Qualified Transportation Fringe, Transportation and Commuting Expenses under Section 274
| Published date | 23 June 2020 |
| Citation | 85 FR 37599 |
| Record Number | 2020-13506 |
| Section | Proposed rules |
| Court | Internal Revenue Service,Treasury Department |
Federal Register, Volume 85 Issue 121 (Tuesday, June 23, 2020)
[Federal Register Volume 85, Number 121 (Tuesday, June 23, 2020)]
[Proposed Rules]
[Pages 37599-37615]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-13506]
=======================================================================
-----------------------------------------------------------------------
DEPARTMENT OF TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-119307-19]
RIN 1545-BP49
Qualified Transportation Fringe, Transportation and Commuting
Expenses under Section 274
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
-----------------------------------------------------------------------
SUMMARY: This document contains proposed regulations to implement
legislative changes to section 274 of the Internal Revenue Code (Code)
effective for taxable years beginning after December 31, 2017.
Specifically, the proposed regulations address the elimination of the
deduction under section 274 for expenses related to certain
transportation and commuting benefits provided by employers to their
employees in taxable years beginning after December 31, 2017. The
proposed regulations provide guidance to determine the amount of such
expenses that is nondeductible and apply certain exceptions under
section 274(e) that may allow such expenses to be deductible. These
proposed regulations affect taxpayers who pay or incur such expenses.
DATES: Written or electronic comments and requests for a public hearing
must be received by August 24, 2020. Requests for a public hearing must
be submitted as prescribed in the ``Comments and Requests for a Public
Hearing'' section.
ADDRESSES: Commenters are strongly encouraged to submit public comments
electronically. Submit electronic submissions via the Federal
Rulemaking Portal at www.regulations.gov (indicate IRS and REG-119307-
19) by following the online instructions for submitting comments. Once
submitted to the Federal Rulemaking Portal, comments cannot be edited
or withdrawn. The IRS expects to have limited personnel available to
process public comments that are submitted on paper through mail. Until
further notice, any comments submitted on paper will be considered to
the extent practicable. The Department of the Treasury (Treasury
Department) and the IRS will publish for public availability any
comment submitted electronically, and to the extent practicable any
comment submitted on paper, to its public docket. Send paper
submissions to: CC:PA:LPD:PR (REG-119307-19), room
[[Page 37600]]
5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station,
Washington, DC 20044.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
call Patrick Clinton of the Office of Associate Chief Counsel (Income
Tax and Accounting), (202) 317-7005; concerning the submission of
comments and/or requests for a public hearing, Regina L. Johnson, (202)
317-5177 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This notice of proposed rulemaking contains proposed amendments to
the Income Tax Regulations (26 CFR part 1) under section 274 of the
Code.
1. Statutory Framework
Section 274 was added to the Code by section 4 of the Revenue Act
of 1962, Public Law 87-834 (76 Stat. 960) and has been amended numerous
times over the years. In general, section 274 limits or disallows
deductions for certain expenditures that otherwise would be allowable
under chapter 1 of the Code (chapter 1), primarily under section
162(a), which allows a deduction for ordinary and necessary expenses
paid or incurred during the taxable year in carrying on any trade or
business.
On December 22, 2017, section 274 was amended by section 13304 of
Public Law 115-97 (131 Stat. 2054), commonly referred to as the Tax
Cuts and Jobs Act (TCJA), to disallow a deduction for the expense of
any qualified transportation fringe (QTF) as defined in section 132(f)
provided to an employee of the taxpayer, effective for amounts paid or
incurred after December 31, 2017.
The TCJA also added section 512(a)(7) providing that a tax-exempt
organization's unrelated business taxable income (UBTI) is increased by
the amount of the QTF expense for which a deduction is not allowable
under section 274, effective for amounts paid or incurred after
December 31, 2017. However, on December 20, 2019, section 512(a)(7) was
repealed retroactive to the original date of enactment of the TCJA by
section 302 of the Taxpayer Certainty and Disaster Tax Relief Act of
2019, enacted as part of the Further Consolidated Appropriations Act,
2020, Public Law 116-94, 133 Stat. 2534, Div. Q, Title III (2019).
Although section 512(a)(7) was retroactively repealed, the rules of
section 274 and these proposed regulations apply to tax exempt
organizations to the extent the amount of the QTF expenses paid or
incurred by an exempt organization is directly connected with an
unrelated trade or business conducted by the exempt organization. In
such case, the amount of the QTF expenses directly connected with the
unrelated trade or business is subject to the disallowance under
section 274(a)(4) and, thus, is disallowed as a deduction in
calculating the UBTI attributable to such unrelated trade or business
under the general rule of section 512(a)(1). While the examples set
forth in proposed Sec. 1.274-13 involve taxable entities, tax exempt
organizations with unrelated trades or businesses may use the examples
to assist in determining the amount of the section 274(a)(4)
disallowance for purposes of calculating their UBTI under section
512(a)(1).
Finally, the TCJA added section 274(l), which provides that no
deduction is allowed under chapter 1 for any expense incurred for
providing any transportation, or any payment or reimbursement, to an
employee of the taxpayer in connection with travel between the
employee's residence and place of employment, except as necessary for
ensuring the safety of the employee, effective for transportation and
commuting expenses paid or incurred after December 31, 2017.
2. Qualified Transportation Fringes
Section 132 generally excludes from employees' gross income the
value of certain fringe benefits. Section 132(a)(5) generally provides
that gross income does not include any fringe benefit that qualifies as
a QTF under section 132(f). QTFs are defined in section 132(f)(1) to
mean any of the following provided by an employer to an employee: (1)
Transportation in a commuter highway vehicle between the employee's
residence and place of employment, (2) any transit pass, (3) qualified
parking, and (4) any qualified bicycle commuting reimbursement. Section
132(f)(5)(A), (B), (C), and (F)(i) define transit pass, commuter
highway vehicle, qualified parking, and qualified bicycle commuting
reimbursement, respectively. Section 132(f)(2) provides that the amount
of QTFs provided by an employer to any employee that can be excluded
from gross income under section 132(a)(5) cannot exceed a maximum
monthly dollar amount, adjusted for inflation. The adjusted maximum
monthly excludable amount for 2020 is $270.
Although section 132(f)(1) includes qualified bicycle commuting
reimbursements as a QTF, section 132(f)(8) provides that the inclusion
of qualified bicycle commuting reimbursements in the definition of a
QTF is suspended for taxable years beginning after December 31, 2017,
and before January 1, 2026. Accordingly, for such taxable years,
qualified bicycle commuting reimbursements are not excluded from an
employee's income as a QTF.
Section 274(a)(4), as added by the TCJA, provides that no deduction
is allowed under chapter 1 for the expense of any QTF (as defined in
section 132(f)) provided by taxpayers to their employees for expenses
paid or incurred after December 31, 2017. Although the value of a QTF
is relevant in determining the exclusion under section 132(f) and
whether the section 274(e)(2) exception for expenses treated as
compensation applies, the deduction disallowed under section 274(a)(4)
relates to the expense of providing a QTF, not its value. In addition,
the disallowance of a deduction for commuting and transportation
expenses under section 274(l) is suspended for any qualified bicycle
commuting reimbursement (described in section 132(f)(5)(F)) paid or
incurred after December 31, 2017, and before January 1, 2026. Thus, for
such period, deductions for qualified bicycle commuting reimbursements
are not disallowed under sections 274(a)(4) and 274(l).
A. Section 274(e) Exceptions to Section 274(a)(4)
Section 274(e) enumerates nine specific exceptions to section
274(a), three of which, sections 274(e)(2), (e)(7), and (e)(8), are
relevant for QTFs. Deductions for expenses that are within any of the
three exceptions in section 274(e) are not disallowed under section
274(a)(4).
Section 274(e)(2) applies to expenses for goods, services, and
facilities, to the extent that the expenses are treated by the
taxpayer, with respect to the recipient of the entertainment,
amusement, or recreation, as compensation to its employees under
chapter 1 and as wages to its employees under chapter 24 of the Code
(chapter 24). Although the language in section 274(e)(2) refers to a
recipient of entertainment, amusement, or recreation, it applies as a
specific exception to the application of section 274(a), which, as
amended by the TCJA, includes the QTF expense disallowance in section
274(a)(4). Thus, the Treasury Department and the IRS have determined
that QTF expenses are included in this exception to the extent that the
fair market value of the QTF exceeds the section 132(f)(2) limitation
on exclusion and such excess amount is treated by the taxpayer as
compensation to the employee on the taxpayer's return of tax under
chapter 1 and wages to
[[Page 37601]]
such employee for purposes of chapter 24. See Sec. 1.132-9(b), Q/A-8.
This interpretation is consistent with Congressional intent. See H.R.
Rep. No. 115-409, at 266 (2017) (``As part of its broader tax reform
effort, the Committee believes that certain nontaxable fringe benefits
should not be deductible by employers if not includible in income of
employees.'').
Section 274(e)(7) applies to expenses for goods, services, and
facilities made available by the taxpayer to the general public.
Section 274(e)(8) applies to expenses for goods or services (including
the use of facilities) which are sold by the taxpayer in a bona fide
transaction for an adequate and full consideration in money or money's
worth.
B. Qualified Parking
As explained earlier in part 2 of this Background, QTFs are defined
in section 132(f)(1) to include qualified parking. The term ``qualified
parking'' is defined in section 132(f)(5)(C) as parking provided to an
employee on or near the business premises of the employer or on or near
a location from which the employee commutes to work. The term does not
include any parking on or near property used by the employee for
residential purposes.
On December 24, 2018, the Treasury Department and the IRS published
Notice 2018-99, 2018-52 I.R.B. 1067, ``Parking Expenses for Qualified
Transportation Fringes under Sec. 274(a)(4) and Sec. 512(a)(7) of the
Internal Revenue Code''. Notice 2018-99 explains that the Treasury
Department and the IRS have received questions about how to determine
the amount of parking expenses that is nondeductible or treated as
UBTI. Notice 2018-99 provides interim guidance for taxpayers to
determine the amount of parking expenses for QTFs that is nondeductible
under section 274(a)(4) (nondeductible amount) and for tax exempt
organizations to determine the corresponding increase in the amount of
UBTI under section 512(a)(7) attributable to the nondeductible parking
expenses. Because section 512(a)(7) was retroactively repealed, as
noted in part 1 of this Background, the following discussion of Notice
2018-99 focuses only on section 274(a)(4).
Under Notice 2018-99, the method for determining the nondeductible
amount depends on whether the taxpayer pays a third party to provide
parking for its employees or the taxpayer owns or leases a parking
facility where its employees park. If a taxpayer pays a third party an
amount so that its employees may park at the third party's parking
facility, the section 274(a)(4) disallowance generally is calculated as
the taxpayer's total annual cost of employee parking paid to the third
party. However, if the amount the taxpayer pays to a third party for an
employee's parking exceeds the section 132(f)(2) monthly limitation on
exclusion, which for 2020 is $270 per employee, that excess amount
generally must be treated by the taxpayer as compensation and wages to
the employee. As a result, the total of the monthly amount in excess of
$270 per employee that is treated as compensation and wages is excepted
from the taxpayer's section 274(a) disallowance amount by section
274(e)(2).
Notice 2018-99 provides that if a taxpayer owns or leases all or a
portion of one or more parking facilities where its employees park, the
section 274(a)(4) disallowance may be calculated using any reasonable
method and provides a four-step methodology that is deemed to be a
reasonable method. However, using the value of employee parking to
determine expenses allocable to employee parking in a parking facility
owned or leased by the taxpayer is not a reasonable method because
section 274(a)(4) disallows a deduction for the expense of providing a
QTF, regardless of its value. Furthermore, for taxable years beginning
on or after January 1, 2019, a method under Notice 2018-99 that fails
to allocate expenses to reserved employee spaces cannot be a reasonable
method.
For purposes of Notice 2018-99, a ``parking facility'' includes
indoor and outdoor garages and other structures, as well as parking
lots and other areas, where employees may park on or near the business
premises of the employer or on or near a location from which the
employee commutes to work. The term does not include any parking on or
near property used by the employee for residential purposes. If a
taxpayer owns or leases more than one parking facility in a single
geographic location, the taxpayer may aggregate the number of spaces in
those parking facilities. However, if a taxpayer owns or leases parking
facilities in more than one geographic location, the taxpayer may not
aggregate the spaces in parking facilities that are in different
geographic locations.
