Disallowance of Business Deductions for Employee Parking Benefits
Before the passage of the Tax Cuts and Jobs Act of 2017 (TCJA), the Internal Revenue Code allowed employers to deduct up to $255 per employee for qualified parking. This deduction is no longer an allowable business expense. The new tax law removes qualified employee transportation fringe benefits from the list of deductions available to employers starting in the 2018 taxable year.
The Code continues to allow employees to exclude from their taxable income payments to them by their employer for workplace parking costs through an employer-sponsored salary reduction program. Employers, however, are no longer allowed to deduct any costs associated with providing what were previously “qualified transportation fringe benefits”, except as necessary for ensuring the safety of an employee.
The IRS does offer guidance on what it considers ‘necessary for ensuring the safety of an employee’ in its Fringe Benefits Audit Techniques Guide last reviewed in December of 2017. The Guide states “Under § 1.132-5(m)(2)(i), the employer must demonstrate the existence of a bona fide security concern. A bona fide security concern exists if the facts and circumstances demonstrate a specific basis for concern regarding the safety of the employee. Examples of specific bases for a bona fide security concern include a specific threat to harm the employee or a recent history of violent terrorist activity in the geographic area in which the transportation is provided.” This deduction is further qualified by being only available when employers have an overall security program.
The Washington Post reports that Congress made this change as a partial offset for the lowering of corporate tax rate from a high of 35% to a single rate of 21%. This is not, however, a trade-off for smaller businesses without C-corporation status which do not benefit from the lower tax rate. Further, the 20% deduction given to members of “pass through” business entities, such as limited liability partnerships and limited liability corporations, has limited application as a trade-off because it does not apply to entities in service industries. It is suggested that parking reimbursement benefits will disappear because employers will find it cost effective to discontinue parking allowances altogether. Others argue that in some places commuter benefits have become too commonplace to do away with—similar to healthcare benefits. They maintain that without reasonable allowances, top talent will be less attracted to the business.
One alternative may warrant exploration: If an employer rents office space and pays for parking expenses separately, it may be able to renegotiate its lease to include parking. This probably would only be feasible if parking and office space were offered by the same landlord. This alternative may not last long, however, since some experts believe that the IRS will quickly figure out the workaround and come down harshly against it.
A business must decide how to proceed. It must weigh the benefit of offering the parking allowance during hiring negotiations and its importance to future employees with the cost of no longer being able to deduct the expense. The business may also entertain the possibility of bundling rent and parking expenses, if feasible, keeping in mind that it is uncertain whether the IRS will look upon this bundling favorably.
For more information see:
- Martine Powers, With new tax law, will employers continue to subsidize your commute? The Washington Post (January 6, 2018).
- Paul Drizner and Michael Lobie, Tax Reform Impact on Employers and Employees, HRWatchdog, (December 22, 2017).
- Stephen Miller, President Signs Tax Bill Altering Employee Benefits, Society for Human Resource Management (December 20, 2017).