In Notice 2018-99 the IRS has provided guidance to employers and tax-exempt organizations attempting to deal with provisions in the Tax Cuts and Jobs Act dealing with employer-provided parking.

As the Notice explains:

As amended by the Act, § 274(a)(4) generally disallows a deduction for expenses with respect to QTFs provided by taxpayers to their employees, and § 512(a)(7) generally provides that a tax-exempt organization’s UBTI is increased by the amount of the QTF expense that is nondeductible under § 274.

The notice provides guidance on computing the amount of disallowed deduction (for taxable entities) and UBTI (for tax-exempt organizations) to be recognized under this provision.

The IRS first notes that if the fair value of the parking benefit received by the employee exceeds the limitation under IRC §132(f)(2) for exclusion from the employee’s income, the expenses are deductible to the extent such fair market value exceeds the exclusion.

If a taxpayer pays a third party for the employee parking, the IRS provides the following valuation method:

If a taxpayer pays a third party an amount so that its employees may park at the third party’s parking lot or garage, the § 274(a)(4) disallowance generally is calculated as the taxpayer’s total annual cost of employee parking paid to the third party. However, if the amount the taxpayer pays to a third party for an employee’s parking exceeds the § 132(f)(2) monthly limitation on exclusion, which for 2018 is $260 per employee, that excess amount must be treated by the taxpayer as compensation and wages to the employee. As a result, the total of the monthly amount in excess of $260 that is treated as compensation and wages is excepted from the taxpayer’s disallowance amount by § 274(e)(2).

If, however, the taxpayer owns or leases all or a portion of a parking facility, the disallowance can be calculated using “any reasonable method” thought the IRS goes on to provide a deemed reasonable method of allocating the expenses to employee parking.

The IRS provides the following information on expenses that should be considered:

For purposes of this notice, “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, landscape costs, parking lot attendant expenses, security, and rent or lease payments or a portion of a rent or lease payment (if not broken out separately).

However, the IRS provides the following expense will be excluded from parking costs:

A deduction for an allowance for depreciation on a parking structure owned by a taxpayer and used for parking by the taxpayer’s employees is an allowance for the exhaustion, wear and tear, and obsolescence of property, and not a parking expense for purposes of this notice.

The IRS outlines a four step calculation for computing the disallowed expenses.

Step 1 is to calculate the disallowance for any reserved parking spaces.

A taxpayer that owns or leases all or a portion of one or more parking facilities must identify the number of spots in the parking facility, or the taxpayer’s portion thereof, exclusively reserved for the taxpayer’s employees (“reserved employee spots”). Employee spots in the parking facility, or portion thereof, may be exclusively reserved for employees by a variety of methods, including, but not limited to, specific signage (for example, “Employee Parking Only”) or a separate facility or portion of a facility segregated by a barrier to entry or limited by terms of access.

The taxpayer must then determine the percentage of reserved employee spots in relation to total parking spots and multiply that percentage by the taxpayer’s total parking expenses for the parking facility. The product is the amount of the deduction for total parking expenses that is disallowed under § 274(a)(4) for reserved employee parking spots.

Step 2 is to determine the primary use of the remaining parking spaces (the “primary use test”).

The taxpayer may identify the remaining parking spots in the parking facility and determine whether their primary use is to provide parking to the general public. If the primary use of the remaining parking spots in the parking facility is to provide parking to the general public, then the remaining total parking expenses for the parking facility are excepted from the § 274(a) disallowance by the general public exception under § 274(e)(7). For purposes of § 274(a)(4) and this notice, “primary use” means greater than 50 percent of actual or estimated usage of the parking spots in the parking facility. Primary use of the parking spots is tested during normal business hours on a typical business day, or in the case of an exempt organization during the normal hours of the exempt organization’s activities on a typical day. Non-reserved parking spots that are available to the general public but empty during normal business hours on a typical business day, or in the case of an exempt organization, during the normal hours of the exempt organization’s activities on a typical day, are treated as provided to the general public. In addition, if the actual or estimated usage of the parking spots varies significantly between days of the week or times of the year, the taxpayer may use any reasonable method to determine the average actual or estimated usage.