Also for purposes of Notice 2018-99, ``total parking expenses''
include, but are not limited to, repairs, maintenance, utility costs,
insurance, property taxes, interest, snow and ice removal, leaf
removal, trash removal, cleaning, landscape costs, parking lot
attendant expenses, security, and rent or lease payments or a portion
of a rent or lease payment (if not broken out separately). A deduction
for an allowance for depreciation on a parking structure owned by a
taxpayer and used for parking by the taxpayer's employees is an
allowance for the exhaustion, wear and tear, and obsolescence of
property, and not a parking expense for purposes of Notice 2018-99.
Compare section 274(a)(1) (disallowing deductions for any ``item'' with
respect to entertainment activities or facilities) with section
274(a)(4) (disallowing deductions for the ``expense'' of any QTF). See
also W.L. Schautz v. United States, 567 F.2d 373, 376 (Ct. Cl. 1977)
(noting that section 274(a)(1) applies to deductions broadly, not to
expenses), and Gordon v. Commissioner, 37 T.C. 986, 987 (1962) (``Any
allowance for depreciation is not an `expense paid' or `amount paid.'
''). Expenses paid or incurred for items not located on or in the
parking facility, including items related to property next to the
parking facility, such as landscaping or lighting, also are not
included.
The term ``employee,'' as used in Notice 2018-99, is defined in
Sec. Sec. 1.132-1(b)(2)(i) and 1.132-9(b), Q/A-5, as any individual
who is currently employed by the employer; the term includes common law
employees and other statutory employees, such as officers of
corporations. Section 1.132-9(b), Q/A-24, explains that partners, 2-
percent shareholders of S corporations, sole proprietors, and
independent contractors are not employees for purposes of section
132(f).
Notice 2018-99 provides a four-step method deemed to be a
reasonable method for calculating the amount of parking expenses that
is nondeductible under section 274(a)(4).
i. Step 1
First, the taxpayer calculates the disallowance for reserved
employee spaces. A taxpayer that owns or leases all or a portion of one
or more parking facilities must identify the number of spaces in the
parking facility, or the taxpayer's portion thereof, exclusively
reserved for the taxpayer's employees (reserved employee spaces).
Employee spaces in the parking facility, or portion thereof, may be
exclusively reserved for employees by a variety of methods, including,
but not limited to, specific signage (for example, ``Employee Parking
Only'') or a separate facility or portion of a facility segregated by a
barrier to entry or limited by terms of access.
The taxpayer must then determine the percentage of reserved
employee spaces in relation to total parking spaces and
[[Page 37602]]
multiply that percentage by the taxpayer's total parking expenses for
the parking facility. The product is the amount of the deduction for
total parking expenses that is disallowed under section 274(a)(4) for
reserved employee spaces.
ii. Step 2
Second, the taxpayer determines the primary use of remaining spaces
(primary use test). The taxpayer may identify the remaining parking
spaces in the parking facility and determine whether their primary use
is to provide parking to the general public. If the primary use of the
remaining parking spaces in the parking facility is to provide parking
to the general public, then the remaining total parking expenses for
the parking facility are excepted from the section 274(a) disallowance
by the general public exception under section 274(e)(7).
For purposes of calculating the disallowance, the term ``primary
use'' means greater than 50 percent of actual or estimated usage of the
parking spaces in the parking facility. Primary use of the parking
spaces is tested during normal business hours on a typical business
day. Nonreserved parking spaces that are available to the general
public but empty during normal business hours on a typical business day
are treated as provided to the general public. In addition, if the
actual or estimated usage of the parking spaces varies significantly
between days of the week or times of the year, the taxpayer may use any
reasonable method to determine the average actual or estimated usage.
For purposes of Notice 2018-99, the term ``general public''
includes, but is not limited to, customers, clients, visitors,
individuals delivering goods or services to the taxpayer, students of
an educational institution, patients of a health care facility, and
congregants of a religious organization. As noted in part 1 of the
Background, section 512(a)(7) was retroactively repealed, therefore
``congregants of a religious organization'' is not included in the
definition of the ``general public'' in these proposed regulations. The
general public does not include employees, partners, 2-percent
shareholders of S corporations, or independent contractors of the
taxpayer.
iii. Step 3
Third, the taxpayer calculates the allowance for reserved
nonemployee spaces. If the primary use of a taxpayer's remaining
parking spaces is not to provide parking to the general public, the
taxpayer may identify the number of spaces in the parking facility, or
the taxpayer's portion thereof, exclusively reserved for nonemployees
(reserved nonemployee spaces). For example, reserved nonemployee spaces
include spaces reserved for visitors and customers, as well as spaces
reserved for partners, sole proprietors, and 2-percent shareholders of
S corporations.
Notice 2018-99 explains that the number of reserved nonemployee
spaces in the parking facility, or portion thereof, may be exclusively
reserved for nonemployees by a variety of methods, including, but not
limited to, specific signage (for example, ``Customer Parking Only'')
or a separate facility or portion of a facility segregated by a barrier
to entry or limited by terms of access. A taxpayer that has no reserved
nonemployee spaces may proceed to Step 4.
A taxpayer that has reserved nonemployee spaces may determine the
percentage of reserved nonemployee spaces in relation to the remaining
total parking spaces and multiply that percentage by the taxpayer's
remaining total parking expenses. The product is the amount of the
deduction for remaining total parking expenses that is not disallowed
under section 274(a)(4).
iv. Step 4
Fourth, the taxpayer determines the remaining use and allocable
expenses of any remaining parking spaces. If the taxpayer completes
Steps 1 through 3 of the method in Notice 2018-99 and has any remaining
parking expenses not specifically categorized as deductible or
nondeductible, the taxpayer must reasonably determine the employee use
of the remaining parking spaces during normal business hours on a
typical business day and the related expenses allocable to employee
parking spaces. Methods to determine employee use of the remaining
parking spaces may include specifically identifying the number of
employee spaces based on actual or estimated usage. Actual or estimated
usage may be based on the number of spaces, the number of employees,
the hours of use, or other measures.
C. Comments on Notice 2018-99
Notice 2018-99 requested comments for future guidance to further
clarify the treatment of QTFs under section 274. In particular, the
Treasury Department and the IRS requested comments on the definitions
of ``primary use'' and ``general public'', whether primary use should
be used to determine the extent to which parking is made available to
the general public under section 274(e)(7), other methodologies for
determining the use of the parking spaces and the related expenses
allocable to employee parking, the applicability of section 274(e)(8)
to expenses for any goods or services that constitute a QTF sold by the
taxpayer to an employee in a bona fide transaction for an adequate and
full consideration in money or money's worth, and the circumstances
under which such a transaction should be excluded from the term QTF for
purposes of section 274(a)(4).
The Treasury Department and the IRS received approximately 500
comments in response to Notice 2018-99. All comments were considered in
drafting these proposed regulations and are available at
www.regulations.gov or upon request. Approximately 200 comments
addressed issues involving section 512(a)(7), which was retroactively
repealed, as explained in part 1 of the Background. Approximately 70
comments expressed support for the disallowance of parking expenses in
section 274(a)(4) on environmental policy grounds and encouraged the
Treasury Department and the IRS to further discourage employers from
subsidizing employees that drive to work. The majority of the remaining
comments requested additional methodologies and simplified rules for
taxpayers that own or lease parking facilities to calculate the amount
of the parking expense disallowance.
Several of the comments addressing section 274(a)(4) are summarized
in the Explanation of Provisions. However, comments recommending
statutory revisions or addressing issues outside the scope of these
proposed regulations, such as environmental policy issues, are not
addressed.
Explanation of Provisions
The proposed regulations describe and clarify the statutory
requirements of section 274(a)(4) and 274(l), as well as the
applicability of certain exceptions under section 274(e) to QTF
expenses. To implement the TCJA's disallowance of deductions for QTF
expenses under section 274(a)(4), the proposed regulations create a new
Sec. 1.274-13 (proposed Sec. 1.274-13) to address QTF expenses paid
or incurred by an employer, and the application of certain exceptions
in section 274(e) to QTF expenses. Further, the proposed regulations
create a new Sec. 1.274-14 (proposed Sec. 1.274-14) to address
transportation and commuting expenses paid or incurred by an employer.
As discussed in part 2 of the Background, the statutory changes made by
the TCJA
[[Page 37603]]
apply to QTF expenses paid or incurred by employers after December 31,
2017.
1. Qualified Transportation Fringes
A. In General
Proposed Sec. 1.274-13 restates the statutory rules under section
274(a)(4), defines relevant terms, and modifies certain guidance in
Notice 2018-99, providing a general rule and three simplified
methodologies to determine the amount of nondeductible parking expenses
when a parking facility is owned or leased by the taxpayer.
Additionally, the proposed regulations build on Notice 2018-99 to
include rules addressing the deduction disallowance for expenses
related to providing employees transportation in a commuter highway
vehicle and transit pass QTFs.
The proposed regulations include special rules to clarify and
simplify the calculations underlying the methodologies to determine the
amount of QTF parking expenses. In addition, the proposed regulations
generally apply the guidance in Notice 2018-99 and the applicable
exceptions in section 274(e) to all QTF expenses.
Specifically, as in Notice 2018-99, the proposed regulations
provide that if the taxpayer pays a third party for its employee's QTF,
the section 274(a)(4) disallowance is generally calculated as the
taxpayer's total annual cost of the QTF paid to the third party. With
regard to QTF parking expenses, the proposed regulations provide that
if the taxpayer owns or leases all or a portion of one or more parking
facilities, the section 274(a)(4) disallowance may be calculated using
a general rule, as defined below, or any one of three simplified
methodologies. Taxpayers may choose to apply the general rule or a
simplified methodology for each taxable year and for each parking
facility. Special rules and definitions are included in the proposed
regulations for allocating certain mixed parking expenses, aggregating
parking spaces by geographic location, removing inventory/unusable
spaces from available parking spaces, defining general public for
multi-tenant building parking facilities, and disregarding five or
fewer reserved parking spaces if the reserved spaces are 5 percent or
less of total parking spaces. Taxpayers may use statistical sampling
with the general rule or simplified methodologies if they follow the
procedures in Rev. Proc. 2011-42, 2011-37 I.R.B. 318, as corrected by
Ann. 2013-46, 2013-48 I.R.B. 593.
The general rule in the proposed regulations allows taxpayers to
calculate the disallowance based on a reasonable interpretation of
section 274(a)(4). However, taxpayers must use the expense paid or
incurred in providing a QTF instead of its value to an employee,
allocate parking expenses to reserved employee spaces, and properly
apply the exception for parking made available to the general public. A
special rule for aggregating parking spaces by geographic location may
be used with the general rule.
The proposed regulations also include three simplified
methodologies that taxpayers may use instead of the general rule. Under
the first simplified methodology, the ``qualified parking limit
methodology,'' taxpayers calculate the disallowance by multiplying the
total number of spaces used by employees during the peak demand period,
or, alternatively, the total number of the taxpayer's employees, by the
section 132(f)(2) monthly per employee limitation on exclusion for
qualified parking ($270), for each month in the taxable year.
The second simplified methodology, the ``primary use methodology,''
is largely based on the method deemed reasonable in Notice 2018-99,
modified in response to comments received. Special rules for allocating
certain mixed parking expenses and aggregating parking spaces by
geographic location may be used with the primary use methodology.
Definitions in Notice 2018-99 for employee, general public, parking
facility, total parking spaces, reserved employee spaces, reserved
nonemployee spaces, primary use, and total parking expenses, as
modified in response to comments, are also included in the proposed
regulations. New definitions for geographic location, inventory/
unusable spaces, available parking spaces, peak demand period, and
mixed parking expense are included in the proposed regulations to
clarify the methodology in response to comments received.
The final simplified methodology is the ``cost per space
methodology,'' which allows taxpayers to calculate the disallowance by
multiplying the cost per parking space by the number of available
parking spaces to be used by employees during the peak demand period.
Cost per space is calculated by dividing total parking expenses
(including expenses for inventory/unusable spaces) by total parking
spaces (including inventory/unusable spaces). Special rules for
allocating certain mixed parking expenses and aggregating parking
spaces by geographic location may be used with the cost per space
methodology.
B. Definitions
As described below, the proposed regulations generally include the
definitions from Notice 2018-99, modified in response to comments
received, along with new definitions to clarify terms as needed.
i. Qualified Transportation Fringe
The proposed regulations add a definition for the term ``qualified
transportation fringe.'' The definition is based on section 132(f)(1),
except that it does not include qualified bicycle commuting
reimbursements for the reasons described in part 2 of the Background.
