TCJA Takes a Bite Out of Employer Deductions Related to Transportation Fringe Benefits
Under The Tax Cuts and Jobs Act (“TCJA”), many businesses are encountering some new challenges related to transportation fringe benefits.
IRC Sec. 274(4) places severe limitations on the deduction for any qualified transportation fringes provided to the employee by the employer.
A qualified transportation fringe is defined as any of the following:
- Transportation in a commuter highway vehicle for travel between the employee’s residence and place of employment
- Transportation passes
- Qualified parking
- Qualified bicycle commuting reimbursement
In this discussion, we focus on transportation passes and qualified parking. Employers can no longer deduct payments for qualified transportation fringes unless they are provided for the safety of an employee. The loss of the deductions also impacts not-for-profit employers by creating unrelated business taxable income.* If you are an employer that provides transportation passes to employees or allows employees to fund their transit passes through a pre-tax (salary reduction) plan, you will no longer be allowed a tax deduction for these amounts. The TCJA now requires the employer to forfeit the salary deduction for the amount that the employees elect to exclude on a pre- tax basis.
Employees will continue to exclude these amounts from taxable income, provided the benefit is within the monthly exclusion amount. Amounts above the exclusion amounts are required to be included in the employees’ W-2s as compensation.
If an employee chooses the 2019 maximum pre-tax salary reduction of $265 a month ($260 for 2018) the employer will no longer receive a tax deduction for that amount. Multiply that by 12 months and the number of employees and this amount can become a significant addition to the taxable income of a business. Also, consider the local laws in New York City, the District of Columbia, and the San Francisco Bay area that require certain employers to maintain qualified transportation fringe benefit programs. In these cities, an employer must provide this fringe benefit program for employees despite foregoing the tax deduction for that portion of their wages.
Qualified parking is parking provided to the employee on or near the business premises of the employer. As long as the benefit is under the monthly exclusion amounts listed above for transportation benefits, it is not taxable to the employee. However, the result is different for the employer. Whether an employer pays a third party for a parking lot, owns the building and lot or leases the building or lot, it will likely be losing a tax deduction.
IRS Notice 2018-99 issued on December 10, 2018 provides guidance on how to determine the amount of employee parking that is non-deductible. The next few paragraphs are a brief summary of the key items in the Notice.
If the employer pays a third party for parking spots, the disallowance is the amount paid to the third party less any amounts included in the employees’ taxable income.
If the employer owns or leases all or part of a parking lot, it can be more complicated to determine the non-deductible portion of the parking lot. According to the Notice, the employer can compute the disallowance using any reasonable method (until further guidance is issued) or it can follow the method shown in Notice 2018-99. The value of the spaces in the parking lot is not a reasonable method.
In order to follow the guidance in the Notice, the employer must determine the total parking costs for the lot. These expenses include but are not limited to repairs, maintenance, utility costs, insurance, property taxes, interest, snow and ice removal, leaf removal, trash removal, cleaning, landscape costs, parking lot attendance expenses, security and rent or lease payments -- but not depreciation. What is a reasonable method to determine how much of your monthly rent relates to the parking lot? How do you determine how much of your property taxes relate to the parking lot? The Notice does not provide answers to those questions.
If the employer can determine the parking costs, then the Notice gives additional steps to follow. The first step is to establish how much of the parking costs are for reserved employee parking (non-deductible), then whether the primary use is for the general public (customers, clients, visitors and individuals delivering goods or services to the company). If more than 50% of the use is for the general public, then stop. All parking costs are deductible except for the costs of reserved employee parking. If less than 50% of the lot’s use is for the general public, the employer must continue on to analyze the portion that is reserved for non-employee visitors, customers or owners of the business (the additional portion may be non-deductible). If there are any remaining parking costs not specifically categorized as deductible or non-deductible, the employer must consider the employee use of the remaining parking spots during normal business hours on a typical business day and the related expenses allocable to employee parking spots. The method may be based on actual or estimated usage.
The Notice allows the employer to change its parking arrangements to reduce or eliminate those parking spots reserved for employees on or before March 31, 2019 and have these changes apply retroactively to January 1, 2018 (potentially reducing non-deductible parking expenses and taxable income for the 2018 tax reporting).
An employer should also consider the state tax treatment of these disallowed deductions. If a state has not conformed to the TCJA, these amounts may be deductible at the state level.