In an information letter, the IRS concludes that benefits an employer provides under its company parking policy are taxable income to the employees that choose to use the benefit.
An IRS information letter is the agency’s response to a taxpayer’s request for information about the taxation of a specific benefit under particular circumstances. Information letters are not binding legal advice and may not be used or cited as precedent. However, they provide general guidance for other employers that provide, or are contemplating providing, similar benefits to employees under similar circumstances.
An employer implemented a policy under which it contracted and paid for secure parking for its employees in a parking facility near the office. The employer pays the parking vendor directly for the parking spots. Employees who wish to use the parking must agree, in writing, to reimburse the employer by having the monthly parking fee deducted from their pay the month before they use the parking. The employees cannot get a refund of the amounts withheld if they do not use the parking.
The cost of the parking is less than the statutory limit under Internal Revenue Code (IRC) § 132. The employees do not have the option to choose between taxable cash compensation and parking. Accordingly, the employer does not exclude the cost of the parking from the employees’ taxable wages. Instead, the employer deducts the cost of the parking from the employees’ after-tax wages.
The employer requested information from the IRS because employees who have elected to use the parking spots have asked whether the amounts deducted from their wages should be excluded from their taxable income and wages as a “qualified parking” benefit under the IRC.
‘Qualified Parking’ Under the IRC
Under the IRC, an employer-provided fringe benefit is presumed to be taxable income to employees unless it is specifically excluded from income by another section of the IRC. Under IRC § 132(a)(5), “qualified transportation fringe benefits” are excluded from employees’ gross income. “Qualified parking” that is “provided” to employees on or near an employer’s work premises is excluded from gross income under IRC § 132(f)(1)(C). Under IRC regulation § 1.132- 9(b) Q/A 4, parking is “provided” by an employer if:
- It is on employer-owned or -leased property;
- It is paid for by the employer; or
- The employer reimburses employees for their parking expenses.
In its information letter responding to the employer’s inquiry, the IRS concluded that in the employer’s particular situation, the parking benefits are not “qualified transportation fringe benefits” and, therefore, are taxable to the employees. To be considered “qualified”, and therefore tax-free, the employer would have to reimburse the employees for their parking expenses by providing the reimbursements either:
- In addition to the employee’s regular wages; or
- In place of pay.
Reimbursements provided in place of pay are called “compensation reduction arrangements.” Under such arrangements, an employer permits employees to elect to reduce their taxable compensation in order to receive tax-free reimbursements for parking expenses they have actually incurred.
This particular employer’s arrangement, under which the employer purchases parking spots from a parking vendor and then permits employees to pay the employer for the parking spots using the employees’ own after-tax compensation, does not meet the definition of “qualified parking” under the IRC and regulations.
If you should have any questions, please contact your HR Specialist at 925-556-4404.