Qualified Transportation Fringe, Transportation and Commuting Expenses Under Section 274

• Citation: 85 FR 81391
• Record Number: 2020-27505
• Published date: 16 December 2020
• Section: Rules and Regulations
• Court: Internal Revenue Service,Treasury Department

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Federal Register / Vol. 85, No. 242 / Wednesday, December 16, 2020 / Rules and Regulations

services are the following: Export

packing, local drayage in the source

country (including waiting time at the

dock), ocean and other freight, loading,

heavy lift, wharfage, tollage, switching,

dumping and trimming, lighterage,

insurance, commodity inspection

services, and services of a freight

forwarder. ‘‘Delivery service’’ may also

include work and materials necessary to

meet USAID marking requirements.

Developing countries means those

countries that are categorized by the

World Bank as low or lower middle

income economies according to their

gross national income per capita, and

also includes all countries to which

USAID provides assistance. USAID will

maintain a list of developing countries

primarily based on the most recent

World Bank determinations, and will

make the list available in USAID’s

Automated Directives System, ADS 310.

Essential medical supplies means

personal protective equipment, medical

products and equipment,

pharmaceuticals, and other medical

countermeasures needed to address the

COVID–19 pandemic, which are in short

supply, as identified in the ‘‘Notice of

Designation of Scarce Materials or

Threatened Materials Subject to COVID–

19 Hoarding Prevention Measures’’

issued by the Department of Health and

Human Services (HHS) on March 25,

2020, as updated. USAID may designate

additional materials as ‘‘emergency

medical supplies’’ if deemed necessary

and will publish notice of these

additional materials in the Federal

Register.

Free Port or Bonded Warehouse is a

special customs area with favorable

customs regulations (or no customs

duties and controls for transshipment).

Implementing instrument means a

binding relationship established

between USAID and an outside party or

parties to carry out USAID programs, by

authorizing the use of USAID funds

and/or nonfinancial resources for the

procurement of services or commodities

and/or commodity related services.

Implementing instruments include

specific conditions that apply to each

such procurement. Examples of such

instruments include contracts, grants,

cooperating agreements, and

interagency agreements.

Incidental services means services

such as installation, erection,

maintenance, or upgrading of USAID-

financed equipment, or the training of

personnel in the maintenance, operation

and use of such equipment, or similar

services provided for the authorized

disposition of such commodities.

Long term lease means, for purposes

of subpart B, a single lease of more than

180 calendar days; or repetitive or

intermittent leases under a single award

within a one-year period, which

cumulatively total more than 180

calendar days. A single lease may

consist of lease of one or more of the

same type of commodity within the

same lease term.

Motor vehicles means self-propelled

vehicles with passenger carriage

capacity, such as highway trucks,

passenger cars and buses, motorcycles,

scooters, motorized bicycles, ATVs, and

utility vehicles. Excluded from this

definition are ambulances,

snowmobiles, industrial vehicles for

materials handling and earthmoving,

such as lift trucks, tractors, graders,

scrapers, off-the-highway trucks (such

as off-road dump trucks), boats, and

other vehicles that are not designed for

travel at normal road speeds (40

kilometers per hour and above).

Mission means the USAID Mission,

office or representative in a cooperating/

recipient country.

Nationality refers to the place of legal

organization, ownership, citizenship, or

lawful permanent residence (or

equivalent immigration status to live

and work on a continuing basis) of

suppliers of commodities and services.

Pharmaceutical means any substance

intended for use in the diagnosis, cure,

mitigation, treatment, or prevention of

diseases in humans or animals; any

substances (other than food) intended to

affect the structure or any function of

the body of humans or animals; and,

any substance intended for use as a

component in the above. The term

includes drugs, vitamins, oral

rehydration salts, biologicals, and some

in-vitro diagnostic reagents/test kits; but

does not include devices or their

components, parts, or accessories.

Contraceptives, including condoms, are

not included in this definition.

Prohibited sources means countries to

which assistance is prohibited by the

annual appropriations acts of Congress

or other statutes, or those subject to

other executive branch restrictions, such

as applicable sanctions administered by

the U.S. Treasury Department’s Office of

Foreign Assets Control. USAID

maintains a list of prohibited sources,

available in USAID’s Automated

Directives System, ADS 310.

Recipients and contractors. Recipient

has the same meaning as defined in 22

CFR 226.02, except that it shall include

non-U.S. individuals, entities and

organizations, as well as subrecipients.

Contractors mean those entities which

enter into a contract, as the term is

defined in 48 CFR part 2, with the U.S.

Government, and includes

subcontractors.

Services means the performance of

identifiable tasks, rather than the

delivery of an end item of supply.

Source means the country from which

a commodity is shipped to the

cooperating/recipient country or the

cooperating/recipient country itself if

the commodity is located therein at the

time of the purchase, irrespective of the

place of manufacture or production,

unless it is a prohibited source country.

Where, however, a commodity is

shipped from a free port or bonded

warehouse in the form in which

received therein, ‘‘source’’ means the

country from which the commodity was

shipped to the free port or bonded

warehouse.

Supplier means any person or

organization, governmental or

otherwise, who furnishes services,

commodities, and/or commodity related

services, including delivery or

incidental services, financed by USAID.

United States means the United States

of America, any State(s) of the United

States, the District of Columbia, and

areas of U.S. associated sovereignty,

including commonwealths, territories

and possessions.

USAID means the United States

Agency for International Development

or any successor agency, including

when applicable, each USAID Mission

or office abroad.