For purposes of § 274(a)(4) and this notice, the “general public” includes, but is not limited to, customers, clients, visitors, individuals delivering goods or services to the taxpayer, patients of a health care facility, students of an educational institution, and congregants of a religious organization. The general public does not include employees, partners or independent contractors of the taxpayer.

Step 3, if the primary use of the lot is not to provide parking to the general public, a value for the reserved nonemployee spots is calculated.

If the primary use of a taxpayer’s remaining parking spots is not to provide parking to the general public, the taxpayer may identify the number of spots in the parking facility, or the taxpayer’s portion thereof, exclusively reserved for nonemployees (“reserved nonemployee spots”). For example, reserved nonemployee spots include spots reserved for visitors and customers, as well as spots reserved for partners, sole proprietors, and 2-percent shareholders of S Corporations.

The number of reserved nonemployee spots in the parking facility, or portion thereof, may be exclusively reserved for nonemployees by a variety of methods, including, but not limited to, specific signage (for example, “Customer Parking Only”) or a separate facility or portion of a facility segregated by a barrier to entry or limited by terms of access. A taxpayer that has no reserved nonemployee spots may go to Step 4.

If the taxpayer has reserved nonemployee spots, it may determine the percentage of reserved nonemployee spots in relation to the remaining total parking spots and multiply that percentage by the taxpayer’s remaining total parking expenses. The product is the amount of the deduction for remaining total parking expenses that is not disallowed under § 274(a)(4).

Finally, in step 4 a determination is made regarding the remaining use and allocable expenses.

If the taxpayer completes Steps 1-3 in the methodology above and has any remaining parking expenses not specifically categorized as deductible or nondeductible, the taxpayer must reasonably determine the employee use of the remaining parking spots during normal business hours on a typical business day (or, in the case of an exempt organization, during the normal hours of the exempt organization’s activities on a typical day) and the related expenses allocable to employee parking spots. Methods to determine employee use of the remaining parking spots may include specifically identifying the number of employee spots based on actual or estimated usage. Actual or estimated usage may be based on the number of spots, the number of employees, the hours of use, or other measures.

The IRS provides a series of examples for applying these rules. The IRS notes:

For each example, assume that the parking expenses are otherwise deductible expenses; that all or some portion of the expenses relate to a QTF under § 132(f); and that the § 132(f)(2) limitation on an employee’s exclusion is $260 per month.

The IRS first provides two examples:

Example 1. Taxpayer A pays B, a third party who owns a parking garage across the street from A, $100 per month for each of A’s 10 employees to park in B’s garage, or $12,000 per year (($100 x 10) x 12 = $12,000). The $100 per month paid for each employee for parking is excludible under § 132(a)(5), and none of the § 274(e) exceptions apply. Thus, the entire $12,000 is subject to the § 274(a)(4) disallowance.

Example 2. Assume the same facts as Example 1, except A pays B $300 per month for each employee, or $36,000 per year (($300 x 10) x 12 = $36,000). Of the $300 per month paid for parking for each employee, $260 is excludible under § 132(a)(5) and none of the § 274(e) exceptions apply to this amount. Thus, $31,200 (($260 x 10) x 12 = $31,200) is subject to the § 274(a)(4) disallowance. The excess amount of $40 per employee per month is not excludible under § 132(a)(5) and is treated as compensation and wages. As a result, the § 274(e)(2) exception applies to this amount. Thus, $4,800 ($36,000 - $31,200 = $4,800) is not subject to the § 274(a)(4) disallowance and remains deductible.

The IRS provides the following information about Examples 3-10:

For examples 3-10, also assume that the taxpayer or tax-exempt organization uses the methodology described in Steps 1-4 in Section B of this notice, , as applicable.

The examples are reproduced below:

Example 3. Taxpayer C, a big box retailer, owns a surface parking lot adjacent to its store. C incurs $10,000 of total parking expenses. C’s parking lot has 500 spots that are used by its customers and employees. C usually has approximately 50 employees parking in the lot in non-reserved spots during normal business hours on a typical business day. C usually has approximately 300 non-reserved parking spots that are empty during normal business hours on a typical business day.

