If a Maine employer purchases parking spots from a vendor and then charges employees for using them — via paycheck deductions — do the employees qualify for tax-free fringe benefit treatment? The employees in one case asked the IRS for an answer to this question. The IRS has issued an Information Letter and stated the arrangement doesn’t qualify for tax-free treatment. In the arrangement, the employer purchased parking spots from a parking vendor and then allowed employees who wanted to use the parking spots to pay the employer for them using the employees’ own after-tax compensation.

The Law

Maine employers that provide an employee with a “qualified transportation fringe” can exclude the benefit from the employee’s gross income, under the Internal Revenue Code. A “qualified transportation fringe” includes “qualified parking.” The tax code defines “qualified parking” as parking an employer provides that’s located on or near the employer’s business premises.

Parking is considered be provided by the employer if:

• It’s on property that the employer owns or leases;
• The employer reimburses the employee for parking expenses; or
• The employer pays for it.

The Facts of the Case

Here are some of the details involved in this case:

• The employer paid the parking vendor directly for the parking spots.
• The cost of the parking was less than the federal statutory limit ($255 a month in 2017).
• Employees who wished to use the secure parking had to agree, in writing, to reimburse the employer by having the monthly parking fee deducted from their paychecks in the month prior to using the parking.
• The employees couldn’t get a refund of the withheld funds if they didn’t use the parking.
• The employees weren’t given the option of choosing between parking and taxable cash compensation. As a result, the employer didn’t exclude the cost of the parking from the taxable wages of the employees who elected to use it. Instead, the employer simply deducted the cost of the parking from the employees’ after-tax wages.

The IRS Response

The IRS was asked by the employees who elected to use the parking spots whether the amounts deducted from their wages for parking could be excluded from their income and wages as a qualified parking benefit.

In responding, the IRS stated the arrangement didn’t meet the requirements to be considered qualified parking under the tax code. (IRS Information Letter 2017-0007) These types of letters are provided by the IRS National Office in response to requests from taxpayers for general information. They are for informational purposes only and don’t constitute a ruling.

The IRS noted that if the employer instead decided to reimburse employees for qualified parking expenses, it could do so either by providing the reimbursements in the place of pay or, alternatively, the employer could provide reimbursements in addition to the employee’s regular wages. Reimbursements provided in place of pay are called “compensation reduction arrangements.” Under compensation reduction arrangements, the employees are permitted by the employer to elect to reduce their taxable compensation in order to receive tax-free reimbursements for parking expenses that the employees have actually incurred.

Planning to Offer Parking?

If you are a small business in Portland, Maine considering offering parking to your employees, consult with Filler & Associates or your tax advisor if you have questions about the tax implications of your fringe benefits (or of your employees).