Not all employee parking lots are created equal

Editor: Mary Van Leuven, J.D., LL.M.

Since 2018, employers have not been able to deduct expenses related to providing parking to employees if those employees can exclude some or all of the value of the parking from their incomes under a qualified transportation fringe benefit program. Many employers were surprised by the consequences of this change, finding costly expenses related to parking, such as maintenance, insurance, and snow and ice removal, were no longer deductible. But not all parking lots are created equal.

An exception under Sec. 274(e)(8) provides employers with full deductions for expenses related to qualified transportation fringe benefits (including qualified parking) that are sold to customers in bona fide transactions. In applying this rule, as explained in the implementing regulations and related preamble (T.D. 9939), employees who are provided parking may be viewed as customers paying fair market value (FMV) for the parking if the parking has a zero value (Regs. Sec. 1.274-13(e)(2)(iii)). In this situation, the Sec. 274(e)(8) exception permits the employer to fully deduct expenses related to the parking facility. While an employer will have to make some effort to document that the parking available at an employee parking facility has no value, many employers will find that this burden is worth bearing because it allows deducting the full expenses of operating and maintaining the facility.

Qualified parking and related deductions

First, some background may be helpful. A qualified transportation fringe benefit program allows employers to provide employees tax-free assistance to commute to and from work locations (Sec. 132(f)(1)). One benefit available under a qualified transportation fringe benefit program is qualified parking. The value of the parking benefit (subject to monthly limitations) can be provided to employees on a taxfree basis. Qualified parking includes employer-provided parking for an employee on or near the employer’s premises (but not at or near the employee’s residence) (Sec. 132(f)(5)(C); Regs. Sec. 1.132-9(b), Q&A 4).

Historically, all parking expenses were allowed to be deducted by the employer. For this purpose, parking expenses included the employer’s expenses related to parking spaces in a parking facility (for example, a parking garage or parking lot), such as “repairs, maintenance, utility costs, insurance, property taxes, interest, snow and ice removal, leaf removal, trash removal, cleaning, landscape costs, parking attendant expenses, security, and rent or lease payments or a portion of a rent or lease payment” (Regs. Sec. 1.274-13(b)(12)).

Sec. 274 was amended in 2018 to eliminate the deduction for qualified transportation fringe benefits, including expenses related to qualified employee parking benefits, unless an exception applies. (The Sec. 274 regulations provide methodologies for calculating the disallowed parking expenses when the employer pays a third party for employee parking or when an employer owns or leases all or a portion of a parking facility (Regs. Sec. 1.274-13(d)).

One exception to the deduction limitation is called the “primary use” exception. Under this exception, employers such as retail stores or restaurants that provide parking to employees and the public are not subject to the limitation if the employer can demonstrate that the parking facility’s primary use is by the public (typically, customers) (Regs. Secs. 1.274-13(d)(2)(ii)(B) and (f)(4), Example 4).

But the employer does not have to rely on methods such as demonstrating the parking facility’s primary purpose and may deduct the full amount of the total parking expenses incurred, if employees are paying FMV to use the parking facilities.

Treatment of zero-value parking

While an employer generally will be able to avoid the Sec. 274 deduction limitations if it includes the value of employer-provided parking in employees’ income as compensation (see Regs. Sec. 1.274-13(e)), this is not a viable alternative for employers intending to provide employee parking on a taxfree basis (to the extent available) as a qualified transportation fringe benefit. But what if, because the FMV of the parking is zero, the employee is paying market rate for the parking (and so it is not employer-provided)? Would this mean that the employer’s parking expenses are now deductible because they are no longer related to employerprovided parking?

This issue was addressed in the Sec. 274 final regulations released in 2020. A long-standing exception in Sec. 274(e)(8) allows employers to take a full deduction on expenses related to goods or services (including the use of facilities) that are sold to customers in a bona fide transaction for an adequate and full consideration in money or money’s worth. For this purpose, employees may be considered as customers purchasing the benefit from the employer, such as access to parking. As explained in the preamble to the final regulations, Treasury and the IRS agreed with a commenter that the deduction disallowance should not apply if the FMV of the parking is zero, because the employee is “paying” the full value of the parking — even if, in this case, that meant paying nothing (T.D. 9939, 85 Fed. Reg. 81391, 81400 (Dec. 16, 2020)).

How do employers avoid the deduction limitation in these situations? Regs. Sec. 1.274-13(e)(2)(iii) explicitly provides that the employer bears the burden of demonstrating that the parking FMV is zero, but the employer is deemed to meet that burden if it can demonstrate the following:

• The qualified parking is located in a rural, industrial, or remote area;
• No commercial parking is available; and
• An individual who is not an employee would not ordinarily pay to park at the parking facility.

The regulations do not provide definitions of a rural, industrial, or remote area, so those seem subject to reasonable interpretation.

But while the enunciated factors relate only to qualified parking located in rural, industrial, or remote areas, similar factors would seem applicable to demonstrating that other parking, particularly parking in suburban parking facilities, has an FMV of zero. As a practical matter, the employer would need to demonstrate that there is no market for paid parking at or around the worksite. Conversely, if there were paid parking facilities within a walkable distance of the worksite, this would demonstrate that parking at the employee parking facility may have a value of more than zero and/or that a nonemployee individual ordinarily would pay to park at the worksite’s parking facility.

The IRS has not provided further specific guidance on how to demonstrate the absence of a market for paid parking at or near the worksite. But resources do exist to identify paid and nonpaid parking facilities within geographic ranges of specific locations; these resources can be applied to an employee parking facility and worksite based on an assumption of a walkable distance to the worksite.

This approach may sound cumbersome, but the magnitude of the tax savings will, in many cases, be significant. In addition, the analysis is applied separately to each employee parking facility, and so an employer may be able to focus on only those facilities most likely to result in savings. Taking into account all expenses for maintenance, insurance, snow and trash removal, etc. for an employee parking facility and then the potential limitation on the deduction for those expenses due to the amendment of Sec. 274, the financial impact of avoiding the deduction limitation may significantly outweigh the burden of demonstrating qualification for the exception.

Not an inconsequential consideration

Although not one of the more exciting expenditures, employee parking facilities can be expensive to operate and maintain, and therefore the financial impact of a deduction limitation on those expenses can be significant. Employers that provide qualified parking to employees in parking facilities that may reasonably be considered to have an FMV of zero should consider if they fall within an exception under Regs. Sec. 1.274-13(e).

Editor notes

Mary Van Leuven, J.D., LL.M., is a director, Washington National Tax, at KPMG LLP in Washington, D.C. Contributors are members of or associated with KPMG LLP. For additional information about these items, contact Van Leuven at 202-533-4750 or mvanleuven@kpmg.com.

The information in these articles is not intended to be “written advice concerning one or more federal tax matters” subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230. The information contained in these articles is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. The articles represent the views of the authors only, and do not necessarily represent the views or professional advice of KPMG LLP.