IRS Guidance on the Treatment of Qualified Transportation Fringes

Employers may provide certain qualified transportation benefits to their employees without the employees being taxed on these benefits (“qualified transportation fringes”). After the changes enacted as part of tax reform, certain benefits remain nontaxable to employees, but the cost of providing these benefits is no longer deductible to the employer. These benefits are:

  • Transportation in a commuter highway vehicle between the employee’s residence and place of employment
  • Any transit pass
  • Qualified parking

Among these benefits, qualified parking is particularly important to consider, both because of the potential complications involved in determining what amount (if any) is nondeductible and due to the large number of employers who provide some sort of parking benefit to employees.

Qualified parking refers to parking on or near the employer’s business location (or a location from which the employee commutes to work via public transit). It is generally provided in one of two ways:

  • Employee pays for the parking and is reimbursed through pre-tax payroll deductions
    • The nondeductible amount will generally equal the amount provided. Note that there are monthly limits on the amount that may be provided pre-tax ($260 per month in 2018). Any amount in excess of this will be taxable to the employee and deductible by the employer.
  • Employer provides parking to its employees
    • The following points should be considered in determining what amount is nondeductible:
      • The nondeductible amount for employer-provided parking is based on cost to the employer, not value to the employee.
      • Parking that is made available to the general public (including current and potential clients of a business) is not subject to these rules and may be deducted.
        • The following information should be considered in determining the nondeductible amount:
          • Number of spots reserved for use by employees
          • Number of spots reserved for use by the general public.
          • Based on how spots are used during normal business hours, what is the primary use of the lot? Is it for employees or the general public?
        • The IRS has not mandated a specific method for calculation, although it has provided a sample method, as well as some guidelines.
        • See the following page for more detailed information on calculating the nondeductible amount.

Note that the information provided is based on current IRS guidance and although it is subject to change, it may be relied upon until the IRS issues further guidance.

Additional Details on Calculating Nondeductible Parking Expense

  • If an employer pays a 3rd party to allow employees to park at the 3rd party’s facility, the nondeductible amount will be the total cost to the employer for the employee parking. Note that if this exceeds the monthly limit of $260/employee, the excess amount is actually taxable compensation to the employee, but it is deductible to the employer.
  • If an employer owns or leases some portion of a parking facility, the following is one possible method of calculating the amount that is nondeductible:
    • Step #1: Determine total parking expenses
      • Examples include: 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).
      • The following are not included:
        • Depreciation
        • Any costs for items no located directly on the parking facility (eg, adjacent lighting and landscaping).
      • Step #2: Determine the amount of total expenses that should be allocated to spots reserved for employees. This amount is nondeductible.
      • Step #3: Determine the primary use of the remaining spots. If the primary use of the remaining spots is to provide parking to the general public, all of the remaining parking expenses may be deducted, and no further analysis is needed. Primary use is based on more than 50% of the usage of the spots during normal business hours.
        • It may be necessary to consider differences in usage during different parts of the week or different times of year, if they are significant.
        • The general public does not include employees, partners or independent contractors of the employer. Spots that are available to the general public, but are generally empty, are considered to be for the use of the public.
      • Step #4: If the primary use is not for the general public, the next step is to calculate the number of spots reserved for non-employees. The amount allocated to these spots is deductible.
        • Note that this includes spots reserved for partners, sole proprietors, and 2% S corporation shareholders.
      • Step #5: Any expenses not allocated under the previous steps should be allocated as deductible or nondeductible based on employee use of the spaces during normal business hours of a normal business day. There is no specific method that must be used, but hours of use and number of employees and spots are among the factors that may be considered.
    • The IRS has stated that any reasonable method may be used to calculate the nondeductible amount of parking expense, and that it considers the method illustrated above to be a reasonable method.
      • For tax years beginning in 2019, whatever method is used must consider reserved employee spots (as in Step #2 above).
    • If an employer makes changes by March 31, 2019 to decrease the number of employee-reserved spots in its facility, it may treat those changes as if they were made retroactively to January 1, 2018.
    • If an employer has multiple parking facilities, the calculation of nondeductible parking expense will be affected by whether these facilities are considered to be in a single geographic location.