Thursday, April 20, 2017

STRUCTURING A PARKING REIMBURSEMENT PLAN AS A TAXABLE OR TAX-FREE FRINGE BENEFIT

By:  Cyndi Moore


In Information Letter 2017-0007, the IRS analyzed an employer’s parking reimbursement arrangement and concluded that it was not a tax-free fringe benefit.
The employer purchased parking spots from a parking vendor near the employer’s office and offered employees the opportunity to use the parking spots.  Those employees who elected to use the parking spots were required to pay the employer by having the monthly parking fee deducted from their paychecks, on an after-tax basis, in the month prior to using the parking spot.  The parking fee was less than the statutory limit for qualified parking of $255 per month.  Employees asked the IRS whether they could exclude the parking fee from their income as a “qualified parking benefit” under Section 132(f)(1)(C) of the Internal Revenue Code.

The IRS concluded that the arrangement was not a “qualified parking benefit” because the deductions were made from employee pay on an after-tax basis.  The employer could have made the arrangement a tax-free benefit in one of two ways:

(1)       The employer could have reimbursed the employees for the amounts paid by each employee for parking (up to the monthly limit of $255); or
(2)       The employer could have allowed the employees to pay the cost of parking on a pre-tax basis by offering the employees a choice between cash and a parking benefit through a “compensation reduction arrangement.”  In this type of arrangement, the employee would make his or her election in the month preceding the month in which the parking spot was used, and then payroll deductions for parking expenses would be made in that month.
The employer in this case was clearly trying to give employees a benefit by making parking spots available to them, but it could have been an even better benefit if the employer had structured the arrangement as a qualified parking benefit. 

If you have any questions, please contact Cyndi Moore of our Troy office at 248-433-7295.  Ms. Moore and Will Elwood are the co-authors of BNA Tax Management Portfolio No. 395, "Employee Fringe Benefits."