8907 / How can an employer calculate the value of parking benefits that it provides to employees after enactment of the 2017 tax reform legislation?

Late in 2018, the IRS released guidance on how to calculate the value of parking benefits provided to employees after the 2017 tax reform legislation restricted the deductibility of these benefits. The 2020 proposed regulations expanded upon this guidance and provided rules for calculating amounts that may be deductible. Under Notice 2018-99, employers were permitted to take steps by March 31, 2019 to retroactively change their parking arrangements to reduce or eliminate the number of parking spaces reserved for employees.

Under the IRS guidance, employers can use any reasonable interpretation for determining the amount in question, but fair market value of the parking provided to employees does not constitute a reasonable method because the deduction is related to the expense of providing the benefit, not its value.

Determining the relevant amount will depend on whether the employer pays a third party for the parking spaces, or whether the employer owns or leases all or a portion of a parking facility. If the employer pays a third party, the amount that is paid will constitute the total annual cost of employee parking.¹ If that amount exceeds the Section 132(f) limitation ($325 in 2025, $315 in 2024, $300 in 2023, $280 in 2022), the amounts paid above that limit are taxable compensation to the employee. Amounts treated as taxable compensation are deductible by the employer.

If the employer owns or leases the parking facility, the proposed regulations provide a general rule and three simplified methods for calculating the amount of nondeductible expenses. Taxpayers may elect to apply the general rule or a simplified methodology for each taxable year and for each parking facility.

The general rule provides that employers can use a reasonable interpretation for calculating the disallowance under Section 274, but that employers must (1) use expenses that are paid or incurred in providing the parking benefit, rather than its value to employees, (2) allocate parking expenses to spaces reserved for employees, and (3) properly apply the exception for parking made available to the general public.²

Under the first simplified method, the “qualified parking limit method,” taxpayers calculate the disallowance by multiplying the total number of spaces used by employees during the peak demand period, or, alternatively, the total number of the taxpayer’s employees, by the Section 132(f)(2) monthly per-employee limit on exclusion for qualified parking, for each month in the tax year.³

The primary use method is based on the guidance provided in Notice 2018-99. It contains a four-step process that requires the employer to (1) calculate the disallowance for reserved employee spaces, (2) determine the primary use of available parking spaces, (3) calculate the allowance for reserved non-employee spaces and (4) determine the remaining use of available parking spaces and allocable expenses. Note that there is no disallowance for reserved employee spaces if the primary use of the available parking spaces is to provide parking to the general public, and there are five or fewer reserved employee spaces in the parking facility and the reserved employee spaces are 5 percent or less of the total parking spaces. The regulations modify the definition of  “general public” to exclude employees, partners, 2 percent shareholders of S-corporations, sole proprietors, independent contractors, clients, or customers of unrelated tenants in multi-tenant buildings (among other individuals).⁴

The third simplified method is the “cost per space method”. This method allows taxpayers to calculate the disallowance by multiplying the cost per parking space by the number of available parking spaces to be used by employees during the peak demand period. Cost per space is calculated by dividing total parking expenses (including expenses for inventory/unusable spaces) by total parking spaces (including inventory/unusable spaces). Special rules for allocating certain mixed parking expenses and aggregating parking spaces by geographic location may be used with the cost per space method.⁵

Note that parking expenses include all of the costs of taking care of the facility—i.e., repairs, maintenance, utilities, insurance, property taxes, snow/leaf/trash removal, cleaning, costs of employing parking attendants, as well as any actual costs for leasing or renting the space. Depreciation is not included. The expenses must then be allocated between those spaces reserved for employee parking, spaces reserved for the general public and spaces that can be used by either employees or the public.

The percentage of costs allocated to employee parking is no longer deductible, and the costs allocated to public parking are deductible as business expenses.

With respect to “non-reserved” spaces, the employer must determine their primary use. If the spaces are used more than 50 percent of the time by employees during business hours, the deduction is.⁶