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Free Parking Only Exists in Monopoly: New IRS Guidance Makes Employer-Provided Parking More Costly and Burdensome Than You Think


As part of its comprehensive 2017 tax reform bill, Congress repealed deductions for Qualified Transportation Fringes including for employer-provided parking, while also requiring that tax-exempt organizations increase their unrelated business taxable income by the nondeductible parking expenses. Recently released IRS Notice 2018-99 addresses some of the year-end tax filing and tax planning concerns for affected employers with rules of special interest to tax-exempt employers.

In Depth

In late 2017, Congress passed the Tax Cuts and Jobs Act, which included a repeal of the employer deduction for most “expenses” associated with providing qualified transportation fringe benefits (QTFs) and also required tax-exempt employers to increase their unrelated business taxable income (UBTI) by the amount of QTF expenses that would be nondeductible by a taxable employer. Without further guidance, both taxable and tax-exempt employers struggled to determine how this new provision would work. The Internal Revenue Service (IRS) released Notice 2018-99 (Notice) on December 10, 2018 to address some of these concerns.

The Notice provides interim guidance on how to determine the amount of parking expenses that are nondeductible or must be added to UBTI until the IRS publishes proposed regulations addressing these issues. However, the interim guidance is a bit of a mixed bag, as it provides relief for “any reasonable method” for computing the deduction disallowance while at the same time expanding both the parking subject to the disallowance and the type of expenses that are disallowable. All employers, other than government employers (like the IRS), are subject to the guidance and should evaluate the resulting tax impact. Employers should also consider whether they want to take advantage of the provisions that allow for retroactive changes to parking policies in order to avoid some of the negative impacts of the guidance.

Taxable Employers

According to the Notice, an employer who owns or leases all or a portion of a parking facility for its employees may use “any reasonable method” to calculate the deduction disallowance until the IRS publishes proposed regulations. To provide certainty, the Notice includes a four-step safe harbor method that the IRS deems to be a reasonable method. The Notice also states that using the value of employee parking to determine parking expenses is not reasonable; therefore, the IRS position impacts an employer’s deduction even if the employer-provided parking has no, or a de minimis, fair market value.

The safe harbor method takes into account both the number of reserved parking spaces for employees and the “total parking expense” attributable to the parking facility. Employers that provide reserved employee parking spots have until March 31, 2019 to change their parking arrangements, and any such changes will be deemed retroactive to January 1, 2018.

While helpful, the four-step safe harbor method fails to address the most administratively burdensome step for employers: determining and allocating the underlying “total parking expenses.” This determination is critical because the total parking expense is applied against the ratio of employee parking (both reserved and nonreserved, if the lot is not primarily available for general public use) to determine the deduction disallowance.

Under the Notice, parking expenses include, but are not limited to, repairs, maintenance, utility costs, insurance, property taxes, interest, snow and ice removal, leaf removal, trash removal, parking lot attendant expenses, security, and rent or lease payments. Most of these items are not separately broken out from the employer’s broader place of business property expenses, making it potentially burdensome and impractical to calculate. In addition to the administrative burden, the expansive interpretation of what constitutes “parking expenses” may have a disproportionately negative impact on employers that own parking lots and incur large continuing upkeep expenses (especially in areas where parking has no fair market value), as opposed to employers that pay a fixed amount to lease parking spots or have parking spots included as part of a larger lease.

Importantly, the IRS did clarify that depreciation on a parking structure that is owned by an employer and used by the employer’s employees would not be considered a parking expense for purposes of the Notice.

Tax-Exempt Employers

Tax-exempt employers are not spared from this new burden. The methods for computing allocable parking costs mirror those governing taxable entities discussed above. Instead of a deduction disallowance, tax-exempt employers must increase their UBTI by the amount of the allocable “deduction disallowance.” The method used to track parking expenses outlined in the four-step safe harbor method may be particularly onerous for tax-exempt employers. This is because the administrative burden of tracking and allocating the expenses far outweighs the UBTI generated and can trigger a UBTI filing for tax-exempt entities that have never previously been subject to UBTI. Therefore, the guidance set forth in the Notice will have far-reaching effects unless the proposed regulations adopt more reasonable positions.

Next Steps

All nongovernmental employers should consider some important next steps.  

First, until the proposed regulations are released, taxable and tax-exempt employers should consult with their tax advisors regarding appropriate next steps to ascertain and adopt a reasonable method for calculating the disallowed deduction or increase in UBTI. Second, as solicited by the Notice, individual employers or associations should consider providing comments to the IRS (prior to February 22, 2019) seeking more easily administered rules (e.g., only allocate as parking expenses amounts that are separately broken out for parking, as opposed to the entire business premises); an exemption for parking with no, or a de minimis, fair market value; and clarification that the rules do not apply to reserved parking spaces for handicapped employees.

