The 2017 tax reform law ushered in new tax cuts, but it also did away with some common write-offs for business expenses. As companies and their tax advisors unpacked what is commonly known as the Tax Cuts and Jobs Act (TCJA), the elimination of two benefits in particular stuck out: deductibility of parking expenses and certain employer-provided food costs. Because these expenses are no longer deductible, they do not help to lower your year-end tax bill. The IRS is cognizant of taxpayer pleas for change and may be remodeling its approach so that taxpayers can find at least partial relief.
Current Expectations for Parking
The TCJA’s rule change did not render parking expenses categorically nondeductible; the tax law continues to allow businesses to deduct parking expenses for customers and the general public. Parking expenses paid or incurred on behalf of a business’s employees are the concern.
When a business contracts with a third party to provide employees with parking benefits, the total parking expenses and the calculation of the nondeductible portion is straightforward. When a business owns or leases its parking lot, the calculation is more nuanced.
Total parking expenses are difficult to ascertain in these owned and leased arrangements. Potential expenses include snow removal, insurance, property taxes, repair and maintenance costs, and many other unseen costs. A portion of rent expense must be attributed to parking that is obtained as part of leased building space, but this portion can be difficult to measure. And even as total parking expenses are determined, the calculation for the nondeductible portion remains a challenge. It requires a four-step calculation. Thereafter, businesses must subtract the nondeductible amount of total parking expenses from total expenses, and must calculate quarterly tax deposit requirements on that amount.
Current Expectations for Food Costs
The TCJA chafed many taxpayers when it comes to the deductibility of employer-provided food costs because it eliminated the deduction for entertainment expenses. Certain food costs at entertainment venues remain 50% deductible, but companies must isolate such food costs in billing statements. The documentation and billing arrangement at times can be impractical. The IRS clarified these documentation procedures in 2018 with IRS Notice 2018-76.
Although it helped, the 2018 notice did not resolve all of the issues around deductibility of employer provided food costs, which is causing some concern for businesses that offer food as an incentive or worksite perk for employees.
IRS Reviewing Concerns
There may be some movement to address these concerns for parking expenses and food costs. At a Federal Bar Association event in May, a spokesperson from the IRS said that some additional changes to these provisions are being considered.
The IRS is considering methods for simplifying the parking calculation, including:
Institute a Safe Harbor for Leased Parking Expenses
If the IRS adopts this plan, companies that lease building space can designate a certain percentage of total lease expenses—perhaps 5 or 10%—as parking costs. From there, companies can calculate the disallowed portion using the four-step method.
Allow Taxpayers to Use Average Parking Costs by Region
The IRS is also considering an option that would allow taxpayers to use regional averages as their total parking expenses. Taxpayers would then calculate the disallowed portion using the four-step method.
Reverse the Guidance that Says Value Cannot Inform Expense
In guidance that was released in December 2018, the IRS stated that the value of parking spaces should not inform taxpayers’ expense calculations. It argued that expenses may exceed intrinsic values, and the TCJA is written to disallow a deduction only for the expense. Since the IRS guidance was released, companies have argued that it is impractical to calculate actual parking expenses, and that a value-based approach is reasonable. The IRS may be leaning in this direction, based on the recent comments, and is re-considering the rule that prohibits such value-based approaches to approximate expenses.
The IRS is also considering a rule that would make employer-provided snacks 100% deductible again. At a recent event, a spokesperson from the IRS said that it is considering a certain dollar amount of snacks per employee that an employer could deduct, which would make snacks provided in a breakroom, for example, deductible.
Only time will tell if these changes are adopted. While we wait for the IRS to decide, businesses must refer to the current guidance for parking expense and food costs. If you have any questions about your parking expenses or food costs, please contact us.
Published on September 10, 2019