Benefit News

IRS Issues Interim Guidance for Employers to Determine Amount of Parking Expenses that are Nondeductible

December 12, 2018

On December 10, 2018, the IRS released Notice 2018-99 (available here), which provides interim guidance for an employer (taxpayer) to determine the amount of parking expense that is nondeductible under Code Section 274(a)(4) when the taxpayer provides parking for its employees. In addition, this Notice includes guidance for tax-exempt organizations to determine the corresponding increase in the amount of unrelated business taxable income (UBTI) under Code Section 512(a)(7) attributable to the nondeductible parking expenses.

The IRS also announced that together with the Department of the US Treasury, it intends to publish proposed regulations that will include guidance on above. Until further guidance is issued, however, taxpayers may rely on the guidance provided in this Notice to determine the amount of expenses for qualified transportation fringes that are nondeductible under Code Section 274(a)(4) or treated as an increase in UBTI under Code Section 512(a)(7).


Prior to January 1, 2018, Code Section 274 allowed taxpayers to take a deduction for qualified transportation fringe expenses, including for qualified parking expenses that they provided to their employees. However, the Tax Cuts and Jobs Act, passed late last year, amended Code Section 274 effective for amounts paid or incurred after December 31, 2017, to generally disallow a deduction for expenses with respect to all qualified transportation fringes provided by taxpayers to their employees, which includes qualified parking expenses.

In addition, the Tax Cuts and Jobs Act amended Code Section 512(a)(7) to generally provide that a tax-exempt organization's UBTI is increased by the amount of the qualified transportation fringe expense that is nondeductible under Code Section 274.

Determining the Amount of Nondeductible Parking Expenses Under Code 274

Under the interim guidance, parking expenses are divided into two categories for purposes of determining the amount of nondeductible parking expenses, depending upon whether (1) payments are made to a third party to provide parking to the employees, or (2) the taxpayer owns or leases the parking facility where the employees park.

  1. Taxpayer Pays Third Party for Employee Parking Spots

    If a taxpayer pays a third party to permit its employees to park at the third party's parking lot or garage, the nondeductible amount of the parking expenses under Code Section 274(a)(4) generally is calculated as the taxpayer's total annual cost of employee parking paid to the third party. However, if the amount paid to the third party exceeds the Code Section 132(f)(2) monthly limitation on exclusion, which for 2018 is $260 per employee (for 2019, the limit increases to $265), that excess amount must be treated by the taxpayer as compensation and wages to the employee and is not included in the taxpayer's Code Section 274(a) nondeductible amount.

    For example, in 2018, a taxpayer pays a third party who owns a parking garage across the street from it, $100 per month for each of its 10 employees to park in the third party's garage for a total of $12,000 per year ($100 x 10 x 12 =$12,000) in valid qualified transportation fringe expenses. Since $100 per month is less than the 2018 monthly limitation of $260, the entire $12,000 would be disallowed under Code Section 274. However, if instead of $100 per month, the third party charges the taxpayer $300 per month ($36,000) for each employee to park in its garage, the excess over $260 per month ($40) would be treated as taxable compensation to the employee. $31,200 ($260 x 10 x 12) in total would be not deductible, but a total of $4,800 for the year ($40 x 10 x12) will remain deductible for the taxpayer.

  2. Taxpayer Owns or Leases All or a Portion of a Parking Facility

    Until further guidance is issued, if a taxpayer owns or leases all or a portion of one or more parking facilities where its employees park, the nondeductible amount under Code Section 274(a)(4) may be calculated using any reasonable method. To assist taxpayers in determining whether a method is reasonable or not, the IRS has indicated that it would not be reasonable to use the value of employee parking as the nondeductible amount. The IRS also indicated that generally, after January 1, 2019, a method that fails to allocate expenses to reserved employee spots also will not be considered a reasonable method.

    In this guidance, the IRS has put forth the following 4-step methodology that it considers to be a reasonable method, which it illustrated by including several examples in the Notice.

    • Step 1: Calculate the disallowance amounts for parking spots exclusively reserved for the taxpayer's employees (reserved employee spots).

      This could include spots reserved using specific signage (e.g., "Employee Parking Only") or a segregation of the facility or portion of the facility by a barrier to entry or limited by terms of access.

      The percentage of reserved employee spots in relation to total parking spots must then be determined and that percentage multiplied by the taxpayer's total parking expenses for that parking facility to determine the nondeductible amount.

      Until March 31, 2019, taxpayers with such reserved employee spots may change their parking arrangements to decrease or eliminate their reserved employee spots (and thus, treat them as not reserved employee spots retroactively back to January 1, 2018).

    • Step 2: Determine the primary use of the remaining spots (the "primary use test").

      In this step, the taxpayer will assess whether the primary purpose, or "primary use", of the remaining spots in the parking facility is to provide parking to the "general public", in which case, the general public exception under Code Section 274 (e) could apply and none of the remaining total parking expenses for the parking facility will be disallowed as a deduction.

      The Notice defined "primary use" to generally mean greater than 50 percent of actual or estimated usage of the parking spots in the parking facility, and "general public" to include, but not be limited to, customers, clients, visitors, individuals delivering goods or services to the taxpayer, patients of a health care facility, students of an educational institution, and congregants of a religious organization. Furthermore, general public does not include employees, partners, or independent contractors of the taxpayer.

    • Step 3: Calculate the allowance for reserved nonemployee spots.

      If the primary use of a taxpayer's remaining parking spots is not to provide parking to the general public, the taxpayer may identify the number of spots exclusively reserved for nonemployees, such as spots reserved for visitors and coustomers, as well as spots reserved for partners, sole proprietors, and 2-percent shareholders of S Corporations.

      To the extent that the taxpayer has reserved nonemployee spots, to determine the amount of the deduction for the remaining total parking expenses that is not disallowed under Code Section 274(a), the taxpayer must determine the percentage of the reserved nonemployee spots in relation to the remaining total parking spots and multiply that percentage by the taxpayer's remaining total parking expenses.

    • Step 4: Calculate any remaining use and allocable expenses.

      If after completing Steps 1-3 above, there are remaining parking expenses not specifically categorized as deductible or nondeductible, the taxpayer must reasonably determine 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.

Code Section 512(a)(7) Issues for Tax-exempt Organizations

The rules for determining the increase in UBTI under Code Section 512(a)(7) mirrors the rules for taxpayers under Code Section 274. Accordingly, the amount of the deduction disallowed under Code Section 274(a)(4) would, in the case of a tax-exempt organization with the same relevant facts, result in an increase in UBTI under Section 512(a)(7). This Notice also includes examples illustrating the application of these principles to tax-exempt organizations. However, Code Section 512(a)(7) does not apply to the extent the amount paid or incurred that 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.

For additional information, please contact your Burnham Benefits Consultant or Burnham Benefits at 949-833-2983 or

Burnham Benefits does not engage in the practice of law and this publication should not be construed as the providing of legal advice or a legal opinion of any kind. The consulting advice we provide is intended solely to assist in assessing its compliance with the Patient Protection and Affordable Care Act and other applicable federal and state law requirements, and is based on Burnham Benefit’s interpretation of federal guidance in effect as of the date of this publication. To the best of our knowledge, the information provided herein, and assumptions relied on, are reasonable and accurate as of the date of this publication. Furthermore, to ensure compliance with IRS Circular 230, any tax advice contained in this publication is not intended to be used, and cannot be used, for purposes of (i) avoiding penalties imposed under the United States Internal Revenue Code or (ii) promoting, marketing or recommending to another person any tax-related matter.

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