Revise Your Employee Parking Arrangements Before the March 31 Deadline

In December 2018, the IRS issued Notice 2018-99 to provide taxpayers interim guidance for determining the nondeductible portion of parking expenses for qualified transportation fringe (QTF) benefits. Following a comment period, which has seen hundreds of comments submitted, the IRS intends to issue proposed regulations.

Until the regulations are issued, taxpayers who own or lease employee parking facilities may use any reasonable method to determine the amount of nondeductible parking expense and may rely on guidance provided in the Notice. However, for taxable years beginning on or after January 1, 2019, a method that fails to allocate expenses to reserved employee parking spots can’t be a reasonable method.

Taxpayers have until March 31, 2019, to modify existing parking arrangements for employees, which will be effective for the tax year beginning on or after January 1, 2018.

Here’s a look at interim guidance included in the Notice and potential impacts on employers.


The 2017 tax reform reconciliation act, also known as the Tax Cuts and Jobs Act (TCJA), generally disallows deductions for expenses related to QTFs that taxpayers provide to employees under Section 274(a)(4). However, the TCJA doesn’t provide guidance regarding how to determine which portion of parking expenses related to QTFs are nondeductible.

Areas to review for potential QTFs include the following:

  • Qualified parking, which is parking provided to an employee—including parking spaces owned by the employer or leased from a third party
  • Transit passes
  • Transportation in a commuter highway vehicle, such as a company bus or van, between the employee’s residence and place of employment

Impacts for Employers

The Notice provides several important areas for employers to consider regarding QTFs.

Tax Treatment

Employers may provide a QTF fringe benefit to employees. The benefit generally isn’t included in gross income to employees, and the excludable amount can’t exceed a maximum dollar amount, adjusted for inflation. For 2018, the adjusted maximum monthly excludable amount is $260. For 2019, the amount is $265.

The notice further clarifies that if the fair-market value of the QTF exceeds the limitation on exclusion, the excess amount is included in employee compensation.

Parking Requirements

For parking expenses to qualify as a business deduction, more than 50% of the available space must be used by the general public during the business’s normal operating hours. Empty, unreserved spaces available to the general public and not used by employees are also counted as used by the general public.

The term general public includes, but isn’t limited to, customers, clients, visitors, and individuals delivering goods or services to the business. It doesn’t include employees, partners, or independent contractors of the business.

Nondeductible Parking Expense

The method for determining the nondeductible portion of parking expenses depends on the following factors:

  • Whether the taxpayer pays a third party to provide parking for its employees
  • Whether the taxpayer owns or leases a parking facility where its employees park

Generally, if an employer pays a third party for employees to park in a parking lot or garage, the total annual cost of employee parking paid to the third party is nondeductible. However, if the taxpayer pays the third party for an employee’s parking and that amount exceeds the monthly limitation on exclusion, which is $260 for 2018 and $265 for 2019, the excess amount over the limitation is treated as compensation to the employee and deductible to the employer.

If an employer owns or leases all or a portion of a parking facility, the disallowance of parking expenses provided to employees may be calculated using any reasonable method. The Notice deems the following four-step methodology a reasonable method for determining the nondeductible portion of parking expenses.

Determine Nondeductible Parking Expense

Described below, the four-step methodology categorizes parking expenses as either deductible or nondeductible.

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, landscaping costs, parking lot attendant expenses, security, and rent or lease payments allocated to parking, if not broken out separately.

The Notice doesn’t clarify how to determine the allocation of expenses between office space and a parking facility when the lease agreement doesn’t itemize the cost for use of parking.

Here are four steps for determining nondeductible parking expense.

Step One: Calculate Disallowance

The first step for determining nondeductible parking expense is to calculate the disallowance for reserved employee spots. This can be broken out into the following two parts:

  • Determine how many parking spots in the parking facility are exclusively reserved for employees. These spots could include those with specific signage or those located in a separate portion of the facility, segregated by a barrier to entry or limited access.
  • Determine the percentage of reserved employee spots in relation to total parking spots and multiply by total parking expenses

Step Two: Determine Primary Use

Next, an employer determines the primary use of remaining spots, referred to as the primary-use test. Primary-use means greater than 50% of actual or estimated parking spots in the parking facility are used during normal business hours on a typical business day. An employer should identify the remaining parking spots in the parking facility to determine whether the primary use is for employees or the general public.

If it’s determined more than 50% of the total parking spots are available to the general public, the remaining total parking expenses are deductible under Section 274(e)(7). However, if the primary use—more than 50%—is for employees, the employer must continue to step three.

Step Three: Calculate the Allowance

The next step is to calculate the allowance for reserved nonemployee spots, which include parking spots for nonemployees, visitors, customers, partners, sole-proprietors, and 2% shareholders of S corporations. This deductible amount is calculated by total nonemployee reserved parking over total parking spots multiplied by total parking expenses.

Step Four: Determine Remaining Use and Allocate Expenses

If the employer has any remaining parking expenses not specifically categorized in the previous steps, they must determine remaining parking spot use and allocate parking expenses as either nondeductible or deductible.

To determine remaining employee parking spots, an employer can identify the number of employee spots based on actual or estimated usage. The remaining parking expenses allocable to employee parking spots are nondeductible.


Employers have until March 31, 2019, to change parking arrangements and reduce or eliminate the number of parking spots reserved for employees. The change can retroactively apply, dating back to January 1, 2018.

Reminders and Clarifications

Here are some reminders and clarifications for reviewing qualified transportation fringe benefits and parking expenses.

  • Maximum monthly amounts. QTFs have a maximum monthly amount, per employee, of $260 for 2018—indexed for inflation. The amount for 2019 is $265. The fair-market value of benefits provided above that threshold continues to be taxable to the employee and deductible to the employer.
  • Expense deductions. Section 274(a)(4) disallows deductions for expenses incurred for QTFs, regardless of whether the benefit is provided by the employer in-kind, via a bona fide cash reimbursement arrangement, or a compensation reduction agreement.
  • Taxpayer-owned or leased parking facilities. The change in QTFs has implications for those who own or lease a parking facility. Taxpayers should review building lease or rental agreements to determine the amount that’s no longer available as a business deduction. Taxpayers who own parking facilities must also analyze costs associated with provided parking.
  • Parking structure depreciation. Favorably, the Notice clarifies that depreciation on a parking structure is excluded from total parking expenses. Expenses paid for items that aren’t located on or in the parking facility, including items related to property next to the parking facility—such as landscaping or lighting—are also excluded from total parking expenses.

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For more information about guidance relating to Notice 2018-99 or QTFs, contact your Moss Adams professional.

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