IRS Issues Guidance for Qualified Transportation Fringe Benefits
February 28, 2019
Qualified transportation fringe benefits allow employees and employers to use pre-tax dollars towards commuting expenses. The amount of pre-tax dollars allowable varies based on cost-of-living adjustments by the IRS. (The monthly maximum limit for 2019 is $265.) In general, these benefits are completely optional and employers are not required to offer them. However, some cities with high commuter populations (e.g. New York City, San Francisco, Washington, D.C.) have laws that make it mandatory for employers to offer the benefit.
The tax law defines qualified transportation fringe benefits as:
- Any transit pass
- Qualified parking
- Transportation in a commuter highway vehicle between the employee’s residence and place of employment
- Any qualified bicycle commuting reimbursement (Beginning 1/1/2018 employees are no longer able to exclude reimbursements for bicycles from their income.)
Under the Tax Cuts and Jobs Act of 2017, employer-provided qualified transportation fringe benefits remain tax-free for employees but are no longer deductible for employers. For tax-exempt employers, qualified transportation fringe benefits may result in unrelated business taxable income (UBTI). Affected qualified transportation fringe benefits include mass transit, parking, vanpooling and bicycle commuting reimbursements (except as necessary to ensure employee safety), and the change in tax status applies to taxable years 2018 through 2025. Employees may continue paying for mass transit or workplace parking costs with pre-tax salary reductions. Employers may still deduct parking that is taxable to the employee, but may not deduct parking provided on a pre-tax basis under a salary reduction agreement.
Notice 2018-99 provides additional guidance for determining the amount of employee parking expense that will be treated as non-deductible (or as UBTI for tax-exempt businesses) and establishes a four-step safe harbor for the calculations. Notice 2018-100 provides tax penalty relief to certain exempt organizations required to file Form 990-T under the new rules. Tax-exempt organizations must include the value of parking expenses paid to or on behalf of employees as unrelated business income.
Notice 2018-99 addresses two situations:
Employers that pay a third party for employee parking
If an employer leases an employee parking facility from a third party, payments generally constitute the non-deductible amount (and UBTI for tax-exempt employers). If fair market value of the employee parking exceeds the monthly maximums ($265 for 2019) the excess amount becomes taxable income to employees and a deductible expense for the employer (and is not included in UBTI for tax-exempt employers).
Employers that own or lease all or a portion of parking facilities for employee parking
Until further guidance is issued, employers that own or lease all or a portion of parking facilities may use any reasonable method to determine their cost of providing parking. Parking expenses include repairs, maintenance, utilities, insurance, property taxes, interest, snow and ice removal, leaf removal, trash removal, cleaning, landscaping, lot attendant costs, security, and rent or lease payments. Parking expenses do not include depreciation.
According to Notice 2018-99, after determining the parking expense, employers must use a reasonable method for determining the expense attributable to qualified employee parking. The notice provides a four-step safe harbor that will be considered a reasonable method of calculating the portion of parking expense that is nondeductible or included in UBTI.
Tax-exempt organizations that incur UBTI of more than $1,000 must file Form 990-T, and those that failed to make estimated tax payments during 2018 would normally be subject to a penalty. Notice 2018-100 provides that the penalty will be waived for exempt organizations that were not required to file Form 990-T for the last filing season, and that file Form 990-T and pay the UBTI reported for the taxable year of the relief on time. To claim the penalty waiver, an exempt organization must write “Notice 2018-100” at the top of its Form 990-T. Taxpayers that do not qualify for this relief may be able to avoid a penalty for underpayment of estimated income tax by meeting a statutory safe harbor or exception provision under the tax code.
Both for-profit and tax-exempt employers that offer parking fringe benefits must determine their cost as set out in Notice 2018-99. For non-exempt employers, the amount will be disallowed as a tax deduction. Tax-exempt employers that offer parking fringe benefits will need to determine the amount that must be included as UBTI and reported on Form 990-T. Tax-exempt employers filing Form 990-T for the first time may qualify for the tax penalty relief provided in Notice 2018-100. Employers may rely on Notice 2018-99 until further guidance is published or use any reasonable method for determining non-deductible parking expenses.
For additional information:
https://www.irs.gov/pub/irs-drop/n-18-99.pdf