Employers should also consider eliminating most, if not all, reserved parking, including spots reserved by places of worship for church staff or even spots reserved for employees as a reward on a rotating basis, such as for the “employee of the month.” Any changes should be made by March 31, 2019 to take advantage of the retroactive effect. Finally, employers should consider whether adopting an exemption for reserved parking for employees with special parking needs, such as handicapped parking, is a reasonable position under the Notice.

© 2020 McDermott Will & EmeryNational Law Review, Volume VIII, Number 352


About this Author

Samantha Souza, McDermott Law Firm, Washington DC, Labor and Employment Attorney

Samantha Souza focuses her practice on matters involving employee fringe benefits, payroll taxes, information reporting, and executive compensation. She regularly assists clients with navigating through Internal Revenue Service audits and appeals. Sam’s practice also includes tax litigation on a variety of employment tax and tax refund matters. Previously, Sam served as a law clerk to the Honorable Ronald L. Buch at the United States Tax Court.

While in law school, Samantha was senior editor of the Charlotte Law Review.

David Fuller Tax Litigation Lawyer DC

David Fuller focuses his practice on matters involving employee fringe benefits, independent contractor/employee classification, payroll taxes, information reporting, corporate aircraft, supplemental unemployment compensation benefits (SUB pay), and the contingent workforce (outsourcing, PEOs, and employee leasing). His unique practice includes tax litigation on a wide range of significant FICA and tax refund matters.

David has experience in employment tax, employee-independent contractor, and fringe benefits planning strategies, as well as handling tax controversy matters with IRS Exam and IRS Appeals. He has also handled an array of non-litigation issues with attorneys, agents and officials at all levels of the IRS, including voluntary payroll tax compliance submissions.

Prior to re-joining McDermott, David advised various Fortune 500 clients on tax planning and controversy matters involving employment taxes, fringe benefits and contingent workforce issues. He has helped business and government entities address matters relating to payroll taxes, with special focus on worker classification, Social Security taxes, federal income tax withholding, Section 530 relief and Section 3121(v)(2) compliance.

David frequently speaks and publishes on fringe benefits, payroll tax and worker classification issues. He is the past co-contributing editor for Thompson Information Services’ Employer’s Guide to Fringe Benefit Rules and Complying with IRS Employee Benefit Rules.

  • Handled audits and appeals involving payroll tax and corporate deduction issues for companies in the health care, airline and technology industries where the proposed taxes and penalties, in the aggregate, totaled more than $350 million*
  • Led the IRS settlement negotiations for a large financial service entity in a customer and HR sensitive voluntary self-disclosure/self-correction matter before the IRS settling an issue of approximately $75 million for $2 million despite the fact the taxpayer had booked a reserve of more than $20 million*
  • 100% abatement of a $3 million stock option late deposit penalty involving a large corporate client’s next-day federal tax deposits*
  • Obtained more than $20 million in employment tax refunds for two separate outsourcing clients involving application of the FICA and FUTA tax single wage base limitations*
  • Settlement of multi-million dollar IRS examination audit of long-term travel away from home expenses for an oil and gas client for pennies on the dollar despite the IRS’s increased allocation of audit resources to this issue*
  • Spearheaded the development and implementation of employer-sponsored charitable contribution programs and leave bank programs for hurricane relief in the aftermath of Hurricanes Harvey, Irma and Maria*

*Matter handled prior to joining McDermott.

Ralph E. DeJong, McDermott Will Emery Law Firm, Employment Labor Attorney

Ralph E. DeJong is a partner in the law firm of McDermott Will & Emery LLP and is based in its Chicago office.   He focuses his practice on the compensation, executive benefits and employee benefits of tax-exempt organizations.  This includes designing and preparing deferred and incentive compensation arrangements, leading governing boards in the review and approval of executive and physician compensation arrangements, negotiating and preparing executive and physician employment agreements, and analyzing the private inurement and intermediate sanctions implications of executive and...


Robert C. Louthian is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm's Washington, D.C. office.  He focuses his practice on the representation of exempt organizations on a wide range of tax and related issues, including determinations of exempt status, securing private letter rulings on proposed transaction, and preparing and representing clients who are under audit by the Internal Revenue Service.  He works primarily with hospitals and other institutional providers, private foundations, scientific research organizations, universities and trade...

Erika Mayshar, McDermott Law Firm, Business and Tax Law Attorney

Erika Mayshar provides tax planning advice for business entities and tax-exempt organizations. Her clients include a wide variety of tax-exempt organizations, including hospitals, medical foundations, universities, public charities, corporate and family foundations, and trade associations.

She counsels clients regarding the daily complexities of operating exempt organizations, such as private foundation grantmaking and investing, and provides structuring advice for health care entities and other nonprofits entering into joint ventures,...