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Employee provided parking and autos: Important IRS updates

Employee provided parking and autos – important IRS updates

On December 9, 2020 the IRS issued the final regulations regarding the disallowance of qualified transportation fringe (QTF) benefits.

The benefits impacted are:

  • Transportation in a commuter highway vehicle, if the travel is between the employee’s residence and place of employment
  • Any transit passes
  • Qualified parking
  • Any qualified bicycle commuting reimbursement
The IRS response to comments resulted in the clarification of several items in the proposed regulations related to qualified parking. Among these are:
  • Clarification that the general public includes employees, partners, 2-percent shareholders of S corporations, sole proprietors, independent contractors, clients, or customers of unrelated tenants in a multi-tenant building, as well as customers, clients, or visitors of the taxpayer, individuals delivering goods and services to the taxpayer, students of educational institutions, and patients of health care facilities. The clarification should help many employers in multi-tenant buildings avoid the deduction disallowance, because, under the regulations’ primary purpose test, the majority of the parking at the building will be available to the general public unless the employer occupies a large portion of the building.
  • That parking spaces that are used to park vehicles owned by members of the general public while the vehicles await repair or service by the taxpayer also are treated as provided to the general public.
  • That taxpayers may use any reasonable methodology to determine the number of inventory/unusable spaces in the parking facility. The final regs also provide that a reasonable methodology may include using the average of monthly inventory counts.
  • The final reg adopt the definition of mixed parking expenses (an amount paid or incurred by a taxpayer for both a parking facility and non-parking facility that a taxpayer owns or leases). The final regs expand the special rule to allocate 5% of mixed expenses to parking.
  • To provide relief to taxpayers affected by the COVID-19 pandemic or other federally declared disasters, the final regs add an optional rule in the definition of "peak demand period" for taxpayers who own or lease a parking facility that is in a federally declared disaster area. A taxpayer that uses this rule may identify a typical business day for the tax year in which the disaster occurred by reference to a typical business day in that taxable year prior to the date that the taxpayer's operations were impacted by the federally declared disaster.
Why do these clarifications matter? The answer is they may provide opportunity to qualify some portion of the QTF parking related expense for deduction within the exceptions listed below. The tax code provides three exceptions to the disallowance of QTF, highlighted below:
  • A deduction is not disallowed to the extent it is included in employee compensation.
  • Deduction for goods, service and facilities made available to the general public.
  • The fair market value of the parking benefit is $0. If, in a bona fide transaction, the adequate and full consideration (i.e., the fair market value) of the parking is zero, then the section exception applies even though the taxpayer does not actually sell the parking to employees. The taxpayer has the burden of proving that the fair market value of the parking is zero. However, solely for purposes of this exception, the taxpayer is treated as satisfying this burden if the qualified parking is provided in a rural, industrial, or remote area in which no commercial parking is available and an individual other than an employee ordinarily would not pay to park. 

AUTO LEASE VALUATION RELIEF PROVISION

On January 4, 2021, the IRS released Notice 2021-7, a response to the coronavirus pandemic. The notice provides temporary relief for employers and employees using the automobile lease valuation rule. Employers and employees can choose between the cents per mile and the automobile lease valuation rule to determine the fair market value of the automobile that has been provided to an employee. Previously, under the consistency rules once a method was adopted for a vehicle it must be used by the employer for the vehicle for all subsequent years.

Notice 2021-7 provides employers relief from the consistency rules for 2020 and 2021. Employers using the automobile lease valuation rule may switch to the cents-per-mile valuation beginning March 13, 2020. This change is applicable if, at the beginning of the 2020 calendar year, the employer reasonably expected that an automobile with a fair market value not exceeding $50,400 would be regularly used in the employer's trade or business throughout the year, but due to the COVID-19 pandemic the automobile was not regularly used in the employer's trade or business throughout the year.
Employers that choose to switch from the automobile lease valuation rule to the vehicle cents-per-mile valuation rule in the 2020 calendar year must prorate the value of the vehicle using the automobile lease valuation rule for January 1, 2020, through March 12, 2020. Employers should multiply the applicable Annual Lease Value by a fraction, the numerator of which is the number of days during the period beginning on January 1, 2020, and ending on March 12, 2020 (72 days), and the denominator of which is 365. Employees using the automobile lease valuation rule whose employers switch from the automobile lease valuation rule to the vehicle cents-per-mile valuation rule under the Notice must also switch to the vehicle cents-per-mile valuation rule.
The notice allows employers to revert to the automobile lease valuation in 2021 or continue with the cents-per-mile method. However, the method chosen for 2021 will be subject to the consistency rule.

Final Thoughts
Although these rules for valuing qualified parking provided to employees and the value of providing a company vehicle for employee use can be tedious and possibly confusing it is important for employers to understand and properly apply these rules. Please contact your Herbein tax adviser if you have questions or need assistance complying with these rules.

Article prepared by Chuck Bezler.