In Notice 2018-99, the IRS, responding to questions from taxpayers, provided guidance about how to determine the amount of parking expenses that is nondeductible when employers provide parking for their employees. Under Sec. 274(a)(4), expenses incurred for providing parking to employees that are Sec. 132(f) qualified transportation fringes (QTF) are nondeductible by employers. They are also treated as an increase in unrelated business taxable income (UBTI) by tax-exempt employers after the amendments to Sec. 274 and Sec. 512 by the tax law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97. The IRS said taxpayers may rely on the notice until further guidance is issued; it intends to issue proposed regulations and is requesting comments on the notice by Feb. 22, 2019.
The TCJA amended Sec. 274(a)(4) to provide that no deduction is allowed for the expense of any QTF benefit that taxpayers provide to their employees. Under Sec. 512(a)(7), as added by the TCJA, the UBTI of tax-exempt organizations is increased by any amount for which a deduction is not allowable by reason of Sec. 274 and that is paid or incurred by the organization for any QTF.
Under Sec. 132(a)(5), the amount of QTFs an employer provides to any employee is excluded from the employee's gross income, but under Sec. 132(f)(2) the excluded amount cannot exceed a maximum monthly dollar amount, adjusted for inflation, which is $260 for 2018 ($265 for 2019). To the extent the employer provides a reimbursement to employees or provides parking for employees with a fair market value that exceeds the Sec. 132(a)(5) limitation, the amount is included in the employees' income and is deductible by the employer. A second exception to nondeductibility is for parking provided to the general public.
The notice provides guidance to determine the nondeductible amount of parking expenses under Sec. 274, as well as the amount treated as increasing UBTI under Sec. 512(a)(7). The method of determining the nondeductible amount depends on whether the taxpayer pays a third party to provide parking for its employees or the taxpayer owns or leases a parking facility where its employees park. In the first instance, the disallowance amount is based on the amount paid to the third party by the taxpayer, and, in the second, a taxpayer may use any reasonable method to determine the disallowance amount.
The notice provides a four-step method that will be considered reasonable and states that using the value of employee parking to determine expenses allocable to employee parking in a parking facility owned or leased by the taxpayer is not a reasonable method because Sec. 274(a)(4) disallows a deduction for the expense of providing a QTF, regardless of its value. In addition, for tax years beginning on or after Jan. 1, 2019, a method that fails to allocate expenses to reserved employee spots cannot be a reasonable method.
Regarding the determination of the amount of the increase in UBTI under Sec. 512(a)(7) by tax-exempt organizations, the rules, as the IRS notes, necessarily mirror the rules for taxpayers under Sec. 274. However, Sec. 512(a)(7) does not apply to the extent the amount paid or incurred is directly connected with an unrelated trade or business that is regularly carried on by the organization. The notice also clarifies the effect of the changes to Sec. 512(a)(7) on the requirement for organizations to file Form 990-T, Exempt Organization Business Income Tax Return, if they have gross income, included in computing UBTI, of $1,000 or more.
— Sally P. Schreiber, J.D., (Sally.Schreiber@aicpa-cima.com) is a JofA senior editor.