any leased facilities, a business may want to consider contacting the landlord of the leased property to determine/quantify the amount of their lease payment related to any parking spots. This removes the business from having to determine (using a reasonable method) the cost associated with the parking facility.

Please contact your Sikich tax advisor with any questions you may have.

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This publication contains general information only and Sikich is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or any other professional advice or services. This publication is not a substitute for such professional advice or services, nor should you use it as a basis for any decision, action or omission that may affect you or your business. Before making any decision, taking any action or omitting an action that may affect you or your business, you should consult a qualified professional advisor. In addition, this publication may contain certain content generated by an artificial intelligence (AI) language model. You acknowledge that Sikich shall not be responsible for any loss sustained by you or any person who relies on this publication.


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