Step 1. Because none of C’s parking spots are exclusively reserved for employees, there is no amount to be specifically allocated to reserved employee spots.

Step 2. The primary use of C’s parking lot is to provide parking to the general public because 90% (450/500 = 90%) of the lot is used by the public. The 300 empty non-reserved parking spots are treated as provided to the general public. Thus, expenses allocable to these spots are excepted from the § 274(a) disallowance by § 274(e)(7). Because the primary use of the parking lot is to provide parking to the general public, none of the $10,000 is subject to the § 274(a)(4) disallowance.

Example 4. Taxpayer D, a manufacturer, owns a surface parking lot adjacent to its plant. D incurs $10,000 of total parking expenses. D’s parking lot has 500 spots that are used by its visitors and employees. D usually has approximately 400 employees parking in the lot in non-reserved spots during normal business hours on a typical business day. Additionally, D has 25 spots reserved for nonemployee visitors.

Step 1. Because none of D’s parking spots are exclusively reserved for employees, there is no amount to be specifically allocated to reserved employee spots.

Step 2. The primary use of D’s parking lot is not to provide parking to the general public because 80% (400/500 = 80%) of the lot is used by its employees. Thus, expenses allocable to those spots are not excepted from the § 274(a) disallowance by § 274(e)(7) under the primary use test.

Step 3. Because 5% (25/500 = 5%) of D’s parking lot spots are reserved nonemployee spots, up to $9,500 ($10,000 x 95% = $9,500) of D’s total parking expenses are subject to the § 274(a)(4) disallowance under this step.

Step 4. D must reasonably determine the employee use of the remaining parking spots during normal business hours on a typical business day and the expenses allocable to employee parking spots.

Example 5. Taxpayer E, a manufacturer, owns a surface parking lot adjacent to its plant. E incurs $10,000 of total parking expenses. E’s parking lot has 500 spots that are used by its visitors and employees. E has 50 spots reserved for management and has approximately 400 employees parking in the lot in non-reserved spots during normal business hours on a typical business day. Additionally, E has 10 reserved nonemployee spots for visitors.

Step 1. Because E has 50 reserved spots for management, $1,000 ((50/500) x $10,000 = $1,000) is the amount of total parking expenses that is nondeductible for reserved employee spots under § 274(a)(4).

Step 2. The primary use of the remainder of E’s parking lot is not to provide parking to the general public because 89% (400/450 = 89%) of the remaining parking spots in the lot are used by its employees. Thus, expenses allocable to these spots are not excepted from the § 274(a) disallowance by § 274(e)(7) under the primary use test.

Step 3. Because 2% (10/450 = 2.22%) of E’s remaining parking lot spots are reserved nonemployee spots, the $200 allocable to those spots ($10,000 x 2%)) is not subject to the § 274(a)(4) disallowance and continues to be deductible.

Step 4. E must reasonably determine the employee use of the remaining parking spots during normal business hours on a typical business day and the expenses allocable to employee parking spots.

Example 6. Taxpayer F, a financial services institution, owns a multi-level parking garage adjacent to its office building. F incurs $10,000 of total parking expenses. F’s parking garage has 1,000 spots that are used by its visitors and employees. However, one floor of the parking garage is segregated by an electronic barrier and can be entered only with an access card provided by F to its employees. The segregated floor of the parking garage contains 100 spots. The other floors of the parking garage are not used by employees for parking during normal business hours on a typical business day.

Step 1. Because F has 100 reserved spots for employees, $1,000 ((100/1,000) x $10,000 = $1,000) is the amount of total parking expenses that is nondeductible for reserved employee spots under § 274(a)(4).

Step 2. The primary use of the remainder of F’s parking lot is to provide parking to the general public because 100% (900/900 = 100%) of the remaining parking spots are used by the public. Thus, expenses allocable to those spots are excepted from the § 274(a) disallowance by § 274(e)(7) under the primary use test, and only $1,000 is subject to the § 274(a)(4) disallowance.

