End Reserved Employee Parking by March 31 or Owe 2018 Taxes

To avoid taxes on parking benefits, reclassify employee parking spots as open spots

Stephen Miller, CEBS By Stephen Miller, CEBS March 25, 2019
End Reserved Employee Parking by March 31 or Owe 2018 Taxes

updated March 28, 2019

Employers have until March 31, 2019, to reduce or eliminate parking spots reserved for employees, or they could owe 2018 taxes on those spots, which are considered an employee benefit.

Under the Tax Cuts and Jobs Act (TCJA), as of 2018, "the costs of providing qualified parking to employees as a tax-free fringe benefit is not deductible by for-profit employers and is subject to a 21 percent tax for tax-exempt organization employers" as an unrelated business income tax expense, wrote Scott Galbreath, an attorney with law firm Murphy Austin in Sacramento, Calif. 

While employers may no longer deduct payments for qualified parking and transit benefits, the payments—within annual limits—may be excluded from employees’ taxable wages.

"Employers can no longer deduct payments for qualified transportation fringes unless they are provided for the safety of an employee," wrote Carolyn Dolci, a tax partner at advisory and accounting firm EisnerAmper in Iselin, NJ. "Qualified parking is parking provided to the employee on or near the business premises of the employer," she explained. "As long as the benefit is under the monthly exclusion amounts"—$265 a month (2019), up from $260 a month (2018)—"it is not taxable to the employee."

In December 2018, the IRS issued Notice 2018-99 alerting employers to reclassify by March 31, 2019, some or all employee parking spots as open spots. The reclassification is retroactive to Jan. 1, 2018. Reclassifying parking spots "could save significant taxes for the 2018 tax year, but time is running out," Galbreath noted.

To avoid retroactive and future taxes on parking benefits, employers should "change the method that made the parking reserved exclusively for employees, such as signage or limited access," Galbreath advised, adding, "This should be done before the meter expires at the end of this month."

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Parking Requirements

The December 2018 guidance also clarified how employers can calculate the tax on qualified parking benefits.

For parking expenses to qualify as a business deduction, more than half the available space must be used by the general public during the business's normal operating hours. "Empty, unreserved spaces available to the general public and not used by employees are also counted as used by the general public," wrote Susan Mehlman, leader of the compensation and benefits practice at accounting and consulting firm Moss Adams in Seattle. The term "general public" includes customers, clients, visitors and people delivering goods or services to the business, she noted. "It doesn't include employees, partners or independent contractors of the business."

If more than 50 percent of the total parking spots are available to the general public, "the remaining total parking expenses are deductible under Section 274(e)(7)" of the tax code, she explained.

Once the parking spaces are recharacterized, employers should determine how much of the parking costs are taxable. "This includes determining how many spaces are reserved or primarily used (more than 50 percent of the time) for the general public, which are deductible by for-profit employers and not taxable to exempt employers," Galbreath wrote.

If no spaces are reserved for employees or the general public, "an allocation based on the typical use of the parking on a normal day between employee use and general public use must be determined," he pointed out.

Employers should consider eliminating reserved parking, "even those spots provided to reward employees for a limited amount of time," such as for the employee of the month, said David Fuller, an attorney in the Washington, D.C., office of McDermott, Will and Emery.

"An employer should also consider the state tax treatment of these disallowed deductions," Dolci noted. "If a state has not conformed to the TCJA, these amounts may be deductible at the state level."

Related SHRM Article:

IRS Offers Relief for 2018 Taxes on Parking Benefits, SHRM Online, December 2018

Commuting and Adoption Benefit Amounts Rise in 2019, SHRM Online Benefits, November 2018

What Happens After Tax Law Scuttles Employers' Deduction for Commuting Benefits?SHRM Online, December 2017


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