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Accounting Today
Accounting Today
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In December 2022, President Biden signed the SECURE 2.0 Act into law, introducing sweeping changes to retirement savings plans. Among the most impactful provisions were new rules governing catch-up contributions—additional amounts employees aged 50 or older can contribute to 401(k) and similar plans beyond the standard annual limit.
Initially, these changes were set to take effect in 2024, but implementation challenges prompted the IRS to issue transitional relief in Notice 2023-62. Now, with the release of final regulations on September 15, 2025, the IRS has clarified key requirements and timelines for employers and plan participants.
The final regulations, issued on September 15, 2025, confirm that starting January 1, 2026, employees aged 50 or older who earned more than $145,000 in FICA wages in the prior year must make catch-up contributions on a Roth (after-tax) basis. This applies to 401(k), 403(b), and governmental 457(b) plans.
Key clarifications include:
Importantly, the final regulations do not extend the administrative transition period granted in Notice 2023-62, which ends December 31, 2025.
In addition to the Roth mandate, the SECURE 2.0 Act introduces enhanced catch-up limits for individuals aged 60 to 63, effective for tax years beginning after December 31, 2024. These individuals may contribute up to 150% of the standard catch-up limit, which amounts to $11,250 in 2025.
This “super catch-up” provision is designed to help workers in their peak earning years accelerate retirement savings before transitioning to standard limits at age 64.
Employers offering workplace retirement plans must prepare now to comply with the Roth catch-up mandate:
Starting in 2026:
The final regulations provide much-needed clarity but also underscore the urgency for employers and employees to act. If you sponsor a retirement plan or are nearing retirement age, now is the time to review your plan structure, payroll systems, and communication strategies.
Need help navigating the new rules? Contact us to verify your plan is compliant and your employees are informed.
The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.
The Tax Cuts and Jobs Act of 2017 (“TCJA”) disallowed a deduction to an employer for any qualified transportation fringe (QTF) provided to an employee. A QTF includes, among other things, “qualified parking” on or near the business premises of the employee provided to its employees (Internal Revenue Code Secs. 274(a)(4) and 132(f)). For the most part, the new rule affects only the employer’sdeduction and not the ability to exclude the fringe benefit from the taxable income of the employee. The new rules are very broad in scope and will affect many employers that provide parking to their employees.
Besides the effect on taxable entities for parity purposes, the new rule would also apply to a tax-exempt employer which is now required to increase its unrelated business taxable income (“UBTI”) by the amount of parking expenses that would be nondeductible by a taxable employer (Code Sec. 512(a)(7)). In addition to parking, QTFs impacted by the new rules also include transportation in a highway commuter vehicle and transit passes.
On December 20th, the Internal Revenue Service along with the Treasury Department issued highly-anticipated interim guidance, Notice 2018-99, on the determination of (1) the QTF parking expenses that are no longer deductible under Section 274(a)(4); and (2) the increase in UBTI resulting from the nondeductibility of those expenses. This alert focuses on the impact of the new rules and IRS guidance primarily from the perspective of a for-profit employer, though the rules apply in similar fashion to tax-exempts.
Based on Notice 2018-99, the determination of the nondeductible parking expense is based on the costs paid or incurred for parking and not on the value of the parking provided to the employee. Specifically, the calculation is dependent upon whether (1) the employer pays a third party for employee parking; or (2) the employer owns or leases the parking facility.
Third-Party Parking Expenses: Amounts paid by an employer to a third party for employee parking is generally treated as a disallowed expense. However, if the amount paid by an employer exceeds the monthly exclusion limitation ($260 per month per employee for 2018), the excess amount is treated as compensation to the employee and must be included on the employee’s W-2. Any amounts included on the employee’s W-2 should be excepted from the disallowance rule and deductible as wages.
