Introducing IRS Notice 2018-99

The Tax Cuts and Jobs Act (TCJA) eliminated employer business deductions for employee qualified transportation fringe (QTF) benefit expenses which includes qualified parking. These changes are effective for amounts paid or incurred after December 31, 2017.

Qualified parking is defined as parking “provided to an employee on or near the employer’s business premises or on or near a location from which the employee commutes to work.” It includes indoor and outdoor garages, as well as other parking and surface lots. It does not include any parking that is used by the employee for residential purposes.

Previously, this law change also affected tax-exempt organizations but was repealed retroactively in December of 2019. Tax-exempt organizations are eligible to file a claim for refund if any Unrelated Business Income Tax was paid as a result of the QTFs being treated as Unrelated Business Income.

Notice 2018-99 provides interim guidance to employers for use in determining the amount of nondeductible parking expenses or the corresponding increase in unrelated business taxable income. Notice 2018-99 provides very detailed methods, depending upon whether the employer is paying a third party for the parking expenses, or if the employer owns or leases the parking facility.

Scenario #1 – Employer pays a third-party provider for employee parking

If the employer pays a third party for employee parking spots (either directly or through reimbursement), the total annual cost of amounts paid for employee parking is nondeductible. If an employer pays more than the monthly limit per employee (i.e. $270 for 2020 and 2021), the excess is required to be treated as employee wages (and therefore, deductible as compensation).

Scenario #2 – Employer owns or leases all or a part of the parking facility

According to Notice 2018-99, until further guidance is issued, employers who own employee parking areas or have a property lease that includes employee parking may use any “reasonable method” to calculate nondeductible parking expenses.

The Notice also provides a four-step safe harbor method in determining how the disallowance of parking is calculated for employers who own or lease parking spaces used by their employees.

Step 1. Calculate the disallowance for reserved employee spots.

If the parking facility owned or leased by the employer has a reserved area for employee parking, the employer must determine the percentage of the reserved employee spots compared to total parking spots, then multiply that percentage by the total parking area expenses. For example, if there are 100 spots and 10 are reserved for employees, then 10% are nondeductible parking expenses.

Step 2. Determine the primary use of remaining spots (the “primary use test”). 

Employers should next determine if greater than 50 percent of the unreserved parking spots are available for the general public. If the primary use of the remaining parking spots is for the general public, the remaining parking expenses remain deductible.

“General public” includes (but is not limited to), customers, clients, visitors, individuals delivering goods or services, patients of a health care facility, students of an educational institution, and congregants of a religious organization. The general public does not include the employer’s employees, partners or independent contractors. “Primary use” is tested during normal business hours on a typical workday.

For example, if the parking lot has 100 spots and 10 are reserved for employee parking, and 46 of the remaining 90 are for public use (more than 50%), the remaining parking expenses are still deductible and you do not need to proceed to Step 3.

Step 3. Calculate the allowance for reserved nonemployee spots (if any). 

Employers who reserve parking spots for designated nonemployees, such as visitors, customers or delivery drivers will need to determine the percentage of such parking spots in proportion to the remaining parking spots. If the primary purpose is not for general public use (as set forth in Step 2), taxpayers may identify the number of spots reserved exclusively for non-employees (e.g., if employee use is prohibited by use of signage) and treat allocated costs as fully deductible.

Step 4. Determine remaining use and allocable parking expenses.

Employers who have remaining parking expenses related to spots that are not specifically categorized as deductible or nondeductible under Steps 1-3 must use a “reasonable method” to determine employee use of the remaining spots and treat costs allocated to those spots as nondeductible.

What counts as a parking expense? 

Notice 2018-99 clarifies which costs are to be included to determine deductibility. Expenses are based on employer cost, not “value,” so employers can’t simply use fair market value. Total 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, landscaping, lot attendants, security and rent/lease payments or a portion of such if not broken out separately. Depreciation is not a parking-related expense for these purposes. Similarly, expenses for items not directly in the parking facility, such as adjacent landscaping and lighting, are not included in the pool of expenses.

What if the employer has multiple parking areas?

If an employer owns or leases more than one parking facility in a single geographic location, the employer may aggregate the number of parking spots when calculating nondeductible parking expenses. But if the employer owns or leases parking facilities in more than one geographic location, the employer may not aggregate those parking spaces.

Impact on Employees

Amounts paid for parking by an employer will continue to be treated as tax-free to employees to the extent the value of the qualified parking benefits do not exceed $270 per month in 2020 or 2021. Any expenses paid for employees above these amounts will be taxable as wages to the employee.

Businesses may rely on the IRS Notice 2018-99 until further guidance is issued. For assistance or questions related to nondeductible parking expenses or the impact of these rules on your business or organization, please contact your GBQ tax advisor.


Article written by:
Rich Lundy, CPA
  Director, Tax & Business Advisory Services
Scott Eichar, CPA, CFP
  Senior Manager, Tax & Business Advisory Services
Chelsea Stockmeyer, CPA, CFE
  Senior, Tax & Business Advisory Services


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