Thus, the proposed regulations provide that the term ``qualified
transportation fringe'' means any of the following provided by an
employer to an employee: Transportation in a commuter highway vehicle
if such transportation is in connection with travel between the
employee's residence and place of employment (as described in sections
132(f)(1)(A) and 132(f)(5)(B)); any transit pass (as described in
sections 132(f)(1)(B) and 132(f)(5)(A)); or qualified parking (as
described in sections 132(f)(1)(C) and 132(f)(5)(C)).
ii. Employee
The proposed regulations include the definition of the term
``employee,'' which is taken from Sec. Sec. 1.132-1(b)(2)(i) and
1.132-9(b), Q/A-5 and Q/A-24. Commenters have asked whether volunteers
are treated as employees under Notice 2018-99, although most of the
comments concerning the status of volunteers related to section
512(a)(7), which has been retroactively repealed. The term ``employee''
for Federal tax purposes generally is understood to refer to a common-
law employee (although the regulations under section 132 also include
certain statutory employees such as officers of corporations in the
definition of employee for purposes of QTFs). Whether a service
provider is a common-law employee generally turns on whether the
service recipient has the right to direct and control the service
provider, not only as to the result to be accomplished by the work but
also as to the details and means by which that result is accomplished.
See, e.g., Sec. 31.3121(d)-1(c)(2) of the Employment Taxes and
Collection of Income Tax at Source Regulations. The determination does
not depend on whether or how the individual is compensated, or by which
person. The employment status of a volunteer depends on the facts and
circumstances in each case. Accordingly, the proposed regulations
[[Page 37604]]
do not address the employment status of volunteers.
iii. General Public
Commenters raised concerns that, for taxpayers that lease space in
a multi-tenant building, Notice 2018-99 did not include employees,
partners, 2-percent shareholders of S corporations, independent
contractors, clients, or customers of unrelated tenants in the building
as members of the general public. In response to these comments, the
proposed regulations modify the definition of the term ``general
public'' from Notice 2018-99 to include employees, partners, 2-percent
shareholders of S corporations, sole proprietors, independent
contractors, clients, or customers of unrelated tenants in multi-tenant
buildings, as well as customers, clients, or visitors of the taxpayer,
individuals delivering goods or services to the taxpayer, students of
an educational institution, and patients of a health care facility.
iv. Parking Facility
The proposed regulations include a definition of the term ``parking
facility'' that follows the definition of qualified parking in section
132(f)(5)(C) and includes one or more indoor or outdoor garages and
other structures, as well as parking lots and other areas where
employees may park. Commenters suggested that because qualified parking
as defined in section 132(f)(5)(C) and Sec. 1.132-9(b), Q/A-4(c) does
not include any parking on or near property used by the employee for
residential purposes, including parking for resident employees of
residential rental buildings, the definition of ``total parking
spaces'' should exclude such spaces. In response to these comments, the
proposed regulations specifically exclude parking spaces on or near
property used by the employee for residential purposes from the
definition of parking facility.
v. Geographic Location
Commenters have asked how a geographic location is defined for
purposes of aggregating the number of parking spaces to determine the
section 274(a)(4) disallowance using the primary use methodology.
Specifically, Notice 2018-99 provides that if a taxpayer owns or leases
more than one parking facility in a single geographic location, the
taxpayer may aggregate the number of spaces in those parking
facilities. However, if a taxpayer owns or leases parking facilities in
more than one geographic location, the taxpayer may not aggregate the
spaces in parking facilities that are in different geographic
locations.
In response to these comments, the proposed regulations add a
definition of the term ``geographic location'' as contiguous tracts or
parcels of land owned or leased by the taxpayer. Two or more tracts or
parcels of land are contiguous if they share common boundaries or would
share common boundaries but for the interposition of a road, street,
railroad, stream, or similar property. Tracts or parcels of land which
touch only at a common corner are not contiguous. The proposed
regulations follow Notice 2018-99 and allow taxpayers to aggregate the
number of parking spaces in a single geographic location to determine
the section 274(a)(4) disallowance using the general rule, primary use
methodology, or cost per space methodology.
vi. Total Parking Spaces
The proposed regulations define the term ``total parking spaces''
as the total number of parking spaces in the parking facility. New
terms ``available parking spaces'' and ``inventory/unusable spaces''
are added to the proposed regulations and the definition of the term
``parking facility'' is clarified in response to comments received.
vii. Reserved Employee Spaces
A commenter recommended that the definition of the term ``reserved
employee spaces'' be limited to parking spaces actually used by
employees on a typical business day. Because section 274(a)(4)
disallows the deduction for the expense of providing a QTF to an
individual employee, the commenter reasoned that the taxpayer should
identify the expense for each QTF provided to each individual employee
when determining the amount that is disallowed.
After considering the comment, the Treasury Department and the IRS
have determined that costs allocated to reserved employee spaces should
be disallowed regardless of actual use of the reserved spaces. However,
a special rule is included in step 1 of the primary use methodology
providing that there is no disallowance for reserved employee spaces if
the primary use of the available parking spaces is to provide parking
to the general public, there are five or fewer reserved employee
spaces, and the number of reserved employee spaces is 5 percent or less
of the total parking spaces in the parking facility.
viii. Reserved Nonemployee Spaces
A commenter suggested that parking spaces reserved for drivers with
disabilities be treated as ``reserved nonemployee spaces'' and as such,
any related expenses not be disallowed under section 274(a)(4). After
considering the comment, the Treasury Department and the IRS have
determined that the proposed regulations should not include parking
spaces reserved for drivers with disabilities in the definition of
reserved nonemployee spaces. Unlike parking spaces reserved for
customers or visitors, parking spaces reserved for drivers with
disabilities may be used by employees (with disabilities), and section
274(a)(4) would then apply to disallow the expense. Parking spaces
reserved for drivers with disabilities are also not included in
``reserved employee spaces'' because they may or may not be exclusively
reserved for employees.
ix. Inventory/Unusable Spaces
The Treasury Department and the IRS received questions and comments
on how parking spaces reserved for, or used by, inventoried vehicles
are to be treated for purposes of determining the disallowance. For
example, taxpayers asked whether parking spaces reserved exclusively
for, or used by, vehicles to be sold or leased to customers at a car
dealership or car rental agency are treated as spaces available to the
general public.
In response to the comments and questions received, the proposed
regulations add a new definition for the term ``inventory/unusable
spaces'' that includes parking spaces used for inventoried vehicles,
qualified nonpersonal use vehicles (as described in Sec. 1.274-5(k)),
other fleet vehicles used in a taxpayer's trade or business, or
otherwise not usable for parking by employees.
Inventory/unusable spaces are specifically excluded from the
definitions of ``available parking spaces,'' discussed later, and
``reserved nonemployee spaces,'' discussed earlier, under the primary
use methodology and primary use test in the proposed regulations. The
proposed regulations exclude inventory/unusable spaces because those
spaces are generally not available to employees or the general public
but are instead used for other purposes. Inventory/unusable spaces are
included in total parking spaces under the cost per space methodology
because taxpayers do incur costs in maintaining the spaces.
x. Available Parking Spaces
The proposed regulations add a new definition for the term
``available parking spaces'' to clarify that reserved employee spaces
and inventory/unusable spaces are not included in
[[Page 37605]]
determining primary use under the primary use methodology.
xi. Primary Use
The Treasury Department and the IRS received numerous comments on
the primary use test used in step 2 of the four-step method in Notice
2018-99 to determine the extent to which parking is made available to
the general public under section 274(e)(7). Notice 2018-99 provides
that ``primary use'' means greater than 50 percent of actual or
estimated usage by the general public of the parking spaces in the
parking facility.
Several commenters suggested that primary use should mean greater
than 85, 90, or 95 percent of actual or estimated usage by the general
public, thereby applying the exception in section 274(e)(7) only to
taxpayers with less than 15 percent actual or estimated usage by
employees. Other commenters suggested that 50 percent is fair and
reasonable.
After considering the comments received, the Treasury Department
and the IRS have decided to retain the primary use test as described in
Notice 2018-99 as a reasonable interpretation of the exception in
section 274(e)(7) for parking made available to the general public.
This interpretation is consistent with recent proposed regulations
addressing the application of the section 274(e)(7) exception to the
limitation on deduction for meals and entertainment expenses. See 85 FR
11020 (February 26, 2020). Specifically, the proposed regulations for
meals and entertainment expenses (proposed Sec. 1.274-11 and Sec.
1.274-12) include a definition of the term ``primarily consumed'' that
means greater than 50 percent of actual or reasonably estimated
consumption.
xii. Total Parking Expenses
Commenters suggested that safety-related expenses, such as
lighting, snow and ice removal, leaf removal, trash removal, cleaning,
and security, should be excluded from the definition of ``total parking
expenses.'' Commentators reasoned that including the expenses may
encourage unsafe parking conditions and neglect of care in maintaining
the parking facilities.
Commenters also requested the removal of indirect costs, such as
utility costs, insurance, property taxes, snow and ice removal, leaf
removal, trash removal, cleaning, parking lot attendant expenses, and
security. Multiple commenters also suggested adding depreciation to
total parking expenses, reasoning that these are costs of parking
facilities.
After considering the comments received, the Treasury Department
and the IRS have determined that the proposed regulations should adopt
the definition of the term ``total parking expenses'' from Notice 2018-
99. Section 274(a)(4) disallows a deduction for the expense of
providing a QTF, without regard to whether the expense is required for
safety reasons. Further, QTF parking expenses include indirect costs
such as allocable salaries for security and maintenance personnel,
property taxes, repairs and maintenance, etc. See Joint Committee on
Taxation, General Explanation of Public Law 115-97 (JCS-1-18), at 190,
December 2018. However, as explained in Notice 2018-99 and in part 2.B.
of the Background, a deduction for an allowance for depreciation is not
included in total parking expenses because it is an allowance for the
exhaustion, wear and tear, and obsolescence of property, and not a
parking expense.
xiii. Mixed Parking Expense
Numerous commenters expressed concerns and asked questions about
how to determine the amount of expenses allocable to a parking facility
if the invoice does not separate parking facility expenses from
nonparking facility expenses. Commenters explained that determining and
allocating expenses may impose excessive and unduly burdensome
recordkeeping requirements on taxpayers and may be difficult for
taxpayers and the IRS to administer. Commenters noted that such
expenses for parking and nonparking property may include rent or lease
payments, repairs, maintenance, utility costs, insurance, property
taxes, interest, snow or ice removal, and security. In response to the
comments, the Treasury Department and the IRS have included in the
proposed regulations a definition for the term ``mixed parking
expense'' and a special rule for allocating certain mixed parking
expenses. ``Mixed parking expense'' is defined as an amount paid or
incurred by a taxpayer for both a parking facility and nonparking
facility property that a taxpayer owns or leases. The special rule for
allocating certain mixed parking expenses to a parking facility is
explained in part 1.C of this Explanation of Provisions.
xiv. Peak Demand Period
In these proposed regulations, several of the methodologies for
determining the section 274(a)(4) disallowance for parking facilities
require the taxpayer to determine the total number of parking spaces
used by employees during the peak demand period for employee parking on
a typical business day. Thus, the proposed regulations provide that for
purposes of proposed Sec. 1.274-13, the term ``peak demand period''
means the period of time on a typical business day when the greatest
number of the taxpayer's employees are utilizing parking spaces in the
taxpayer's parking facility. If a taxpayer's employees work in shifts,
the peak demand period would take into account the shift during which
the largest number of employees park in the taxpayer's parking
facility. However, a brief transition period during which two shifts
overlap in their use of parking spaces, as one shift of employees is
getting ready to leave and the next shift is reporting to work, may be
disregarded. Taxpayers may use any reasonable methodology to determine
the total number of spaces used by employees during the peak demand
period on a typical business day, for example based on periodic
inspections or employee surveys.
The recent Coronavirus Disease (COVID-19) pandemic highlights that
taxpayers may experience significant variations in employee parking
during the taxable year due to a national emergency or other type of
disaster. The Treasury Department and the IRS request comments on what
additional rules, if any, are needed to address significant variations
in employee parking during the taxable year and whether any additional
rules should apply to all taxpayers generally or should be triggered
only upon certain events.
