On Monday, December 10, 2018, the Internal Revenue Service issued Notice 2018-99 providing interim guidance to calculate the amount of non-deductible parking and other qualified transportation fringe (QTF) expenses for businesses and tax-exempt organizations.
- The Tax Cuts and Jobs Act (TCJA) amended code sections 274 and 512 for amounts incurred or paid after December 31, 2018.
- Code section 274 (a)(4) provides that no deduction is allowed for any QTF provided by taxpayers to their employees.
- Code section 512(a)(7) requires tax-exempt organization’s increase unrelated business taxable income (UBTI) for non-deductible QTF. These are reported on Form 990T and applicable taxes are payable at 21% for federal purposes.
What are Qualified Transportation Fringe Expenses?
These include transportation in a commuter highway vehicle to and from work, any transit passes and qualified parking expenses. Qualified parking expenses are further defined as parking provided to an employee on or near the business premises of the employer or a location where the employee commutes to work.
What Guidance was Issued?
Guidance issued on December 10, 2018 provides examples of ways to identify and calculate non-deductible parking expenses including a four-step process when taxpayers and tax-exempt organizations own or lease parking facilities. This guidance allows for any reasonable method in calculating the non-deductible expenses. The overall effect of this guidance shows that reserved or unreserved parking used primarily for employees are nondeductible expenses for taxpayers. It further explains the nondeductible expenses increase UBTI for exempt organizations.
Code Section 132(f)(2) allows for $260/month of parking expenses to be excluded from an employee’s compensation as a tax-free benefit to the employee. Any monthly parking expense exceeding $260/month must be added to the employee’s Form W-2. Employers should make the appropriate calculations before year-end to make payroll deposits on applicable wages. This will also be an important reporting requirement for Form W-2 and Form 941 reporting which must be completed by January 31, 2019. The $260/month amount is tax free to the employee but the amount is still not deductible by taxpayers under Code Section 274(a)(4). Since the $260/month is taxable as unrelated business income for tax-exempt organizations, some organizations have decided not to provide this benefit to their employees and are reporting the amount as additional compensation to the employees on their Form W-2.
The IRS also issued Notice 2018-100 on Monday, December 10, 2018 providing for a waiver of estimated tax penalty relief for certain tax exempt organizations for underpayment of estimated income tax payments required to be made on or before December 18, 2018, to the extent they underpay estimated income tax due to changes in the tax treatment of certain QTFs. The relief is further limited to tax-exempt organizations who were not required to file Form 990-T for the taxable year immediately preceding the organization’s first taxable year ending after December 31, 2017.
Contact PBMares today to see how parking expenses can be qualified transportation fringes.