New Law Nips Employee Parking Expense Deductions
What TCJA gives, it also takes away. Veterinary practice expenses related to employee parking may no longer be deductible for many employers.
In order to pay for tax cuts, Congress eliminated certain deductions to offset tax revenue loss, as part of the shell game of shifting complex rules to keep tax revenues steady.
Little did you know or think that employer-owned and employer-provided parking are fringe benefits, that fall in the category of “Qualified Transportation Fringes” (Section 274 of the Internal Revenue Code). Under pre-2018 law, if a veterinary practice provided its employees’ parking, the employees generally had no reportable income from the benefit, and the practice could deduct the costs of providing the benefit.
Under new law (the Tax Cuts and Jobs Act or TCJA), employees can still exclude the parking benefit from income, up to certain limits (and then the excess amount must be included in taxable wages, just as it was under prior law). BUT, employers can no longer deduct the costs, whether renting a parking lot or paying for expenses related to parking areas.
The IRS issued temporary guidance (Notice 2018-99) about how to determine nondeductible parking expenses under the law change, until such time the IRS publishes proposed regulations.
Notice 2018-99 makes the following important point about Congressional intent, that may indicate the future treatment of other qualified benefits that are as of yet untaxed (think health insurance, for example): “As part of its broader tax reform effort, the Committee believes that certain nontaxable fringe benefits should not be deductible by employers if not includible in income of employees.”
Veterinary practice employers and their advisors need to be familiar with Notice 2018-99 guidance in order to prepare 2018 tax returns.
Two different scenarios are discussed in the notice: where the employer pays a third party for employee parking spots, and second, where the employer owns or rents a parking facility or lot for the benefit of its employees. Eight total examples are given, using various rules to allocate costs that are deductible and not deductible. Unfortunately they don’t clarify what happens with a triple net lease arrangement, such as that typical in veterinary practice ownership which is separate and distinct from practice real estate ownership.
Before we dive down that rabbit hole, let’s simplify. Think about your own situation. Is the veterinary parking area used greater than 50% by the general public? Does your parking area have NO reserved employee parking spots? If “yes” to both these questions, then the “primary use” is to provide parking to the public and all expenses are deductible. You don’t need to go further.
If your practice has set aside some reserved parking spots for employee use, then consider eliminating them. The notice gives taxpayers until March 31, 2019 to ditch this complexity in determining what is and is not deductible retroactively to January 1, 2018. This move will possibly increase expense deductibility if allocation is necessary due to greater than 50% parking space use by employees.
If you run an equine or food animal practice, parking areas likely have copious room for client horse and stock trailer rigs. Until the IRS issues further guidance, the notice states the “disallowance may be calculated using any reasonable method.” While the notice examples may help you think this through, none of them will exactly apply to your situation. Consider using Google Maps or property development blueprints to outline all parking areas and apportioning public and employee usage; this may constitute a reasonable approach to figuring and documenting the parking area proportions.
Any practice with limited parking, that puts employee use at greater than 50%, will need to go through the notice and examples to determine allocation.
The next step is to ascertain what costs the practice expends in total and what portion is attributable to employee parking (non-deductible) and what portion is client/public parking (deductible).
The notice is explicit about multiple expenditures employer might make that must be included in total parking expenses, included but 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 payment or a portion of a rent or lease payment (if not broken out separately).
Depreciation is not included, nor are expenses paid for items not located on or in the parking facility, including items related to property next to the parking facility, such as landscaping or lighting. Yes, you must determine whether landscaping is or is not included!
Assuming your practice has a triple net lease agreement with the real estate owner/entity, then you will need to figure out what portion of the rent paid pertains to the parking area. We have never seen a lease that segregates this expense, and this may be a time to amend lease agreements to be explicit about building versus parking area rental, and nail down exactly what you intend to optimize deductions.
Under a triple net lease agreement, all other parking area related expenses likely would be paid by the practice and can be isolated by going through the detail of the general ledger. Ascertaining what portion of real estate taxes attribute to the parking area will be as vague as determining what portion of the rent applies. Document your conclusions and keep them with other information supporting tax return positions.
Unfortunately, the solutions to the problems the new law creates are complicated and take away a deduction that many or most of us never considered to be an employee benefit. One way or another, practice owners, employees, or both are bearing the cost for the new qualified parking non-deduction rule.
One way to avoid loss of the deduction is to make a taxable bonus to all employees, that they then use to pay for their parking on an after-tax basis. While employer and employees then share the cost, both will also pick up additional social security and Medicare taxes on the bonus amounts. It may be possible to gross up 2018 qualified parking expenditures and bonus them to employees by March 15, 2019 in order to preserve the costs a practice would have previously been able to deduct prior to 2018.
Talk with your tax advisor to establish a plan of managing this unforeseen complication of so-called tax simplification.
Marsha Heinke, DVM, EA, CPA, CVPM | 02/18/2019