Example 7. Taxpayer G, an accounting firm, leases a parking lot adjacent to its office building. G incurs $10,000 of total parking expenses related to the lease payments. G’s leased parking lot has 100 spots that are used by its clients and employees. G usually has approximately 60 employees parking in the leased parking lot in non-reserved spots during normal business hours on a typical business day.

Step 1. Because none of G’s leased parking spots are exclusively reserved for employees, there is no amount to be specifically allocated to reserved employee spots.

Step 2. The primary use of G’s leased parking lot is not to provide parking to the general public because 60% (60/100 = 60%) of the lot is used by its employees. Thus, G may not utilize the general public exception from the § 274(a) disallowance provided by § 274(e)(7).

Step 3. Because none of G’s parking spots are exclusively reserved for nonemployees, there is no amount to be specifically allocated to reserved nonemployee spots.

Step 4. G must reasonably determine the use of the parking spots and the related expenses allocable to employee parking. Because 60% (60/100 = 60%) of G’s parking spots are used by G’s employees during normal business hours on a typical business day, G reasonably determines that $6,000 ($10,000 x 60% = $6,000) of G’s total parking expenses is subject to the § 274(a)(4) disallowance.

Example 8. Taxpayer H, a large manufacturer, owns multiple parking lots and garages adjacent to its manufacturing plant, warehouse, and office building at its complex in the city of X. H owns parking lots and garages in other cities as well. For purposes of applying the methodology in this notice, H chooses to aggregate the parking spots in the lots and garages at its complex in city X. However, H may not aggregate the spots in parking lots and garages in other cities with its parking spots in city X. H incurs $50,000 of total parking expenses related to the parking lots and garages at its complex in city X. H’s parking lots and garages at its complex in city X have 10,000 spots in total that are used by its visitors and employees. H has 500 spots reserved for management and has approximately 8,000 employees parking in the garages and lots in non-reserved spots during normal business hours on a typical business day at H’s complex in city X.

Step 1. Because H has 500 reserved spots for management, $2,500 ((500/10,000) x $50,000 = $2,500) is the amount of total parking expenses that is nondeductible for reserved employee spots under § 274(a)(4).

Step 2. The primary use of the remainder of H’s parking facility is not to provide parking to general public because 84% (8,000/9,500 = 84%) of the remaining parking spots in the facility are used by its employees. Thus, expenses allocable to these spots are not excepted from the § 274(a) disallowance by § 274(e)(7) under the primary use test.

Step 3. Because none of H’s parking spots are exclusively reserved for nonemployees, there is no amount to be specifically allocated to reserved nonemployee spots. Step 4. H must reasonably determine the employee use of the remaining parking spots during normal business hours on a typical business day and the expenses allocable to employee parking spots at its complex in city X. Because 84% (8,000/9,500 = 84%) of the remaining parking spots in the lot are used by its employees during normal business hours on a typical business day, H reasonably determines that $39,900 (($50,000-$2,500) x 84% = $39,900) of H’s total parking expenses is subject to the § 274(a)(4) disallowance.

Example 9. Tax-Exempt Organization J, a religious organization that operates a church and a school, owns a surface parking lot adjacent to its buildings. J incurs $10,000 of total parking expenses. J’s parking lot has 500 spots that are used by its congregants, students, visitors, and employees, and 10 spots that are reserved for certain employees. During the normal hours of J’s activities on weekdays, J usually has approximately 50 employees parking in the lot in non-reserved spots and approximately 440 non-reserved parking spots that are empty. During the normal hours of J’s activities on weekends, J usually has approximately 400 congregants parking in the lot in non-reserved spots and 20 employees parking in the lot in non-reserved spots.

Step 1. Because J has 10 reserved spots for certain employees, $200 ((10/500) x $10,000 = $200) is the amount of total parking expenses that is nondeductible for reserved employee spots under § 274(a)(4). Thus, under § 512(a)(7), J must increase its UBTI by $200, the amount of the deduction disallowed under § 274(a)(4).