Employer-Owned/Leased Parking Facility: If the employer owns or leases a parking facility, it is permitted to use any reasonable method to calculate expenses allocable to employee parking. (See below for a discussion of allocation of expenses.) Total parking expenses include the following: repairs, maintenance, utility costs, insurance, property taxes, interest, snow/ice removal, leaf removal, trash removal, cleaning, landscaping costs, parking lot attendant fees, security, and rent or lease payments. Fortunately, depreciation is excluded from the definition of a parking “expense” which significantly reduces the potential tax liability for owners of parking facilities.
Notice 2018-99 provides a detailed 4-step methodology as a reasonable method to allocate expenses when a parking facility is owned or leased by an employer.
First, the allocable cost of spots reserved for employee parking is disallowed. For example, if an employer incurs total expenses of $10,000 for a parking facility that has 500 spaces, 50 of which are reserved for employee parking, the nondeductible portion would be $1,000 ($10,000 x 50/500).
Second, if the primary use of the remaining spots is for the general public, the remainder of the parking expenses would not be subject to disallowance. In general, the “primary use” test is satisfied if use by the general public exceeds 50% of the actual usage of those spots. Parking spaces available to the general public are typically those used by customers, clients, visitors, and individuals delivering goods or services.
As an example, a parking facility with 500 spaces (with no employee-reserved parking) in which employees usually utilize 50 spots, with the remaining spots occupied by visitors would satisfy the primary use test. Accordingly, the expenses for that parking facility would be exempt from disallowance under this general public exception.
The third step allocates parking expenses attributable to spots reserved for non-employees such as visitors and customers - as well as partners, sole proprietors, and 2-percent shareholders of S Corporations – which are also exempt from the Section 274 disallowance.
Finally, any remaining parking expenses are allocated based on the usage of the facility during normal business hours on a typical business day.
An employer that currently has reserved employee spots has a limited opportunity to change the treatment of those spots. Under the IRS Notice, an employer may change their parking arrangements (such as signage or access) by March 31, 2019, and treat those spots as not reserved employee spots subject to the disallowance and apply this retroactively to January 1, 2018.
Taxpayer G, an accounting firm, leases a parking lot adjacent to its office building. G incurs $10,000 of total parking expenses related to the lease payments. G’s leased parking lot has 100 spots that are used by its clients and employees. G usually has approximately 60 employees parking in the leased parking lot in non-reserved spots during normal business hours on a typical business day.
Step 1. Because none of G’s leased parking spots are exclusively reserved for employees, there is no amount to be specifically allocated to reserved employee spots.
Step 2. The primary use of G’s leased parking lot is not to provide parking to the general public because 60% (60/100 = 60%) of the lot is used by its employees. Thus, G may not utilize the general public exception from the Section 274(a) disallowance provided by Section 274(e)(7).
Step 3. Because none of G’s parking spots are exclusively reserved for nonemployees, there is no amount to be specifically allocated to reserved nonemployee spots.
Step 4. G must reasonably determine the use of the parking spots and the related expenses allocable to employee parking. Because 60% (60/100 = 60%) of G’s parking spots are used by G’s employees during normal business hours on a typical business day, G reasonably determines that $6,000 ($10,000 x 60% = $6,000) of G’s total parking expenses is subject to the disallowance.
Notice 2018-99 provides welcomed guidance regarding employee parking and disallowance of parking expenses. Although depreciation costs are not considered as parking expenses, all employers should analyze expenses associated with any parking facility in order to appropriately calculate any disallowed deduction. In addition, where an employer pays a third party for employee parking spots, consideration should be given as to whether a portion those expenses should be reported as W-2 wages.
Further, if an employer offers reserved spaces for employees, it may wish to decrease or eliminate reserved employee parking in order to minimize the disallowance of deductions. As noted above, a transition rule permits a modification in employee reserve spot designation which can be applied retroactively to January 1, 2018.
If you have questions on the new rules for employer-provided parking, please contact an Elliott Davis tax advisor.
The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.
Taxing authorities have heavily scrutinized the compensation of closely held business, applying a reasonableness standard. Reasonable compensation is defined in Treasury Regulations as “such amount as would ordinarily be paid for like services by like enterprises under like circumstances.”