C. Special Rules for QTF Parking Expenses
Multiple commenters expressed concerns and asked questions
regarding how to allocate mixed parking expenses. Commenters suggested
the use of a special rule that would allow the taxpayer to allocate a
certain percentage of the taxpayer's mixed parking expenses, such as 5
percent, to a parking facility. Commenters also recommended that
taxpayers be permitted to allocate mixed parking expenses by comparing
rent or lease payments for leases with and without parking facilities
or comparing the value of similar nonparking facilities with and
without parking facilities.
In response to concerns raised by commenters, the proposed
regulations include a special rule for certain mixed parking expenses
to reduce administrative burdens for taxpayers and simplify
calculations in complying with section 274(a)(4). Specifically, the
proposed regulations provide that a
[[Page 37606]]
taxpayer may choose to allocate 5 percent of certain mixed parking
expenses to the parking facility. This special rule applies to mixed
parking expenses related to payments under a lease or rental agreement,
and payments for utilities, insurance, interest and property taxes. The
special rule to allocate certain mixed parking expenses may only be
used in the primary use methodology and cost per space methodology and
may not be used with the general rule or the qualified parking limit
methodology. Taxpayers are not required to use the special rule for
certain mixed parking expenses and may instead use any reasonable
methodology for mixed parking expenses.
The proposed regulations also include a special rule allowing
taxpayers to aggregate the number of parking spaces in a single
geographic location. The rule generally follows the rule in Notice
2018-99, but in response to comments adds a definition of the term
``geographic location,'' which is based on tracts or parcels of land
that are contiguous. The special rule for aggregation of parking spaces
in a single geographic location may be used with the general rule,
primary use methodology, and cost per space methodology, but may not be
used with the qualified parking limit methodology.
D. Calculation of Disallowance of QTF Parking Expenses
The proposed regulations follow Notice 2018-99 and provide that if
a taxpayer pays one or more third parties an amount for its employees'
QTFs, the section 274(a)(4) disallowance is equal to the taxpayer's
total annual cost for the QTFs paid or incurred to third parties. A
commenter suggested that if a taxpayer pays a third party for parking
spaces that are not assigned to specific employees, some of which are
not used (for example, taxpayer leases 10 spaces and only has 8
employees), the disallowance should be limited to parking spaces
actually used by employees on a typical business day. After considering
the comment, the Treasury Department and the IRS determined that
amounts paid to a third party for qualified parking in such situations
should be disallowed regardless of actual employee use of the spaces
because the taxpayer paid or incurred the expense for its employees'
QTFs regardless of employee use.
If instead, the taxpayer owns or leases a parking facility, the
taxpayer may use the general rule or choose any of the following three
simplified methodologies for each parking facility to determine the
section 274(a)(4) disallowance for each taxable year.
i. General Rule
Multiple commenters requested guidance on additional methodologies
that may be used to calculate the disallowance under section 274(a)(4).
In response to these comments, the Treasury Department and the IRS
determined that taxpayers may calculate the disallowance using a
general rule if the calculation is based on a reasonable interpretation
of section 274(a)(4), as long as the taxpayer's methodology does not
use the value of a QTF instead of its expense, fail to allocate parking
expense to reserved employee spaces, or improperly apply the exception
for qualified parking made available to the public (for example, by
treating a parking facility regularly used by employees as available to
the public merely because the public has access to the parking
facility).
ii. Qualified Parking Limit Methodology
Multiple commenters suggested that a standard cost per parking
space similar to the standard mileage rate or per diem rate be used to
determine the disallowance under section 274(a)(4). Other commenters
suggested that a national average fair market value per parking space
be used.
In response to the comments received, the Treasury Department and
the IRS have determined that the maximum monthly dollar amount under
section 132(f)(2), adjusted for inflation, may be used as a simple
estimate of the taxpayer's monthly total cost per parking space. The
adjusted maximum monthly excludable amount for 2020 is $270 per
employee. Using the qualified parking limit methodology, taxpayers may
determine the disallowance simply by multiplying the section 132(f)(2)
monthly per employee limitation on the exclusion by the total number of
spaces used by employees during the peak demand period. Alternatively,
the proposed regulations provide that taxpayers using this methodology
may instead multiply the section 132(f)(2) monthly per employee
limitation on the exclusion by the total number of the taxpayer's
employees.
Section 274(e)(2) and proposed Sec. 1.274-13(e)(2)(i) provide that
the section 274(a)(4) disallowance for QTFs does not apply to the
extent that a QTF is treated as compensation to an employee on the
taxpayer's return and as wages to the employee. A taxpayer using this
qualified parking limit methodology who has monthly expenses per
parking space exceeding the section 132(f)(2) monthly per employee
limitation on the exclusion can deduct those excess expenses without
regard to how much (if any) of the value of the parking space to the
employee exceeds the section 132(f)(2) monthly per employee limitation
on exclusion. However, these proposed regulations provide that the
qualified parking limit methodology may be used only if the value of
the QTF, to the extent it exceeds the sum of the amount paid (if any)
by the employee for the QTF and the applicable statutory monthly limit
in section 132(f)(2), is included on the taxpayer's Federal income tax
return as originally filed as compensation paid to the employee and as
wages to the employee for purposes of withholding under chapter 24
(relating to collection of Federal income tax at source on wages).
Section 132(a)(5) excludes from gross income the value of a QTF up
to the section 132(f)(2) monthly per employee limitation on exclusion,
and therefore no amount for the value of QTFs up to the section
132(f)(2) monthly limitation can be included in an employee's wages.
Thus, the exception in section 274(e)(2) and proposed Sec. 1.274-
13(e)(2)(i)(A) cannot be applied to the value of a QTF that is less
than or equal to the monthly per employee limitation on exclusion in
section 132(f)(2). Because this qualified parking limit methodology
already limits the taxpayer's expenses per parking space to the section
132(f)(2) monthly per employee limitation on exclusion, section
274(e)(2) cannot be used to reduce the disallowed expenses even
further. For this reason, the proposed regulations provide that the
exception to the disallowance for amounts treated as employee
compensation provided for in section 274(e)(2) and in proposed Sec.
1.274-13(e)(2)(i) cannot be applied to reduce a section 274(a)(4)
disallowance calculated using this method.
iii. Primary Use Methodology
The Treasury Department and the IRS received numerous comments on
the four-step method in Notice 2018-99. The proposed regulations adopt
the four-step method in Notice 2018-99, with revisions in response to
comments, and rename it as the ``primary use methodology.'' Comments
received on the definition of primary use in Notice 2018-99 are
discussed in part 1.B.xi. of this Explanation of Provisions.
The four-step method in Notice 2018-99 provides that employee use
of parking spaces is determined by identifying the actual or estimated
usage of the parking spaces during normal business hours on a typical
business day. Multiple commenters suggested
[[Page 37607]]
that taxpayers should instead be required to count the number of
parking spaces in the parking facility actually used by employees. The
Treasury Department and the IRS considered these comments and
determined that, to ease the burden of counting actual spaces used by
employees and provide a clearer standard, taxpayers must identify the
number of available parking spaces used by employees during the peak
demand period.
iv. Cost Per Space Methodology
Multiple commenters stated that the four-step method in Notice
2018-99 is cumbersome and complex. As an alternative, the Treasury
Department and the IRS include in the proposed regulations the cost per
space methodology, which allows taxpayers to calculate the disallowance
by multiplying the cost per space by the number of spaces used by
employees. Taxpayers must identify the number of available parking
spaces used by employees during the peak demand period. Cost per space
is calculated by dividing total parking expenses (including expenses
related to inventory/unusable spaces) by the total number of spaces
(including inventory/unusable spaces).
v. Expenses for Transportation in a Commuter Highway Vehicle and
Transit Pass QTFs
Notice 2018-99 addresses only expenses related to parking QTFs. The
proposed regulations include rules addressing the disallowance of
deductions for expenses for transportation in a commuter highway
vehicle and transit pass QTFs, as well as the applicability of certain
exceptions under section 274(e).
E. Specific Exceptions to Section 274(a) for QTF Expenses
The Treasury Department and the IRS received multiple questions and
comments about whether the exceptions in section 274(e) apply to QTF
expenses that are otherwise nondeductible under section 274(a)(4).
Section 274(e) provides that the deduction disallowance under section
274(a) does not apply to any expense described in section 274(e). The
Treasury Department and the IRS considered the comments and note that
while section 274(e) was not amended by the TCJA, it provides that
section 274(a) ``shall not apply to'' deductions for expenses described
in section 274(e). Therefore, except as described in part 1.E.i. of
this Explanation of Provisions, the proposed regulations provide that
the deduction disallowance does not apply to expenditures for QTFs that
meet the requirements of sections 274(e)(2), (7) and (8).
Numerous commenters also recommended providing exceptions from the
section 274(a)(4) disallowance for QTFs with a zero or a de minimis
fair market value, QTFs required to be provided to employees under
certain laws, or QTFs provided by small business taxpayers. Exceptions
for QTFs with a zero or a de minimis fair market value, QTFs required
under certain laws, and small business taxpayers are not provided for
in any of the exceptions under section 274(e) and therefore are not
exceptions to the section 274(a)(4) disallowance.
i. Certain QTF Expenses Treated as Compensation Under Section 274(e)(2)
Pursuant to section 274(e)(2), the proposed regulations provide
that the disallowance under section 274(a) does not apply to
expenditures for QTFs to the extent the taxpayer treats the expenses as
compensation to the employee on the taxpayer's Federal income tax
return as originally filed, and as wages to the employee for purposes
of withholding under chapter 24 relating to collection of Federal
income tax at source on wages. However, section 132(a)(5) excludes the
value of QTFs from an employee's gross income subject to the
limitations on exclusion provided by section 132(f)(2). Therefore, in
determining whether the section 274(e)(2) exception for expenses
treated as compensation applies, the proposed regulations provide that
the exception in section 274(e)(2) does not apply to expenses paid or
incurred for QTFs the value of which (including a purported value of
zero) is excluded from an employee's gross income under section
132(a)(5).
The Treasury Department and the IRS are aware that some taxpayers
may attempt to claim a deduction under section 274(e)(2) by including a
value that is less than the amount required to be included under Sec.
1.61-21, which provides the rules for valuation of fringe benefits, or
by including a purported value of zero, as compensation and as wages to
the employee. The proposed regulations therefore provide that the
exception in section 274(e)(2) does not apply to expenses paid or
incurred for QTFs for which the value that is included in gross income
is less than the amount required to be included in gross income under
Sec. 1.61-21. Similarly, if the amount required to be included in
gross income under Sec. 1.61-21 is purportedly zero, the exception in
section 274(e)(2) and proposed Sec. 1.274-13(e)(2)(i) does not apply.
As noted above, section 132(a)(5) excludes the value of QTFs from
an employee's gross income subject to the monthly per employee
limitations on exclusion provided by section 132(f)(2). Section
132(f)(2) provides that the amount of QTFs that can be excluded from
gross income cannot exceed a maximum monthly dollar amount, adjusted
for inflation. For taxable years beginning in 2020, the monthly per
employee limitation under section 132(f)(2)(A) regarding the aggregate
fringe benefit exclusion amount for transportation in a commuter
highway vehicle and any transit pass is $270 per employee. The monthly
limitation under section 132(f)(2)(B) regarding the fringe benefit
exclusion amount for qualified parking is $270 per employee. Rev. Proc.
2019-44, 2019-47 I.R.B. 1093. Therefore, if an employer provides an
employee with QTFs, the value of which exceeds the sum of the amount,
if any, paid by the employee for the fringe benefits and the applicable
statutory monthly per employee limit, then the employer must include
the value of the benefits provided in excess of the amount paid by the
employee and the applicable statutory per employee monthly limit in the
employee's wages for income and employment tax purposes. See Sec.
1.61-21(b)(1) and Sec. 1.132-9(b), Q/A-8. The proposed regulations
provide that the employer must follow this treatment in order to rely
on the exception in section 274(e)(2).
ii. Expenses for Transportation in a Commuter Highway Vehicle, Transit
Pass, or Parking Made Available to the Public
As noted in part 2.A. of the Background, section 274(e)(7) applies
to expenses for goods, services, and facilities made available by the
taxpayer to the general public. When enacting section 274(n) in 1986
(limiting the deduction for meal and entertainment expenses), Congress
indicated that a taxpayer's customers and potential customers are
members of the general public for purposes of section 274(e)(7):
The reduction rule [in section 274(n)] does not apply in the
case of items, such as samples and promotional activities, that are
made available to the general public. For example, if the owner of a
hardware store advertises that tickets to a baseball game will be
provided to the first 50 people who visit the store on a particular
date, or who purchase an item from the store during a sale, then the
full amount of the face value of the tickets is deductible by the
owner.
