IRS releases guidance on employee “parking”

If your company provides its employees with parking at work, there’s a cost associated with each and every parking space. Of course, if yours is a sprawling suburban campus with plenty of acreage, the cost may be negligible. But, if your offices are located in a busy urban area where parking is at a premium, the cost may be substantial–and there may be a tax cost to boot. A new IRS information letter makes it clear that there really is no such thing as “free parking.”

Parking rules

Parking at work is a fringe benefit for employees–even if they don’t view it that way. As such, the value of the parking is treated as compensation, unless a specific tax law exclusion applies.

The tax law does provide an exclusion for qualified transportation fringe benefits, including “qualified parking” (Code Sec. 132(f)(1)). Qualified parking is parking provided by an employer on or near the business premises of the employer. Parking is treated as provided by an employer if it is provided on property the employer owns or leases, the employer pays for parking at another location, or the employer reimburses the employee for parking.

The exclusion for qualified parking is not unlimited. For 2014, the maximum amount that can be excluded from an employee’s income is $250 per month (Rev. Proc. 2013-35, 2013-5 I.R.B. 537). Therefore, if the value of an employee’s parking perks do not exceed that amount, the value can be excluded from the employee’s income. Moreover, the employer is not required to include the value in wages for income tax withholding or employment tax purposes (Code Sec. 3306(a)(20), Code Sec. 3306(b)(16), and Code Sec. 3401(a)(19)).

Example 1. Sue Brown works for Alpha Corp. at its company headquarters. Every work day, Brown parks her car in Alpha’s massive parking lot. Alpha estimates that the fair market value of parking is well under $250 per month. Therefore, no amount is required to be included in Brown’s wages on account of the employer-provided parking.

On the other hand, IRS regulations make it clear that an employee’s gross income includes that amount by which the fair market value of a parking benefit exceeds the amount paid by the employee (if any) and any amount excluded from income as qualified parking. Moreover, if an employer provides an employee with qualified parking that exceeds the monthly limit, the excess must be included in the employee’s wages for income and employment tax purposes (Reg. §1.132-9(b) Q&A-8).

Example 2. Bill Redmond works for Beta Corp. in a major city. Beta Corp. provides Redmond with a designated parking space in the underground parking garage located in its building. Redmond does not pay anything for his parking privileges. Parking spaces in the area rent for $350 month. Since the fair market value of Redmond’s monthly parking benefit ($350) exceeds the maximum exclusion of $250, $100 must be included in Redmond’s wages for income and employment tax purposes. (IRS Information Letter 2014-0017, (June 27, 2014).)

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