The 2017 Tax Cuts and Jobs Act (TCJA) has helped a number of tax prepares make the decision to finally retire! With so many changes to the tax law, what seemed to be a simplification of the tax return, became one of the biggest tax law changes that we've seen in years! Amongst the various TCJA changes, you may have missed that the employee expense for qualified transportation fringe benefits are nondeductible effective January 1st of 2018, retroactively. The new regulation effects businesses that provide transportation benefits such as paid transit passes, other means of transportation to work, as well as employee parking. The regulation also effects churches and exempt organizations as it creates what's called unrelated business taxable income (UBTI).
The basic reasoning for the disallowance of qualified transportation fringe benefits as a deduction is the Congressional intent of the tax reform for this change, which states, "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" (IRS Notice 2018-99). In general, transportation fringe benefits which exceed $265 (in 2019) per month must be reported on an employee's W-2 and are 100% deductible to the business. However, the portion that is under the $265 limit is not reported on the W-2 and is no longer deductible. Knowing what the expense for paying an employees transit pass is easy. However, if your business owns the parking lot adjacent to your business, calculating the portion attributed to the employees as a benefit can be tricky. The Parking Lot (or Parking Facility) To calculate the expense of the parking lot (or facility) attributed to an employee as a benefit, we must primarily look at two variables: (1) the reserved spots, as well as (2) the actual (or estimated) use of the lot for customers (or visitors) versus employees. We must first count the number of total parking spots. The total expense for maintaining the parking lot is than prorated. Parking spots reserved for customers are deductible. Reserved spots for employees are not deductible. Unreserved spots which are available for both the public as well as the employees are prorated based on usage and availability. If, for example, the lot is primarily available for public use, that is more than 50%, then all of the unreserved spots are deductible. If, however, the lot is used primarily by the employees, then only the percentage of spots which are available for customers on a regular business day are deductible. Parking lot expenses include: repairs; maintenance; utility costs; insurance; property taxes; interest; snow and ice removal; leaf removal; trash removal; cleaning; landscape costs; parking lot attendant expenses; security; rent or lease payments, or a portion of rent or lease payments, if not broken out separately. Depreciation expense of the parking lot is fully deductible and should not be added in calculating the fringe benefit. Additionally, property which is next to the parking lot or parking facility, not located on the lot (or in the facility), such as landscaping or lighting should not be included in the fringe benefit calculation. How to avoid losing the parking lot deduction,
Remove employee-reserved parking signs
Avoid designating employee-only parking access
Make enough parking so that more than 50% of the lot is available for the public
Churches and/or Tax-Exempt Organizations In general, a church or tax-exempt organization that has less than $1,000 in unrelated business taxable income (UBTI) is not required to file a Form 990-T annual tax return. A non-deducible expense results in UBTI. An employee transportation fringe benefit, such as reserved parking for the pastor, is not deductible and therefore creates UBTI. If, however, apart from the transportation fringe, the church or tax-exempt organization does not have any other UBTI, then the organization is not required to file a tax return as long as the benefit does not exceed the $1,000 threshold for the year. Vera V. Likhonin, EA Stewardship Tax & Accounting, LLC Reference: IRS Notice 2018-99