H.R. Rep. No. 99-426 (1986), reprinted in 1986-3 (Vol. 2) C.B. 1, 124,
and S. Rep. No. 99-313 (1986), reprinted in
[[Page 37608]]
1986-3 (Vol. 3) C.B. 1, 72. Thus, the Treasury Department and the IRS
have determined that expenses for transportation in a commuter highway
vehicle, any transit pass, and parking that otherwise qualify as QTFs
and are made available to the general public, which includes a
taxpayer's customers and potential customers, are within this
exception. However, goods, services, and facilities are not made
available to the general public if they are made available only to an
exclusive list of guests. See Churchill Downs, Inc. v. Commissioner,
307 F.3d 423 (6th Cir. 2002).
Pursuant to section 274(e)(7), the proposed regulations provide
that any taxpayer expense for transportation in a commuter highway
vehicle, a transit pass, or parking that otherwise qualifies as a QTF
under section 132(f)(1) and that is also made available to the general
public is not subject to the deduction disallowance under section
274(a) to the extent such transportation, transit pass, or parking is
made available to the general public. As described further in part
1.B.iii. of this Explanation of Provisions, ``general public''
includes, but is not limited to, customers, clients, visitors,
individuals delivering goods or services to the taxpayer, and patients
of a health care facility. The general public does not include
employees, partners, 2-percent shareholders of S corporations, sole
proprietors, or independent contractors of the taxpayer. If a taxpayer
owns or leases space in a multi-tenant building, employees, partners,
2-percent shareholders of S corporations, sole proprietors, independent
contractors or customers of unrelated tenants in the building are
included in the definition of general public.
iii. Expenses for Transportation in a Commuter Highway Vehicle, Transit
Pass, or Parking Sold to Customers
As noted in part 2.A. of the Background, section 274(e)(8) applies
to expenses for goods or services (including the use of facilities)
that are sold by the taxpayer in a bona fide transaction for an
adequate and full consideration in money or money's worth. The Treasury
Department and the IRS have determined that expenses for transportation
in a commuter highway vehicle, any transit pass, and parking that
otherwise qualify as QTFs and that are sold by a taxpayer fall within
this exception.
Pursuant to section 274(e)(8), the proposed regulations provide
that any taxpayer expense for transportation in a commuter highway
vehicle, a transit pass, or parking that otherwise qualifies as a QTF
under section 132(f)(1) that is sold to customers in a bona fide
transaction for an adequate and full consideration in money or money's
worth is not subject to the deduction disallowance under section
274(a). The proposed regulations also provide that for purposes of this
section, the term ``customer'' includes an employee of the taxpayer who
purchases the transportation in a commuter highway vehicle, transit
pass, or parking in a bona fide transaction for an adequate and full
consideration in money or money's worth.
Some commenters have stated that QTFs offered through a
compensation reduction agreement should not be subject to the
disallowance under section 274(a)(4) because an employer should not be
disallowed a deduction for expenses for otherwise deductible
compensation when an employee chooses to use that compensation towards
the purchase of a QTF through a compensation reduction agreement.
Pursuant to section 132(f)(4), no amount for a QTF is included in the
gross income of an employee solely because the employee can choose
between any QTF (other than a qualified bicycle commuting
reimbursement) and compensation that would otherwise be includible in
the employee's gross income. Thus, an employee who is offered this
choice and who elects QTFs is not required to include the foregone cash
compensation in income if the election is made pursuant to a
compensation reduction agreement and the relevant requirements are met.
See Sec. 1.132-9(b), Q/A-11 through 15. In other words, an employer
who provides an employee a QTF through a compensation reduction
agreement is incurring an expense for an excludible QTF (assuming the
relevant requirements are met), rather than an expense for the
compensation that was reduced. Therefore, the Treasury Department and
the IRS do not adopt this approach because a QTF is subject to the
section 274(a)(4) disallowance regardless of whether the benefit is
provided by the employer in-kind, through a bona fide cash
reimbursement arrangement, or through a compensation reduction
agreement.
2. Transportation and Commuting Expenses
Proposed Sec. 1.274-14 addresses the disallowance of deductions
under section 274(l) for amounts paid or incurred after December 31,
2017, for any expense incurred to provide any transportation, or any
payment or reimbursement, to an employee of the taxpayer in connection
with travel between the employee's residence and place of employment,
except as necessary for ensuring the safety of the employee. Travel
between the employee's residence and place of employment includes
travel that originates at a transportation hub near the employee's
residence or place of employment. For example, an employee who commutes
to work by airplane from an airport near the employee's residence to an
airport near the employee's place of employment is traveling between
the residence and place of employment.
Responding to comments received, the proposed regulations provide a
definition for an employee's ``residence,'' referencing the definition
of the term ``residence'' in Sec. 1.121-1(b)(1). Under Sec. 1.121-
1(b)(1), whether property is used by the taxpayer as the taxpayer's
residence depends upon all the facts and circumstances. A property used
by the taxpayer as the taxpayer's residence may include a houseboat, a
house trailer, or the house or apartment that the taxpayer is entitled
to occupy as a tenant-stockholder in a cooperative housing corporation.
The proposed regulations also define the term ``safety of the
employee,'' referencing the description of a bona fide business-
oriented security concern in Sec. 1.132-5(m).
Commentators have asked whether section 274(l) applies to expenses
for QTFs provided to an employee of the taxpayer for which a deduction
would be disallowed under section 274(a)(4) except that one of the
exceptions under section 274(e) applies. The Treasury Department and
the IRS have determined that section 274(l) does not apply to
deductions for such expenses.
The Treasury Department and the IRS also received comments
suggesting that the exception in section 274(e)(2) for expenses treated
as compensation should apply to section 274(l) transportation and
commuting expenses. However, the exceptions in section 274(e) apply
only to amounts that are disallowed under section 274(a), and not to
those disallowed under section 274(l). The Joint Committee on
Taxation's Bluebook on the TCJA confirms that the exception in section
274(e)(2) does not apply to section 274(l) expenses:
The provision is intended to include qualified transportation
fringe expenses in the exception to the deduction disallowance for
expenses that are treated as compensation. Any expenses incurred for
providing any form of transportation which are not qualified
transportation fringes (or any payment or reimbursement) for
commuting between the employee's residence and place or employment,
even if included in compensation, are not eligible for this
exception.
[[Page 37609]]
Joint Committee on Taxation, General Explanation of Public Law 115-97
(JCS-1-18), at 190, December 2018. Thus, the proposed regulations do
not apply the section 274(e)(2) exception to section 274(l) expenses.
Request for Comments
The Treasury Department and the IRS request comments on all aspects
of these proposed regulations. Regarding QTF parking expenses under
proposed Sec. 1.274-13, comments are specifically requested on other
methodologies for determining the use of parking spaces and the related
expenses allocable to employee parking. Comments are also requested on
additional guidance needed to determine the amount of commuter highway
vehicle and transit pass expenses for QTFs that is nondeductible under
section 274(a)(4), including whether any specific examples should be
addressed. Regarding transportation and commuting expenses under
proposed Sec. 1.274-14, comments are specifically requested on
additional guidance needed to determine whether transportation is
necessary for ensuring the safety of the employee, and how to define an
employee's residence and place of employment. Comments are also
requested on whether any specific examples of transportation and
commuting expenses should be addressed.
Proposed Applicability Date
These regulations are proposed to apply for taxable years beginning
on or after the date these regulations are published as final
regulations in the Federal Register. Pending the issuance of the final
regulations, a taxpayer may rely on these proposed regulations for QTF
expenses and transportation and commuting expenses, as applicable, that
are paid or incurred in taxable years beginning after December 31,
2017. Alternatively, a taxpayer may choose to rely on the guidance in
Notice 2018-99 until these proposed regulations are finalized.
Special Analyses
These proposed regulations are not subject to review under section
6(b) of Executive Order 12866 pursuant to the Memorandum of Agreement
(April 11, 2018) between the Treasury Department and the Office of
Management and Budget regarding review of tax regulations.
In accordance with the Regulatory Flexibility Act (5 U.S.C. chapter
6), it is hereby certified that this proposed rule will not have a
significant economic impact on a substantial number of small entities.
Although the rule may affect a substantial number of small entities,
the economic impact of the regulations is not likely to be significant.
Data are not readily available about the number of taxpayers affected,
but the number is likely to be substantial for both large and small
entities because the rule affects any entity that provides QTFs or
certain commuting benefits to employees. The economic impact of these
regulations is not likely to be significant, however, because these
proposed regulations substantially incorporate prior guidance and
otherwise clarify the application of the TCJA changes to section 274
related to QTFs and certain commuting benefits. The proposed
regulations will assist taxpayers in understanding the changes to
section 274 and make it easier for taxpayers to comply with those
changes. Notwithstanding this certification, the Treasury Department
and the IRS welcome comments on the impact of these regulations on
small entities.
Pursuant to section 7805(f), these proposed regulations have been
submitted to the Chief Counsel for Advocacy of the Small Business
Administration for comment on their impact on small business.
Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA)
requires that agencies assess anticipated costs and benefits and take
certain other actions before issuing a final rule that includes any
Federal mandate that may result in expenditures in any one year by a
state, local, or tribal government, in the aggregate, or by the private
sector, of $100 million (updated annually for inflation). This rule
does not include any Federal mandate that may result in expenditures by
state, local, or tribal governments, or by the private sector in excess
of that threshold.
Executive Order 13132: Federalism
Executive Order 13132 (entitled ``Federalism'') prohibits an agency
from publishing any rule that has federalism implications if the rule
either imposes substantial, direct compliance costs on state and local
governments, and is not required by statute, or preempts state law,
unless the agency meets the consultation and funding requirements of
section 6 of the Executive order. This proposed rule does not have
federalism implications and does not impose substantial direct
compliance costs on state and local governments or preempt state law
within the meaning of the Executive order.
Comments and Requests for a Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any comments that are submitted timely
to the IRS as prescribed in this preamble under the ADDRESSES heading.
Any electronic comments submitted, and to the extent practicable any
paper comments submitted, will be made available at http://www.regulations.gov or upon request.
A public hearing will be scheduled if requested in writing by any
person who timely submits electronic or written comments. Requests for
a public hearing are also encouraged to be made electronically and can
also be made as prescribed in this preamble under the ADDRESSES
heading. If a public hearing is scheduled, notice of the date and time
for the public hearing will be published in the Federal Register.
Announcement 2020-4, 2020-17 IRB 1, provides that until further notice,
public hearings conducted by the IRS will be held telephonically. Any
telephonic hearing will be made accessible to people with disabilities.
Statement of Availability of IRS Documents
IRS Revenue Procedures, Revenue Rulings, and Notices cited in this
preamble are published in the Internal Revenue Bulletin (or Cumulative
Bulletin) and are available from the Superintendent of Documents, U.S.
Government Publishing Office, Washington, DC 20402, or by visiting the
IRS website at http://www.irs.gov.
Drafting Information
The principal author of this proposed regulation is Patrick
Clinton, Office of the Associate Chief Counsel (Income Tax &
Accounting). Other personnel from the Treasury Department and the IRS
participated in their development.
List of Subjects in 26 CFR Part 1
Income Taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAX
0
Paragraph 1. The authority citation for part 1 is amended by adding
sectional authorities for Sec. Sec. 1.274-13 and 1.274-14 in numerical
order to read in part as follows:
Authority: 26 U.S.C. 7805.
* * * * *
[[Page 37610]]
Section 1.274-13 also issued under 26 U.S.C. 274.
Section 1.274-14 also issued under 26 U.S.C. 274.
* * * * *
0
Par. 2. Sections 1.274-13 and 1.274-14 are added to read as follows:
Sec. 1.274-13 Disallowance of deductions for certain qualified
transportation fringe expenditures.
(a) In general. Except as provided in this section, no deduction
otherwise allowable under chapter 1 of the Internal Revenue Code (Code)
is allowed for any expense of any qualified transportation fringe as
defined in paragraph (b)(1) of this section.
(b) Definitions. The following definitions apply for purposes of
this section:
(1) Qualified transportation fringe. The term qualified
transportation fringe means any of the following provided by an
employer to an employee: Transportation in a commuter highway vehicle
if such transportation is in connection with travel between the
employee's residence and place of employment (as described in sections
132(f)(1)(A) and 132(f)(5)(B)); any transit pass (as described in
sections 132(f)(1)(B) and 132(f)(5)(A)); or qualified parking (as
described in sections 132(f)(1)(C) and 132(f)(5)(C)).
