One aspect of The Tax Cuts and Jobs Act that may unexpectedly impact your business is the amendment to make “Qualified Transportation Fringes” nondeductible for tax purposes. Under the new tax law, expenses such as providing your employees with a place to park their vehicles may now be nondeductible for your company.
The Tax Cuts and Jobs Act amended section 274(a)(4) of the Internal Revenue Code to disallow the deduction of expenses related to “Qualified Transportation Fringe Benefits” (QTFs) provided to employees. These new rules are applicable to amounts paid or incurred after December 31, 2017. As with other fringe benefits, an employer may still deduct these costs if they choose to include these amounts as taxable income on the W-2s issued to employees.
- Expenses for transportation in a commuter highway vehicle between an employee’s residence and place of employment
- Expenses for any transit passes for employees
- Expenses for qualified parking
While the first two items on this list are fairly clear, the loss of a deduction for qualified parking expenses will likely affect a large number of businesses, and the expenses which fall into this category require further consideration.
Qualified parking expenses include parking provided to an employee on or near the business premises of the employer or on or near a location from which the employee commutes to work. While the official regulations have not yet been issued, the IRS has provided interim guidance on how to determine the nondeductible portion of parking expenses in two main situations: (1) where the taxpayer pays a third party for employee parking spots; and (2) where the taxpayer owns or leases all or a portion of a parking facility.
If an employer is paying a third party an amount so that employees may park at the parking lot or garage owned by the third party, the total annual cost paid to the third party is generally considered a nondeductible parking expense to the employer.
If instead the employer owns or leases the parking facility in which the employees park, the IRS has tentatively prescribed a four-step method to calculate the amount of nondeductible expense. This four-step method aims to allocate the employer’s total parking expenses between parking for the general public and parking reserved for employees. For these purposes, an employer’s total parking expense includes: repairs, maintenance, utilities, insurance, property taxes, interest, labor (such as security or parking attendants), and rent or lease payments. Depreciation on the structure is NOT included in this category, and remains fully deductible.
If your business incurs any expenses related to parking facilities, it is important to consider the new laws surrounding qualified transportation fringe benefits when filing your next tax return. While this article has covered the basic changes surrounding this area of the tax code, the calculations and impact on your tax return can be complex. If you have questions about these changes or would like to assess how your business may be impacted, please contact our office at (858) 558-9200.