Employer’s Parking Arrangement Doesn’t Qualify for Tax-Free Treatment
The IRS has issued an Information Letter that explains the tax treatment of an employer who provided parking to employees in an unconventional way. In the arrangement, the employer purchased parking spots from a parking vendor and then allowed employees who wanted to use the parking spots to pay the employer for them using the employees’ own after-tax compensation. The IRS stated the arrangement doesn’t qualify for tax-free treatment.
Under the Internal Revenue Code, employers that provide an employee with a “qualified transportation fringe” can exclude the benefit from the employee’s gross income. A “qualified transportation fringe” includes “qualified parking.” The tax code defines “qualified parking” as parking an employer provides that’s located on or near the employer’s business premises.
Parking is considered be provided by the employer if:
- It’s on property that the employer owns or leases;
- The employer pays for it; or
- The employer reimburses the employee for parking expenses.
The Facts of the Case
Here are some of the details involved in this case:
- The employer paid the parking vendor directly for the parking spots.
- Employees who wished to use the secure parking had to agree, in writing, to reimburse the employer by having the monthly parking fee deducted from their paychecks in the month prior to using the parking.
- The employees couldn’t get a refund of the withheld funds if they didn’t use the parking.
- The cost of the parking was less than the federal statutory limit ($255 a month in 2017).
- The employees weren’t given the option of choosing between taxable cash compensation and parking. As a result, the employer didn’t exclude the cost of the parking from the taxable wages of the employees who elected to use it. Instead, the employer simply deducted the cost of the parking from the employees’ after-tax wages.
The IRS Response
The employees who elected to use the parking spots asked the IRS whether the amounts deducted from their wages for parking could be excluded from their income and wages as a qualified parking benefit.
In responding, the IRS stated the arrangement didn’t meet the requirements to be considered qualified parking under the tax code. (IRS Information Letter 2017-0007) These type of letters are provided by the IRS National Office in response to requests from taxpayers for general information. They are for informational purposes only and don’t constitute a ruling.
The IRS noted that if the employer instead decided to reimburse employees for qualified parking expenses, it could do so either by providing the reimbursements in addition to the employee’s regular wages or, alternatively, the employer could provide the reimbursements in place of pay. Reimbursements provided in place of pay are called “compensation reduction arrangements.” Under compensation reduction arrangements, the employer permits the employees to elect to reduce their taxable compensation in order to receive tax-free reimbursements for parking expenses that the employees have actually incurred.
Consult with Professional Advisors
If you have questions about the tax implications of your fringe benefits (or of your employees), consult with your tax advisor or contact David Schlein at 716-856-3300.