(2) Employee. The term employee means a common law employee or
other statutory employee, such as an officer of a corporation, who is
currently employed by the taxpayer. See Sec. 1.132-9 Q/A-5. Partners,
2-percent shareholders of S corporations, sole proprietors, and
independent contractors are not employees of the taxpayer for purposes
of this section.
(3) General public. The term general public includes, but is not
limited to, customers, clients, visitors, individuals delivering goods
or services to the taxpayer, students of an educational institution,
and patients of a health care facility. If a taxpayer owns or leases
space in a multi-tenant building, the term general public includes
employees, partners, 2-percent shareholders of S corporations, sole
proprietors, independent contractors, clients, or customers of
unrelated tenants in the building. The term general public does not
include individuals that are employees, partners, 2-percent
shareholders of S corporations, sole proprietors, or independent
contractors of the taxpayer. Also, an exclusive list of guests is not
the general public.
(4) Parking facility. The term parking facility includes indoor and
outdoor garages and other structures, as well as parking lots and other
areas, where a taxpayer provides qualified parking (as defined in
section 132(f)(5)(C)) to one or more of its employees. The term parking
facility may include one or more parking facilities but does not
include parking spaces on or near property used by an employee for
residential purposes.
(5) Geographic location. The term geographic location means
contiguous tracts or parcels of land owned or leased by the taxpayer.
Two or more tracts or parcels of land are contiguous if they share
common boundaries or would share common boundaries but for the
interposition of a road, street, railroad, stream, or similar property.
Tracts or parcels of land which touch only at a common corner are not
contiguous.
(6) Total parking spaces. The term total parking spaces means the
total number of parking spaces, or the taxpayer's portion thereof, in
the parking facility.
(7) Reserved employee spaces. The term reserved employee spaces
means the spaces in the parking facility, or the taxpayer's portion
thereof, exclusively reserved for the taxpayer's employees. Employee
spaces in the parking facility, or portion thereof, may be exclusively
reserved for employees by a variety of methods, including, but not
limited to, specific signage (for example, ``Employee Parking Only'')
or a separate facility or portion of a facility segregated by a barrier
to entry or limited by terms of access. Inventory/unusable spaces are
not included in reserved employee spaces.
(8) Reserved nonemployee spaces. The term reserved nonemployee
spaces means the spaces in the parking facility, or the taxpayer's
portion thereof, exclusively reserved for nonemployees. For example,
such parking spaces may include, but are not limited to, spaces
reserved exclusively for visitors, customers, partners, sole
proprietors, 2-percent shareholders of S corporations, vendor
deliveries, and passenger loading/unloading. Nonemployee spaces in the
parking facility, or portion thereof, may be exclusively reserved for
nonemployees by a variety of methods, including, but not limited to,
specific signage (for example, ``Customer Parking Only'') or a separate
facility, or portion of a facility, segregated by a barrier to entry or
limited by terms of access. Inventory/unusable spaces are not included
in reserved nonemployee spaces.
(9) Inventory/unusable spaces. The term inventory/unusable spaces
means the spaces in the parking facility, or the taxpayer's portion
thereof, exclusively used or reserved for inventoried vehicles,
qualified nonpersonal use vehicles described in Sec. 1.274-5(k), or
other fleet vehicles used in the taxpayer's business, or that are
otherwise not usable for parking by employees. Examples of such parking
spaces include, but are not limited to, parking spaces for vehicles
that are intended to be sold or leased at a car dealership or car
rental agency, parking spaces for vehicles owned by an electric utility
used exclusively to maintain electric power lines, or parking spaces
occupied by trash dumpsters (or similar property).
(10) Available parking spaces. The term available parking spaces
means the total parking spaces, less reserved employee spaces and less
inventory/unusable spaces, that are available to employees and the
general public.
(11) Primary use. The term primary use means greater than 50
percent of actual or estimated usage of the available parking spaces in
the parking facility.
(12) Total parking expenses. The term total parking expenses means
all expenses of the taxpayer related to total parking spaces in a
parking facility including, but not limited to, repairs, maintenance,
utility costs, insurance, property taxes, interest, snow and ice
removal, leaf removal, trash removal, cleaning, landscape costs,
parking lot attendant expenses, security, and rent or lease payments or
a portion of a rent or lease payment (if not broken out separately). A
deduction for an allowance for depreciation on a parking facility owned
by a taxpayer and used for parking by the taxpayer's employees is an
allowance for the exhaustion, wear and tear, and obsolescence of
property, and not included in total parking expenses for purposes of
this section. Expenses paid or incurred for nonparking facility
property, including items related to property next to the parking
facility, such as landscaping or lighting, also are not included in
total parking expenses.
(13) Mixed parking expense. The term mixed parking expense means a
single expense amount paid or incurred by a taxpayer that includes both
parking facility and nonparking facility expenses for a property that a
taxpayer owns or leases.
(14) Peak demand period. The term peak demand period refers to the
period of time on a typical business day when the greatest number of
the taxpayer's employees are utilizing parking spaces in the taxpayer's
parking facility. If a taxpayer's employees work in shifts, the peak
demand period would take into account the shift during which the
largest number of employees park in the taxpayer's parking facility.
However, a brief transition period during which two
[[Page 37611]]
shifts overlap in their use of parking spaces, as one shift of
employees is getting ready to leave and the next shift is reporting to
work, may be disregarded. Taxpayers may use any reasonable methodology
to determine the total number of spaces used by employees during the
peak demand period on a typical business day. A reasonable methodology
may include periodic inspections or employee surveys.
(c) Special rules for calculating disallowance of deductions for
qualified transportation fringe parking expenses; taxpayer owned or
leased parking facilities. Either or both of the following special
rules may be used for determining total parking expenses and total
parking spaces in calculating the disallowance of deductions for
qualified transportation fringe parking expenses under the
methodologies in paragraph (d)(2)(ii)(B) and (C) of this section. The
special rule in paragraph (c)(2) of this section may be used for
determining total parking spaces in calculating the disallowance of
deductions for qualified transportation fringe parking expenses under
the methodology in paragraph (d)(2)(i) of this section.
(1) Calculation of mixed parking expenses. For purposes of
determining total parking expenses, a taxpayer may use any reasonable
methodology to allocate the applicable portion of mixed parking
expenses to a parking facility. A taxpayer may choose to allocate 5
percent of the following mixed parking expenses to a parking facility:
Lease or rental agreement expenses, property taxes, interest expense,
and expenses for utilities and insurance.
(2) Aggregation of spaces by geographic location. If a taxpayer
owns or leases more than one parking facility in a single geographic
location, the taxpayer may aggregate the number of spaces in those
parking facilities for purposes of calculating the disallowance of
deductions for certain qualified transportation fringe expenses. For
example, parking spaces at an office park or an industrial complex in
the geographic location may be aggregated. However, a taxpayer may not
aggregate parking spaces in parking facilities that are in different
geographic locations.
(d) Calculation of disallowance of deductions for qualified
transportation fringe expenses--(1) Taxpayer pays a third party for
parking qualified transportation fringe. If a taxpayer pays a third
party an amount for its employees' parking qualified transportation
fringe, the section 274(a)(4) disallowance generally is calculated as
the taxpayer's total annual cost of employee parking qualified
transportation fringes paid to the third party.
(2) Taxpayer provides parking qualified transportation fringe at a
parking facility it owns or leases. If a taxpayer owns or leases all or
a portion of one or more parking facilities where its employees park,
the section 274(a)(4) disallowance may be calculated using the general
rule in paragraph (d)(2)(i) of this section or any of the simplified
methodologies in paragraph (d)(2)(ii) of this section. A taxpayer may
choose to use the general rule or any of the following methodologies
for each taxable year and for each parking facility.
(i) General rule. A taxpayer that uses the general rule in this
paragraph (d)(2)(i) must calculate the disallowance of deductions for
qualified transportation fringe parking expenses for each employee
receiving the qualified transportation fringe based on a reasonable
interpretation of section 274(a)(4). A taxpayer that uses the general
rule in this paragraph (d)(2)(i) may not use the special rule in
paragraph (c)(1) of this section but may use the special rule in
paragraph (c)(2) of this section. An interpretation of section
274(a)(4) is not reasonable unless the taxpayer applies the following
rules when calculating the disallowance under this paragraph (d)(2)(i).
(A) A taxpayer must not use value to determine expense. A taxpayer
may not use the value of employee parking to determine expenses
allocable to employee parking that is either owned or leased by the
taxpayer because section 274(a)(4) disallows a deduction for the
expense of providing a qualified transportation fringe, regardless of
its value.
(B) A taxpayer must not deduct expenses related to reserved
employee spaces. A taxpayer must determine the allocable portion of
total parking expenses that relate to any reserved employee spaces. No
deduction is allowed for the parking expenses that relate to reserved
employee spaces.
(C) A taxpayer must not improperly apply the exception for
qualified parking made available to the public. A taxpayer must not
improperly apply the exception in section 274(e)(7) or paragraph
(e)(2)(ii) of this section to parking facilities, for example, by
treating a parking facility regularly used by employees as available to
the general public merely because the general public has access to the
parking facility.
(ii) Additional simplified methodologies. Instead of using the
general rule in paragraph (d)(2)(i) of this section for a taxpayer
owned or leased parking facility, a taxpayer may use a simplified
methodology under paragraph (d)(2)(ii)(A), (B), or (C) of this section.
(A) Qualified parking limit methodology. A taxpayer that uses the
qualified parking limit methodology in this paragraph (d)(2)(ii)(A)
must calculate the disallowance of deductions for qualified
transportation fringe parking expenses by multiplying the total number
of spaces used by employees during the peak demand period, or the total
number of taxpayer's employees, by the section 132(f)(2) monthly per
employee limitation on exclusion (adjusted for inflation), for each
month in the taxable year. The result is the amount of the taxpayer's
expenses that are disallowed under section 274(a)(4). This methodology
may be used only if the taxpayer includes the value of the qualified
transportation fringe in excess of the sum of the amount, if any, paid
by the employee for the qualified transportation fringe and the
applicable statutory monthly limit in section 132(f)(2) on the
taxpayer's Federal income tax return as originally filed as
compensation paid to the employee and as wages to the employee for
purposes of withholding under chapter 24 of the Code (relating to
collection of Federal income tax at source on wages). In addition, the
exception to the disallowance for amounts treated as employee
compensation provided for in section 274(e)(2) and in paragraph
(e)(2)(i) of this section cannot be applied to reduce a section
274(a)(4) disallowance calculated using this method. A taxpayer using
this methodology may not use either of the special rules in paragraph
(c) of this section.
(B) Primary use methodology. A taxpayer that uses the primary use
methodology in this paragraph (d)(2)(ii)(B) must use the following
four-step methodology to calculate the disallowance of deductions for
qualified transportation fringe parking expenses for each parking
facility. A taxpayer may use either or both of the special rules in
paragraph (c) of this section for determining total parking expenses
and total parking spaces.
(1) Step 1--Calculate the disallowance for reserved employee
spaces. A taxpayer must identify the total parking spaces in the
parking facility, or the taxpayer's portion thereof, exclusively
reserved for the taxpayer's employees. The taxpayer must then determine
the percentage of reserved employee spaces in relation to total parking
spaces and multiply that percentage by the taxpayer's total
[[Page 37612]]
parking expenses for the parking facility. The product is the amount of
the deduction for total parking expenses that is disallowed under
section 274(a)(4) for reserved employee spaces. There is no
disallowance for reserved employee spaces if the primary use (as
defined in paragraphs (b)(11) and (d)(2)(ii)(B)(2) of this section) of
the available parking spaces is to provide parking to the general
public, and there are five or fewer reserved employee spaces in the
parking facility and the reserved employee spaces are 5 percent or less
of the total parking spaces.
(2) Step 2--Determine the primary use of available parking spaces.
A taxpayer must identify the available parking spaces in the parking
facility and determine whether their primary use is to provide parking
to the general public. If the primary use of the available parking
spaces in the parking facility is to provide parking to the general
public, then total parking expenses allocable to available parking
spaces at the parking facility are excepted from the section 274(a)(4)
disallowance by the general public exception under section 274(e)(7)
and paragraph (e)(2)(ii) of this section. Primary use of available
parking spaces is based on the number of available parking spaces used
by employees during the peak demand period. Nonreserved parking spaces
that are available to the general public but empty during normal
business hours on a typical business day are treated as provided to the
general public.
