As part of ongoing efforts to translate tax reform into regulatory reality, the IRS release guidance in early December 2018 that will increase taxes for any for-profit organization that provides parking to its employees. Starting with the 2018 tax year, employers who own a parking lot, lease parking space or reimburse employees for parking expenses may see an increase in taxable income.
Beyond the cost of parking itself, the IRS also considers things like utility costs, maintenance, insurance, property taxes, removal of leaves, trash, snow and ice, landscape costs, repairs, security and rent or lease payments as “parking expenses.”
Determine impact of new tax on parking expenses
Employers should start by quantifying the impact of this lost deduction. For small employers with only a few spots and low maintenance costs, the parking expenses may not result in a significant increase to taxable income. Larger employers with numerous locations may face a larger tax bill.
Please note that this IRS guidance also addresses parking costs for nonprofit organizations as previously discussed on our blog. [Editor’s note: Effective December 20, 2019, nonprofit parking and transportation benefits will no longer be counted as unrelated business taxable income. This full repeal was part of the Taxpayer Certainty and Disaster Tax Relief Act of 2019 and is retroactive for 2018 and 2019.]
There is a small window of opportunity to reclaim deductibility, however. Implement one of the below strategies before March 31, 2019, and the IRS will retroactively apply it back to January 1, 2018.
Methods to preserve deductible parking benefit
- Consider a compensation reduction agreement for employees that would allow them to choose between cash compensation or the parking benefit.
- Give employees a taxable bonus that must be used to cover parking costs on an after-tax basis.
- Make your parking spots available to the general public as well as employees. The IRS permits the deduction of parking expenses if the spots are used more than 50 percent of the time by members of the public, visitors, clients, patients, deliveries, etc.