Regulatory Interpretation Increases Employer-Provided Parking Deduction
August 7, 2020
IRS and Treasury issued proposed regulations clarifying many of the rules regarding the disallowed deduction for qualified parking.
The original rules disallow the cost of parking provided to employees by an employer for expenses paid or incurred after 2017. Often the cost of such parking is included as part of an employer office lease and many times it is in a facility in which others can park. These facts can make determining the cost of employer parking difficult to determine.
Notice 2018-99 provided a four-step method for determining the disallowed deduction. The proposed regulations provide alternative approaches and clarify a number of unanswered questions. In some cases, taxpayers may want to amend previously filed income tax returns to take advantage of the favorable interpretation regarding parking available to the general public.
Parking Available to the General Public
The allowance of a deduction for parking available to the general public is an exception that will benefit many small employers. Under this rule, if more than 50 percent of the actual or estimated use of a parking facility is by the general public, the expenses for spaces used by employees, other than those reserved or limited to employees, are allowed. Until the release of the proposed regulations, many believed that employees of other tenants should not be considered the general public. However, the proposed regulations specify that employees of other tenants are considered the general public for purposes of the 50-percent test.
Assume an employer leases 10 percent of the space in an office park that includes free parking on the office park grounds and has no reserved spaces for anyone. The parking is open to the public, but the facility location is such that only individuals working at or visiting the office park are likely to park there. In this case, it would be reasonable to assume that approximately 90 percent of the parking spaces are used by the general public. As such, this employer does not need to make any calculations or disallow any expenses for employer-provided parking.
Calculation of Cost
Many taxpayers have problems determining the cost of parking facilities when the costs are part of a lease for facilities that includes real property other than parking. The proposed regulations allow taxpayers to use five percent of the lease costs, utilities, insurance, interest and property taxes, where the costs incurred are for more than parking facilities. This five-percent rule is optional; taxpayers can still use any reasonable method to determine costs.
The proposed regulations allow aggregation of parking facilities in the same geographic location for determining disallowed costs. While it was assumed geographic locale meant a metropolitan area, the proposed regulations limit the aggregation of facilities to those that are contiguous, which is defined to mean they share a common boundary but for the imposition of a road, street, railroad, stream or similar property. The proposed regulations state that tracts touching only at a common corner are not contiguous. This is unfavorable for employers with separate locations for employees and customers which are not contiguous, but are in the same metropolitan area.
What to Do Now
Taxpayers need to review their 2018 and 2019 income tax filings and determine if an amended return should be filed. The new definition of general parking and the five-percent rule may result in income tax refunds for some taxpayers. The changed definition of metropolitan area will be disadvantageous for some taxpayers.