Before looking at whether compensation aligns with this definition, let’s first consider why this is an issue. For an S corporation, reasonable compensation can come into question when owners are paid a relatively small salary for services provided to the Company while paying relatively higher distributions. On the contrary, C corporations may encounter issues when the owner’s compensation exceeds what the IRS considers reasonable, with the IRS taking the position that it should be at least partially classified as a distribution of profits in the form of a dividend.
When an owner of a C corporation is providing services to the company as an employee, the company is generally incentivized to pay higher compensation. This higher compensation decreases its taxable income, thereby reducing its overall tax liability. Therefore, paying out higher deductible compensation can be more appealing than paying nondeductible dividends, which results in double-taxation to the shareholder(s). This can lead to an “excessive” and “unreasonable” amount of compensation paid to the owners, which may raise a red flag to the IRS.
Conversely, an S corporation is incentivized to pay lower shareholder salary and higher distributions, which are not subject to double taxation. Additionally, unlike salary, distributions are not subject to payroll taxes. Therefore, coupling smaller compensation with larger distributions decreases the amount of payroll tax liability while netting the owner the same amount.
What qualifies as a ”reasonable” amount of compensation when paying owners, and how can one avoid trouble when setting compensation amounts? While there is not a bright-line test, there are some guidelines that both C corporations and S corporations can use to address this issue. The Tax Court case of Choate Construction Company v. Commissioner in 1997 was the genesis of the guidelines currently in place.
William Choate (Choate) incorporated Choate Construction Company in 1989. Choate worked extensively during the first 3 years of business before hiring and training other employees to help manage the company. In 1992, Choate received a salary of $935,000. Upon examination, the IRS took the position that the amount of compensation was excessive and, therefore, not deductible.
Choate Construction Company challenged the IRS position in court with the burden of proving that William was paid a reasonable salary for his services to the Company. Ultimately, the Tax Court agreed with the Company, finding the amount of compensation paid to be reasonable – and in so doing, set a precedent for the qualifications of reasonable compensation.
The issue of Choate Construction Company v. Commissioner is an example of a C corporation paying out compensation that appears unreasonably high. However, as explained above, an S corporation faces an entirely different issue regarding reasonableness.
For example, Joseph Radtke found himself under scrutiny because he was paid no salary as the sole shareholder and director of an S corporation. Instead, he withdrew money from the S corporation through dividend distributions. Therefore, the reasonableness of his compensation - or lack thereof - was called into question. Ultimately, the court deemed that his dividends took the place of a salary and should be considered compensation subject to payroll taxes.
Although the issues raised are different between Radtke’s and Choate’s cases, the guidelines used by the Court in the Choate Construction Company case for setting reasonable compensation can be helpful across all businesses.
A brief outline of the items to consider when setting compensation, many which relate to the decision in the Choate Construction case, are listed below:
1. Employee’s qualifications – This includes the employee’s education, intelligence, motivation, leadership, and the quality of services rendered.
2. Nature and scope of work – Contribution to the success of the business.
3. Size and complexity of the business – Consider how the amount compares to compensation paid for similar services by similar enterprises.
4. General economic conditions and financial condition of the company – General economic conditions can affect the company’s performance, thus showing the extent of the employee/owner’s effect on the company. The past and present financial condition of the specific company is relevant to the amount of compensation that can be paid.
5. Distributions to shareholders and retained earnings – If a corporation fails to pay dividends during profitable years, or if an S corporation pays out too much in distributions, it may be a sign that compensation was unreasonably set.
6. Whether the employee and employer dealt at arm’s length – Some courts have applied an “Independent Investor Test” to determine if the salary is reasonable.
7. Salary scale for employees – The reasonableness of compensation paid to shareholders versus non-shareholders and unrelated employees is a significant factor.
8. Compensation paid in prior years – The IRS looks at an employee’s salary history to explain the compensation increases. The IRS may challenge deductions taken by the employer for such compensation if there is no corresponding increase to job responsibilities.
Applying these guidelines when setting compensation amounts provides justification if questioned by taxing authorities. Please contact a tax professional at Elliott Davis for further details as well as best practices for compliance.
The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.
