Parking Costs May No Longer Be Deductible

The tax package that was passed in December 2017 included a provision that “qualified transportation” fringe benefits would no longer be deductible for for-profit taxpayers while not-for-profit organizations would be required to treat the expenses as unrelated taxable income. When hearing the term “qualified transportation benefit”, most of us will think about reimbursements for employee paid parking or mass transit costs. However, this term also applies to the “benefit” of parking at work, in a lot owned or leased by the employer. Most employers with on or offsite parking for employees are impacted by this law change.    

With all the other major changes in the law, this provision did not get much attention outside of the not-for-profit community, especially in localities where employees generally don’t pay to park or receive mass transit benefits. Nearly a year after the original law was passed, the Treasury Department issued additional guidance in the form of Notice 2018-99

The notice indicates that the law relates to the cost employers incur for parking, not the value the employees receive. The value of parking, up to $260 per month, is still excluded from an employee’s income.  It also announces that Treasury Department plans to issue regulations with additional guidance. In the interim, taxpayers can use the outlined four-step process for classifying these expenses into deductible or nondeductible categories.

For employers renting a specific number of spaces in a lot or deck, this is fairly straight forward. For employers who own or lease facilities that include parking, determining the cost of the parking (or an appropriate portion of the rent expense) is more complex.  

The notice specifies that parking 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 attendant expenses, security, and rent or lease payments or a portion of a rent or lease payment (if not broken out separately).” Depreciation is excluded.  

The starting point is first to determine all costs related to providing the parking and the number of spaces in total. Employers will also need to identify the number of spaces reserved for employees and reserved for non-employees. Using this information, the notice outlines a four-step process to determine how much of these expenses may not be deductible: 

  1. Calculate the disallowance for reserved employee spaces
  2. Determine the primary use of the remaining spaces
  3. Calculate the allowance for reserved non-employee spaces
  4. Determine remaining use and allocable expenses

The expense disallowed for reserved employee spaces is simply the ratio of these spaces to the total spaces, multiplied times the employer’s total parking expenses.  Partners, 2% shareholder of s-corporations, sole proprietors and independent contractors are NOT employees for these purposes. Reserved spaces could include a separate lot or section of a lot designated solely for employees, or specific spaces designated in an open lot. 

It is still possible to manage this for 2018 returns. If an employer chooses to change their parking arrangements to decrease or eliminate the number of spaces that are reserved before March 31, 2019, the changes will be treated as taking place on January 1, 2018. 

The second step is to determine the primary use of the remaining spaces. For the purposes of this notice, primary use is defined as greater than 50% of the use on a typical business day or normal operating hours of a day. If the primary use of the lot is for the general public (“customers, clients, visitors, patients, students, congregants”), the cost allocable to the non-reserved spaces will be deductible, or not subject to unrelated business income in the case of not-for-profit organizations.  

An employer may have a lot much larger than needed and has unused spaces on any given day. Unreserved spaces that may be used by the public but remain empty on a typical day are counted as general public use for the purposes of this test.   

If the use of the spaces varies significantly by day of the week or seasonally, the employer can use any reasonable method to estimate use. The method should be applied consistently and reviewed once additional regulations are issued. 

Step three is required if the primary purpose is not general public use and if it has other reserved spaces. A deduction is allowed for the expenses related to spaces reserved for non-employees—visitors, customers, partners, 2% shareholders of s-corporations, etc. The ratio of reserved spaces for non-employee use is multiplied times the total parking costs to determine the deductible expense under this step. 

Finally, if the primary use of parking is not for the general public, the employer will need to determine a reasonable percentage of employee use of the non-reserved spaces. This should be done by looking at the number of spaces used by employees on a typical business day. 

For additional information and to discuss ways to minimize the impact to your business, please contact your Smith Leonard tax advisor or email

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