The Tax Cuts and Jobs Act of 2017 (“TCJA”) disallowed a deduction to an employer for any qualified transportation fringe (QTF) provided to an employee. A QTF includes, among other things, “qualified parking” on or near the business premises of the employee provided to its employees (Internal Revenue Code Secs. 274(a)(4) and 132(f)). For the most part, the new rule affects only the employer’s deduction and not the ability to exclude the fringe benefit from the taxable income of the employee. The new rules are very broad in scope and will affect many employers that provide parking to their employees.

Besides the effect on taxable entities for parity purposes, the new rule would also apply to a tax-exempt employer which is now required to increase its unrelated business taxable income (“UBTI”) by the amount of parking expenses that would be nondeductible by a taxable employer (Code Sec. 512(a)(7)). In addition to parking, QTFs impacted by the new rules also include transportation in a highway commuter vehicle and transit passes.

On December 20th, the Internal Revenue Service along with the Treasury Department issued highly-anticipated interim guidance, Notice 2018-99, on the determination of (1) the QTF parking expenses that are no longer deductible under Section 274(a)(4); and (2) the increase in UBTI resulting from the nondeductibility of those expenses. This alert focuses on the impact of the new rules and IRS guidance primarily from the perspective of a for-profit employer, though the rules apply in similar fashion to tax-exempts.

Interim Guidance

Based on Notice 2018-99, the determination of the nondeductible parking expense is based on the costs paid or incurred for parking and not on the value of the parking provided to the employee. Specifically, the calculation is dependent upon whether (1) the employer pays a third party for employee parking; or (2) the employer owns or leases the parking facility.

Third-Party Parking Expenses: Amounts paid by an employer to a third party for employee parking is generally treated as a disallowed expense. However, if the amount paid by an employer exceeds the monthly exclusion limitation ($260 per month per employee for 2018), the excess amount is treated as compensation to the employee and must be included on the employee’s W-2. Any amounts included on the employee’s W-2 should be excepted from the disallowance rule and deductible as wages.

Employer-Owned/Leased Parking Facility: If the employer owns or leases a parking facility, it is permitted to use any reasonable method to calculate expenses allocable to employee parking. (See below for a discussion of allocation of expenses.) Total parking expenses include the following: repairs, maintenance, utility costs, insurance, property taxes, interest, snow/ice removal, leaf removal, trash removal, cleaning, landscaping costs, parking lot attendant fees, security, and rent or lease payments. Fortunately, depreciation is excluded from the definition of a parking “expense” which significantly reduces the potential tax liability for owners of parking facilities.

Reasonable Method for Allocation of Expenses

Notice 2018-99 provides a detailed 4-step methodology as a reasonable method to allocate expenses when a parking facility is owned or leased by an employer.
First, the allocable cost of spots reserved for employee parking is disallowed. For example, if an employer incurs total expenses of $10,000 for a parking facility that has 500 spaces, 50 of which are reserved for employee parking, the nondeductible portion would be $1,000 ($10,000 x 50/500).

Second, if the primary use of the remaining spots is for the general public, the remainder of the parking expenses would not be subject to disallowance. In general, the “primary use” test is satisfied if use by the general public exceeds 50% of the actual usage of those spots. Parking spaces available to the general public are typically those used by customers, clients, visitors, and individuals delivering goods or services.

As an example, a parking facility with 500 spaces (with no employee-reserved parking) in which employees usually utilize 50 spots, with the remaining spots occupied by visitors would satisfy the primary use test. Accordingly, the expenses for that parking facility would be exempt from disallowance under this general public exception.

The third step allocates parking expenses attributable to spots reserved for non-employees such as visitors and customers – as well as partners, sole proprietors, and 2-percent shareholders of S Corporations – which are also exempt from the Section 274 disallowance.

Finally, any remaining parking expenses are allocated based on the usage of the facility during normal business hours on a typical business day.

Special Transition Rule for Reserved Employee Spots

An employer that currently has reserved employee spots has a limited opportunity to change the treatment of those spots. Under the IRS Notice, an employer may change their parking arrangements (such as signage or access) by March 31, 2019 and treat those spots as not reserved employee spots subject to the disallowance and apply this retroactively to January 1, 2018.


Taxpayer G, an accounting firm, leases a parking lot adjacent to its office building. G incurs $10,000 of total parking expenses related to the lease payments. G’s leased parking lot has 100 spots that are used by its clients and employees. G usually has approximately 60 employees parking in the leased parking lot in non-reserved spots during normal business hours on a typical business day.

Step 1. Because none of G’s leased parking spots are exclusively reserved for employees, there is no amount to be specifically allocated to reserved employee spots.

Step 2. The primary use of G’s leased parking lot is not to provide parking to the general public because 60% (60/100 = 60%) of the lot is used by its employees. Thus, G may not utilize the general public exception from the Section 274(a) disallowance provided by Section 274(e)(7).

Step 3. Because none of G’s parking spots are exclusively reserved for nonemployees, there is no amount to be specifically allocated to reserved nonemployee spots.

Step 4. G must reasonably determine the use of the parking spots and the related expenses allocable to employee parking. Because 60% (60/100 = 60%) of G’s parking spots are used by G’s employees during normal business hours on a typical business day, G reasonably determines that $6,000 ($10,000 x 60% = $6,000) of G’s total parking expenses is subject to the disallowance.

Planning and Compliance Points

Notice 2018-99 provides welcomed guidance regarding employee parking and disallowance of parking expenses. Although depreciation costs are not considered as parking expenses, all employers should analyze expenses associated with any parking facility in order to appropriately calculate any disallowed deduction. In addition, where an employer pays a third party for employee parking spots, consideration should be given as to whether a portion those expenses should be reported as W-2 wages.

Further, if an employer offers reserved spaces for employees, it may wish to decrease or eliminate reserved employee parking in order to minimize the disallowance of deductions.   As noted above, a transition rule permits a modification in employee reserve spot designation which can be applied retroactively to January 1, 2018.

We Can Help

If you have questions on the new rules for employer-provided parking, please contact an Elliott Davis tax advisor.

The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.