(3) Step 3--Calculate the allowance for reserved nonemployee
spaces. If the primary use of a taxpayer's available parking spaces is
not to provide parking to the general public, the taxpayer must
identify the number of available parking spaces in the parking
facility, or the taxpayer's portion thereof, exclusively reserved for
nonemployees. A taxpayer that has no reserved nonemployee spaces may
proceed to Step 4 in paragraph (d)(2)(ii)(B)(4) of this section. If the
taxpayer has reserved nonemployee spaces, it may determine the
percentage of reserved nonemployee spaces in relation to remaining
total parking spaces and multiply that percentage by the taxpayer's
remaining total parking expenses. The product is the amount of the
deduction for remaining total parking expenses that is not disallowed
because the spaces are not available for employee parking.
(4) Step 4--Determine remaining use of available parking spaces and
allocable expenses. If a taxpayer completes Steps 1-3 in paragraph
(d)(2)(ii)(B) of this section and has any remaining total parking
expenses not specifically categorized as deductible or nondeductible,
the taxpayer must reasonably allocate such expenses by determining the
total number of available parking spaces used by employees during the
peak demand period.
(C) Cost per space methodology. A taxpayer using the cost per space
methodology in this paragraph (d)(2)(ii)(C) must calculate the
disallowance of deductions for qualified transportation fringe parking
expenses by multiplying the cost per space by the total number of
available parking spaces used by employees during the peak demand
period. The product is the amount of the deduction for total parking
expenses that is disallowed under section 274(a)(4). A taxpayer may
calculate cost per space by dividing total parking expenses by total
parking spaces. A taxpayer using this methodology may use either or
both of the special rules in paragraph (c) of this section for
determining total parking expenses and total parking spaces.
(3) Expenses for transportation in a commuter highway vehicle or
transit pass. If a taxpayer pays a third party an amount for its
employees' commuter highway vehicle or a transit pass qualified
transportation fringe, the section 274(a)(4) disallowance generally is
equal to the taxpayer's total annual cost of employee commuter highway
vehicle or a transit pass qualified transportation fringes paid to the
third party. If a taxpayer provides transportation in a commuter
highway vehicle or transit pass qualified transportation fringes in
kind directly to its employees, the taxpayer must calculate the
disallowance of deductions for expenses for such fringes based on a
reasonable interpretation of section 274(a)(4). However, a taxpayer may
not use the value of the qualified commuter highway vehicle or transit
pass fringe to the employee to determine expenses allocable to such
fringe because section 274(a)(4) disallows a deduction for the expense
of providing a qualified transportation fringe, regardless of its value
to the employee.
(e) Specific exceptions to disallowance of deduction for qualified
transportation fringe expenses--(1) In general. The provisions of
section 274(a)(4) and paragraph (a) of this section (imposing
limitations on deductions for qualified transportation fringe expenses)
are not applicable in the case of expenditures set forth in paragraph
(e)(2) of this section. Such expenditures are deductible to the extent
allowable under chapter 1 of the Code. This paragraph (e) cannot be
construed to affect whether a deduction under section 162 or 212 is
allowed or allowable. The fact that an expenditure is not covered by a
specific exception provided for in this paragraph (e) is not
determinative of whether a deduction for the expenditure is disallowed
under section 274(a)(4) and paragraph (a) of this section.
(2) Exceptions to disallowance. The expenditures referred to in
paragraph (e)(1) of this section are set forth in paragraphs (e)(2)(i)
through (iii) of this section.
(i) Certain qualified transportation fringe expenses treated as
compensation--(A) In general. Under section 274(e)(2) and this
paragraph (e)(2)(i), any expense paid or incurred by a taxpayer for a
qualified transportation fringe is not subject to the disallowance of
deductions provided for in paragraph (a) of this section to the extent
that the expense is treated by the taxpayer--
(1) On the taxpayer's Federal income tax return as originally
filed, as compensation paid to the employee; and
(2) As wages to the employee for purposes of withholding under
chapter 24 (relating to collection of Federal income tax at source on
wages).
(B) Limitation on exception. The exception in section 274(e)(2) and
paragraph (e)(2)(i) of this section does not apply to expenses paid or
incurred for qualified transportation fringes the value of which
(including a purported value of zero) is less than the sum of the
amount, if any, paid by the employee for the fringe benefits and any
amount excluded from gross income under section 132(a)(5). Thus, if an
employer provides an employee with qualified transportation fringes the
value of which is less than the applicable statutory monthly per
employee limit under section 132(a)(5), the exception in section
274(e)(2) and paragraph (e)(2)(i) of this section does not apply to
expenses paid or incurred for the fringe benefits.
(C) Expenses for which value is improperly included. The exception
in section 274(e)(2) and paragraph (e)(2)(i) of this section does not
apply to expenses paid or incurred for qualified transportation fringes
for which the value that is included in gross income of the employee is
less than the amount required to be included in gross income under
Sec. 1.61-21. Similarly, if the amount required to be included in
gross income under Sec. 1.61-21 is purportedly zero, the exception in
section 274(e)(2) and paragraph (e)(2)(i) of this section does not
apply.
(D) Required inclusion in wages. The exception in section 274(e)(2)
and paragraph (e)(2)(i) of this section applies to expenses paid or
incurred for
[[Page 37613]]
qualified transportation fringes the value of which exceeds the sum of
the amount, if any, paid by the employee for the fringe benefits and
any amount excluded from gross income under section 132(a)(5), if
treated as compensation on the taxpayer's Federal income tax return as
originally filed and as wages to the employee for purposes of
withholding under chapter 24. Thus, assuming no other statutory
exclusion applies, if an employer provides an employee with qualified
transportation fringes the value of which exceeds the applicable
statutory monthly limit and the employee does not make any payment, the
value of the benefits provided in excess of the applicable statutory
monthly limit must be included in the employee's wages for income and
employment tax purposes in accordance with section 274(e)(2) and
paragraph (e)(2)(i) of this section. See Sec. 1.61-21(b)(1) and Sec.
1.132-9(b), Q/A-8.
(ii) Expenses for transportation in a commuter highway vehicle,
transit pass, or parking made available to the public. Under section
274(e)(7) and this paragraph (e)(2)(ii), any expense paid or incurred
by a taxpayer for transportation in a commuter highway vehicle, a
transit pass, or parking that otherwise qualifies as a qualified
transportation fringe and that is also made available to the general
public, is not subject to the disallowance of deductions provided for
in paragraph (a) of this section to the extent that such
transportation, transit pass, or parking is made available to the
general public. With respect to parking, this exception applies to the
entire amount of the taxpayer's parking expense, less any expenses
specifically attributable to employees (for example, expenses allocable
to reserved employee spaces), if the primary use of the parking is by
the general public. If the primary use of the parking is not by the
general public, this exception applies only to the costs attributable
to the parking used by the general public.
(iii) Expenses for transportation in a commuter highway vehicle,
transit pass, or parking sold to customers. Under section 274(e)(8) and
this paragraph (e)(2)(iii), any expense paid or incurred by a taxpayer
for transportation in a commuter highway vehicle, a transit pass, or
parking that otherwise qualifies as a qualified transportation fringe
to the extent such transportation, transit pass, or parking is sold to
customers in a bona fide transaction for an adequate and full
consideration in money or money's worth, is not subject to the
disallowance of deductions provided for in paragraph (a) of this
section. For purposes of this paragraph (e)(2)(iii), the term customer
includes an employee of the taxpayer who purchases the transportation
in a bona fide transaction for an adequate and full consideration in
money or money's worth.
(f) Examples. The following examples illustrate the provisions of
this section related to parking expenses for qualified transportation
fringes. For each example, assume the parking expenses are otherwise
deductible expenses paid or incurred during the 2020 taxable year; all
or some portion of the expenses relate to a qualified transportation
fringe under section 132(f); the section 132(f)(2) monthly per employee
limitation on an employee's exclusion is $270; all taxpayers are
calendar-year taxpayers; and the length of the 2020 taxable year is 12
months.
(1) Example 1. Taxpayer A pays B, a third party who owns a
parking garage adjacent to A's place of business, $100 per month per
parking space for each of A's 10 employees to park in B's garage, or
$12,000 for parking in 2020 (($100 x 10) x 12 = $12,000). The $100
per month paid for each of A's 10 employees for parking is
excludible under section 132(a)(5), and none of the exceptions in
section 274(e) or paragraph (e) of this section are applicable.
Thus, the entire $12,000 is subject to the section 274(a)(4)
disallowance under paragraphs (a) and (d)(1) of this section.
(2) Example 2. (i) Assume the same facts as in paragraph (f)(1)
of this section (Example 1), except A pays B $300 per month for each
parking space, or $36,000 for parking for 2020 (($300 x 10) x 12 =
$36,000). Of the $300 per month paid for parking for each of 10
employees, $270 is excludible under section 132(a)(5) for 2020 and
none of the exceptions in section 274(e) or paragraph (e) of this
section are applicable to this amount. A properly treats the excess
amount of $30 ($300 - $270) per employee per month as compensation
and wages. Thus, $32,400 (($270 x 10) x 12 = $32,400) is subject to
the section 274(a)(4) disallowance under paragraphs (a) and (d)(1)
of this section.
(ii) The excess amount of $30 per employee per month is not
excludible under section 132(a)(5). As a result, the exceptions in
section 274(e)(2) and paragraph (e)(2)(i) of this section are
applicable to this amount. Thus, $3,600 ($36,000 - $32,400 = $3,600)
is not subject to the section 274(a)(4) disallowance and remains
deductible.
(3) Example 3. (i) Taxpayer C leases 200 parking spaces from a
third party at a rate of $500 per space, per month in 2020. C's
annual lease payment for the parking spaces is $1,200,000 ((200 x
$500) x 12 = $1,200,000). The number of available parking spaces
used by C's employees during the peak demand period is 200.
(ii) C uses the qualified parking limit methodology described in
paragraph (d)(2)(ii)(A) of this section to determine the
disallowance under section 274(a)(4). Under this methodology, the
section 274(a)(4) disallowance is calculated by multiplying the
number of available parking spaces used by employees during the peak
demand period, 200, the section 132(f)(2) monthly per employee
limitation on exclusion, $270, and 12, the number of months in the
applicable taxable year. The amount subject to the section 274(a)(4)
disallowance is $648,000 (200 x $270 x 12 = $648,000). This amount
is excludible from C's employees' gross incomes under section
132(a)(5) and none of the exceptions in section 274(e) or paragraph
(e) of this section are applicable to this amount. The excess
$552,000 ($1,200,000 - $648,000) for which C is not disallowed a
deduction under 274(a)(4) is included in C's employees' gross
incomes because it exceeds the section 132(f)(2) monthly per
employee limitation on exclusion.
(4) Example 4--(i) Facts. Taxpayer D, a big box retailer, owns a
surface parking facility adjacent to its store. D incurs $10,000 of
total parking expenses for its store in the 2020 taxable year. D's
parking facility has 510 spaces that are used by its customers,
employees, and its fleet vehicles. None of D's parking spaces are
reserved. The number of available parking spaces used by D's
employees during the peak demand period is 50. Approximately 30
nonreserved parking spaces are empty during normal business hours on
a typical business day. D's fleet vehicles occupy 10 parking spaces.
(ii) Methodology. D uses the primary use methodology in
paragraph (d)(2)(ii)(B) of this section to determine the amount of
parking expenses that are disallowed under section 274(a)(4).
(iii) Step 1. Because none of D's parking spaces are exclusively
reserved for employees, there is no amount to be specifically
allocated to reserved employee spaces under paragraph
(d)(2)(ii)(B)(1) of this section.
(iv) Step 2. D's number of available parking spaces is the total
parking spaces reduced by the number of reserved employee spaces and
inventory/unusable spaces or 500 (510 - 0 - 10 = 500). The number of
available parking spaces used by D's employees during the peak
demand period is 50. Of the 500 available parking spaces, 450 are
used to provide parking to the general public, including the 30
empty nonreserved parking spaces that are treated as provided to the
general public. The primary use of D's available parking spaces is
to provide parking to the general public because 90% (450/500 = 90%)
of the available parking spaces are used by the general public under
paragraph (d)(2)(ii)(B)(2) of this section. Because the primary use
of the available parking spaces is to provide parking to the general
public, the exception in section 274(e)(7) and paragraph (e)(2)(ii)
of this section applies and none of the $10,000 of total parking
expenses is subject to the section 274(a)(4) disallowance.