Step 2. Because usage of the parking spots varies significantly between days of the week, J uses a reasonable method to determine that the primary use of the remainder of J’s parking lot is to provide parking to the general public because 90% (440/490 = 90%) of the spots are used by the public during the weekdays and 95% (470/490) of the spots are used by the public on the weekends. The empty, nonreserved parking spots are treated as provided to the general public. Thus, expenses allocable to these spots are excepted from the § 274(a) disallowance by § 274(e)(7) under the primary use test, and only $200 of the $10,000 is subject to the § 274(a)(4) disallowance. Therefore, only $200 of the expenses for the provision of the QTF will result in an increase to UBTI under § 512(a)(7).

If J does not have gross income from any unrelated trades or businesses of $800 or more included in computing its UBTI (to reach the $1,000 filing threshold), J is not required to file a Form 990-T for that year.

Example 10. Tax-Exempt Organization K is a hospital and owns a surface parking lot adjacent to its building. K incurs $10,000 of total parking expenses. K’s parking lot has 500 spots that are used by its patients, visitors, and employees. K has 50 spots reserved for management and has approximately 100 employees parking in the lot in non-reserved spots during the normal operating hours of the hospital.

Step 1. Because K has 50 reserved spots for employees, $1,000 ((50/500) x $10,000 = $1,000) is the amount of total parking expenses that is nondeductible for reserved employee spots under § 274(a)(4). Thus, under § 512(a)(7), K must increase its UBTI by $1,000, the amount of the deduction disallowed under § 274(a)(4).

Step 2. The primary use of the remainder of K’s parking lot is to provide parking to the general public because 78% (350/450 = 78%) of the remaining spots in the lot are open to the public. Thus, expenses allocable to these spots are excepted from the § 274(a) disallowance by § 274(e)(7) under the primary use test, and only $1,000 is subject to the § 274(a)(4) disallowance. Therefore, only $1,000 of the expenses for the provision of the QTF will result in an increase in UBTI under § 512(a)(7).

K will need to add the $1,000 increase of UBTI under § 512(a)(7) to its gross income from unrelated trades or businesses. K is required to file a Form 990-T because the $1,000 increase to UBTI under § 512(a)(7) meets the filing threshold.

The IRS also mentions one quirky oversight in the law related to on-premises athletic facilities and tax-exempt organizations:

Section 512(a)(7) mentions on-premises athletic facilities. However, the Act did not include a corresponding change to § 274 disallowing deductions generally for on-premises athletic facilities. Accordingly, a deduction for expenses paid or incurred for on-premises athletic facilities is not disallowed under § 274 if the athletic facility is primarily for the benefit of the tax-exempt organization’s employees and does not discriminate in favor of highly compensated employees.

As well, the IRS will allow a tax-exempt with one unrelated trade or business to use losses from that business to offset the UBTI from the parking benefits:

The provision of QTFs that results in an increase in UBTI under § 512(a)(7) is not an unrelated trade or business. See Notice 2018-67, 2018-36 I.R.B. 409, which discusses and solicits comments regarding the calculation of UBTI under § 512(a)(6) for exempt organizations with more than one unrelated trade or business. Therefore, any increase in UBTI under § 512(a)(7) is not subject to § 512(a)(6), meaning that an exempt organization with only one unrelated trade or business and an increase in UBTI under § 512(a)(7) does not become an exempt organization with more than one unrelated trade or business subject to § 512(a)(6). Accordingly, for taxable years beginning after December 31, 2017, until further guidance is issued, a tax-exempt organization with only one unrelated trade or business can reduce the increase to UBTI under § 512(a)(7) to the extent that the deductions directly connected with the carrying on of that unrelated trade or business exceed the gross income derived from such unrelated trade or business.

The Notice closes by noting:

Until further guidance is issued, taxpayers may rely on the guidance provided in this notice to determine the amount of expenses for QTFs that is nondeductible under § 274(a)(4) or treated as an increase in UBTI under § 512(a)(7).