(5) Example 5--(i) Facts. Taxpayer E, a manufacturer, owns a
surface parking facility adjacent to its plant. E incurs $10,000 of
total parking expenses in 2020. E's parking facility has 500 spaces
that are used by its visitors and employees. E reserves 25 of these
spaces for nonemployee visitors. The number of available parking
spaces used by E's employees during the peak demand period is 400.
(ii) Methodology. E uses the primary use methodology in
paragraph (d)(2)(ii)(B) of this
[[Page 37614]]
section to determine the amount of parking expenses that are
disallowed under section 274(a)(4).
(iii) Step 1. Because none of E's parking spaces are exclusively
reserved for employees, there is no amount to be specifically
allocated to reserved employee spaces under paragraph
(d)(2)(ii)(B)(1) of this section.
(iv) Step 2. The primary use of E's parking facility is not to
provide parking to the general public because 80% (400/500 = 80%) of
the available parking spaces are used by its employees. Thus,
expenses allocable to those spaces are not excepted from the section
274(a) disallowance by section 274(e)(7) and paragraph (e)(2)(ii) of
this section under the primary use test in paragraph
(d)(2)(ii)(B)(2) of this section.
(v) Step 3. Because 5% (25/500 = 5%) of E's available parking
spaces are reserved nonemployee spaces, up to $9,500 ($10,000 x 95%
= $9,500) of E's total parking expenses are subject to the section
274(a)(4) disallowance under this step as provided in paragraph
(d)(2)(ii)(B)(3) of this section. The remaining $500 ($10,000 x 5% =
$500) of expenses allocable to reserved nonemployee spaces is
excepted from the section 274(a) disallowance and continues to be
deductible.
(vi) Step 4. E must reasonably determine the employee use of the
remaining parking spaces by using the number of available parking
spaces used by E's employees during the peak demand period and
determine the expenses allocable to employee parking spaces under
paragraph (d)(2)(ii)(B)(4) of this section.
(6) Example 6--(i) Facts. Taxpayer F, a manufacturer, owns a
surface parking facility adjacent to its plant. F incurs $10,000 of
total parking expenses in 2020. F's parking facility has 500 spaces
that are used by its visitors and employees. F reserves 50 spaces
for management. All other employees park in nonreserved spaces in
F's parking facility; the number of available parking spaces used by
F's employees during the peak demand period is 400. Additionally, F
reserves 10 spaces for nonemployee visitors.
(ii) Methodology. F uses the primary use methodology in
paragraph (d)(2)(ii)(B) of this section to determine the amount of
parking expenses that are disallowed under section 274(a)(4).
(iii) Step 1. Because F reserved 50 spaces for management,
$1,000 ((50/500) x $10,000 = $1,000) is the amount of total parking
expenses that is nondeductible for reserved employee spaces under
section 274(a)(4) and paragraphs (a) and (d)(2)(ii)(B)(1) of this
section. None of the exceptions in section 274(e) or paragraph (e)
of this section are applicable to this amount.
(iv) Step 2. The primary use of the remainder of F's parking
facility is not to provide parking to the general public because 89%
(400/450 = 89%) of the available parking spaces in the facility are
used by its employees. Thus, expenses allocable to these spaces are
not excepted from the section 274(a)(4) disallowance by section
274(e)(7) and paragraph (e)(2)(ii) of this section under the primary
use test in paragraph (d)(2)(ii)(B)(2) of this section.
(v) Step 3. Because 2% (10/450 = 2.22%) of F's available parking
spaces are reserved nonemployee spaces, the $180 allocable to those
spaces (($10,000 - $1,000) x 2%) is not subject to the section
274(a)(4) disallowance and continues to be deductible under
paragraph (d)(2)(ii)(B)(3) of this section.
(vi) Step 4. F must reasonably determine the employee use of the
remaining parking spaces by using the number of available parking
spaces used by F's employees during the peak demand period and
determine the expenses allocable to employee parking spaces under
paragraph (d)(2)(ii)(B)(4) of this section.
(7) Example 7--(i) Facts. Taxpayer G, a financial services
institution, owns a multi-level parking garage adjacent to its
office building. G incurs $10,000 of total parking expenses in 2020.
G's parking garage has 1,000 spaces that are used by its visitors
and employees. However, one floor of the parking garage is
segregated by an electronic barrier that can only be accessed with a
card provided by G to its employees. The segregated parking floor
contains 100 spaces. The other floors of the parking garage are not
used by employees for parking during the peak demand period.
(ii) Methodology. G uses the primary use methodology in
paragraph (d)(2)(ii)(B) of this section to determine the amount of
parking expenses that are disallowed under section 274(a)(4).
(iii) Step 1. Because G has 100 reserved spaces for employees,
$1,000 ((100/1,000) x $10,000 = $1,000) is the amount of total
parking expenses that is nondeductible for reserved employee spaces
under section 274(a)(4) and paragraph (d)(2)(ii)(B)(1) of this
section. None of the exceptions in section 274(e) or paragraph (e)
of this section are applicable to this amount.
(iv) Step 2. The primary use of the available parking spaces in
G's parking facility is to provide parking to the general public
because 100% (900/900 = 100%) of the available parking spaces are
used by the public. Thus, expenses allocable to those spaces,
$9,000, are excepted from the section 274(a)(4) disallowance by
section 274(e)(7) and paragraph (e)(2)(ii) of this section under the
primary use test in paragraph (d)(2)(ii)(B)(2).
(8) Example 8--(i) Facts. Taxpayer H, an accounting firm, leases
a parking facility adjacent to its office building. H incurs $10,000
of total parking expenses related to the lease payments in 2020. H's
leased parking facility has 100 spaces that are used by its clients
and employees. None of the parking spaces are reserved. The number
of available parking spaces used by H's employees during the peak
demand period is 60.
(ii) Methodology. H uses the primary use methodology in
paragraph (d)(2)(ii)(B) of this section to determine the amount of
parking expenses that are disallowed under section 274(a)(4).
(iii) Step 1. Because none of H's leased parking spaces are
exclusively reserved for employees, there is no amount to be
specifically allocated to reserved employee spaces under paragraph
(d)(2)(ii)(B)(1) of this section.
(iv) Step 2. The primary use of H's leased parking facility
under paragraph (d)(2)(ii)(B)(2) of this section is not to provide
parking to the general public because 60% (60/100 = 60%) of the lot
is used by its employees. Thus, H may not utilize the general public
exception from the section 274(a)(4) disallowance provided by
section 274(e)(7) and paragraph (e)(2)(ii) of this section.
(v) Step 3. Because none of H's parking spaces are exclusively
reserved for nonemployees, there is no amount to be specifically
allocated to reserved nonemployee spaces under paragraph
(d)(2)(ii)(B)(3) of this section.
(vi) Step 4. H must reasonably determine the use of the parking
spaces and the related expenses allocable to employee parking.
Because the number of available parking spaces used by H's employees
during the peak demand period is 60, H reasonably determines that
60% (60/100 = 60%) of H's total parking expenses or $6,000 ($10,000
x 60% = $6,000) is subject to the section 274(a)(4) disallowance
under paragraph (d)(2)(ii)(B)(4) of this section.
(9) Example 9--(i) Facts. Taxpayer I, a large manufacturer, owns
multiple parking facilities adjacent to its manufacturing plant,
warehouse, and office building at its complex in the city of X. All
of I's tracts or parcels of land at its complex in city X are
located in a single geographic location. I owns parking facilities
in other cities. I incurs $50,000 of total parking expenses related
to the parking facilities at its complex in city X in 2020. I's
parking facilities at its complex in city X have 10,000 total
parking spaces that are used by its visitors and employees of which
500 are reserved for management. All other spaces at parking
facilities in I's complex in city X are nonreserved. The number of
nonreserved spaces used by I's employees other than management
during the peak demand period at I's parking facilities in city X is
8,000.
(ii) Methodology. I uses the primary use methodology in
paragraph (d)(2)(ii)(B) of this section to determine the amount of
parking expenses that are disallowed under section 274(a)(4). I
chooses to apply the special rule in paragraph (c)(2) of this
section to aggregate all parking facilities in the geographic
location that comprises its complex in city X. However, I may not
aggregate parking facilities in other cities with its parking
facilities in city X because they are in different geographic
locations.
(iii) Step 1. Because 500 spaces are reserved for management,
$2,500 ((500/10,000) x $50,000 = $2,500) is the amount of total
parking expenses that is nondeductible for reserved employee spaces
for I's parking facilities in city X under section 274(a)(4) and
paragraphs (a) and (d)(2)(ii)(B)(1) of this section.
(iv) Step 2. The primary use of the remainder of I's parking
facility is not to provide parking to the general public because 84%
(8,000/9,500 = 84%) of the available parking spaces in the facility
are used by its employees. Thus, expenses allocable to these spaces
are not excepted from the section 274(a)(4) disallowance by section
274(e)(7) or paragraph (e)(2)(ii) of this section under the primary
use test in paragraph (d)(2)(ii)(B)(2) of this section.
[[Page 37615]]
(v) Step 3. Because none of I's parking spaces in its parking
facilities in city X are exclusively reserved for nonemployees,
there is no amount to be specifically allocated to reserved
nonemployee spaces under paragraph (d)(2)(ii)(B)(3) of this section.
(vi) Step 4. I must reasonably determine the use of the
remaining parking spaces and the related expenses allocable to
employee parking for its parking facilities in city X. Because the
number of available parking spaces used by I's employees during the
peak demand period in city X during an average workday is 8,000, I
reasonably determines that 84.2% (8,000/9,500 = 84.2%) of I's
remaining parking expense or $39,900 (($50,000-$2,500) x 84% =
$39,900) is subject to the section 274(a)(4) disallowance under
paragraph (d)(2)(ii)(B)(4) of this section.
(10) Example 10. (i) Taxpayer J, a manufacturer, owns a parking
facility and incurs mixed parking expenses along with other parking
expenses. J uses the special rule in paragraph (c)(1) of this
section to allocate 5% of certain mixed parking expenses to its
parking facility. Applying the special rule, J determines that it
incurred $100,000 of total parking expenses in 2020. J's parking
facility has 500 spaces that are used by its visitors and employees.
The number of available parking spaces used by J's employees during
the peak demand period is 475.
(ii) J uses the cost per space methodology described in
paragraph (d)(2)(ii)(C) of this section to determine the amount of
parking expenses that are disallowed under section 274(a)(4). Under
this methodology, J multiples the cost per space by the number of
available parking spaces used by J's employees during the peak
demand period. J calculates the cost per space by dividing total
parking expenses by the number of parking spaces ($100,000/500 =
$200). J determines that $95,000 ($200 x 475 = $95,000) of J's total
parking expenses is subject to the section 274(a)(4) disallowance
and none of the exceptions in section 274(e) or paragraph (e) of
this section are applicable.
(g) Applicability date. This section applies for taxable years that
begin on or after [date final rule is published in the Federal
Register].
Sec. 1.274-14 Disallowance of deductions for certain transportation
and commuting benefit expenditures.
(a) General rule. Except as provided in this section, no deduction
is allowed for any expense incurred for providing any transportation,
or any payment or reimbursement, to an employee of the taxpayer in
connection with travel between the employee's residence, as defined in
Sec. 1.121-1(b)(1), and place of employment. Travel between the
employee's residence and place of employment includes travel that
originates at a transportation hub near the employee's residence or
place of employment. For example, an employee who commutes to work by
airplane from an airport near the employee's residence to an airport
near the employee's place of employment is traveling between the
residence and place of employment. These transportation and commuting
expenses do not include any expenditure of any qualified transportation
fringe (as defined in section 132(f)) provided to an employee of the
taxpayer. All qualified transportation fringe expenses are required to
be analyzed under section 274(a)(4) and Sec. 1.274-13.
(b) Exception. The disallowance for the deduction for expenses
incurred for providing any transportation or commuting in paragraph (a)
of this section does not apply if the transportation or commuting
expense is necessary for ensuring the safety of the employee. The
transportation or commuting expense is necessary for ensuring the
safety of the employee if a bona fide business-oriented security
concern, as described in Sec. 1.132-5(m), exists for the employee.
(c) Applicability date. This section applies for taxable years that
begin on or after [date final rule is published in the Federal
Register].
Sunita Lough,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2020-13506 Filed 6-19-20; 4:15 pm]
BILLING CODE 4830-01-P