USAID Principal Geographic Code

means a USAID code which designates

a country, a group of countries, or an

otherwise defined area. The USAID

principal geographic codes for purposes

of procurement are described in

§ 228.03 of this part.

Suk J. Jin,

Deputy General Counsel, U.S. Agency for

International Development.

[FR Doc. 2020–27766 Filed 12–15–20; 8:45 am]

BILLING CODE 6116–02–P

DEPARTMENT OF TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9939]

RIN 1545–BP49

Qualified Transportation Fringe,

Transportation and Commuting

Expenses Under Section 274

AGENCY

: Internal Revenue Service (IRS),

Treasury.

ACTION

: Final Regulations.

SUMMARY

: This document contains final

regulations to implement legislative

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changes to section 274 of the Internal

Revenue Code (Code) effective for

taxable years beginning after December

31, 2017. Specifically, the final

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. The final 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 final regulations

affect taxpayers who pay or incur such

expenses.

DATES

:

Effective Date: These regulations are

effective on December 16, 2020.

Applicability Date: These regulations

apply to taxable years beginning on or

after December 16, 2020.

Notwithstanding the preceding

sentence, taxpayers may choose to apply

§ 1.274–13(b)(14)(ii) to taxable years

ending after December 31, 2019.

FOR FURTHER INFORMATION CONTACT

:

Patrick Clinton of the Office of

Associate Chief Counsel (Income Tax

and Accounting), (202) 317–7005 (not a

toll-free number).

SUPPLEMENTARY INFORMATION

:

Background

This document contains final

regulations under section 274 of the

Code that amend the Income Tax

Regulations (26 CFR part 1). 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 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.

On December 24, 2018, the

Department of the Treasury (Treasury

Department) and the IRS published

Notice 2018–99, 2018–52 I.R.B. 1067,

‘‘Parking Expenses for Qualified

Transportation Fringes under § 274(a)(4)

and § 512(a)(7) of the Internal Revenue

Code.’’ Notice 2018–99, in part,

provided interim guidance for taxpayers

to determine the amount of parking

expenses for QTFs that is nondeductible

under section 274(a)(4).

On June 23, 2020, the Treasury

Department and the IRS published a

notice of proposed rulemaking (REG–

119307–19) in the Federal Register (85

FR 37599) containing proposed

regulations under section 274 (proposed

regulations) to implement the TCJA’s

amendments to section 274. The

proposed regulations would add a new

section at § 1.274–13 to address parking

and other QTF expenses under section

274(a)(4), including the application of

certain exceptions in section 274(e) to

QTF expenses. The proposed

regulations also would add a new

section at § 1.274–14 to address

transportation and commuting expenses

under section 274(l).

Pending the issuance of these final

regulations, taxpayers were allowed to

rely on the proposed regulations or the

guidance provided in Notice 2018–99

for parking expenses, other QTF

expenses, and transportation and

commuting expenses, as applicable,

paid or incurred in taxable years

beginning after December 31, 2017.

The Treasury Department and the IRS

received one request to speak at a public

hearing that was later withdrawn.

Therefore, no public hearing was held.

The Treasury Department and the IRS

received 12 written and electronic

comments responding to the proposed

regulations. All comments were

considered and are available at https://

www.regulations.gov or upon request.

The comments addressing the proposed

regulations are summarized in the

Summary of Comments and Explanation

of Revisions section. However,

comments recommending statutory

revisions or addressing issues outside

the scope of these final regulations are

not discussed in this preamble.

After full consideration of the

comments received on the proposed

regulations, this Treasury decision

adopts the proposed regulations with

modifications in response to certain

comments, as described in the Summary

of Comments and Explanation of

Revisions section.

Summary of Comments and

Explanation of Revisions

1. Qualified Transportation Fringes

A. In General

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. 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.

The proposed regulations restated the

statutory rules under section 274(a)(4),

defined relevant terms, and provided 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 included rules

addressing the deduction disallowance

for expenses related to providing

employees transportation in a commuter

highway vehicle and transit pass QTFs.

Finally, the proposed regulations

applied the applicable exceptions in

section 274(e) to all QTF expenses.

Specifically, the proposed regulations

provided 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

provided 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

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general rule or any one of three

simplified methodologies. The proposed

regulations provided taxpayers the

option to apply the general rule or a

simplified methodology for each taxable

year and for each parking facility. The

proposed regulations included special

rules and definitions 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, disregarding five or

fewer reserved parking spaces if the

reserved spaces are 5 percent or less of

total parking spaces, and determining

employee use of parking on a typical

business day. The preamble to the

proposed regulations provided that

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 allowed taxpayers to

calculate the disallowance based on a

reasonable interpretation of section

274(a)(4). However, the proposed

regulations required taxpayers to use the

expense paid or incurred in providing a

QTF and not 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. The

proposed regulations allowed a special

rule for aggregating parking spaces by

geographic location to be used with the

general rule.

The proposed regulations also

included three simplified

methodologies as alternatives to 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 2020), 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 on

the Notice. The proposed regulations

permitted the use of special rules for

allocating certain mixed parking

expenses and aggregating parking spaces

by geographic location. The proposed

regulations also provided definitions for

employee, general public, parking

facility, total parking spaces, reserved

employee spaces, reserved nonemployee

spaces, primary use, and total parking

expenses, geographic location,

inventory/unusable spaces, available

parking spaces, peak demand period,

and mixed parking expense.

The third simplified methodology

provided in the proposed regulations 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 used by

employees during the peak demand

period. The proposed regulations

provided that cost per space is

calculated by dividing total parking

expenses (including expenses for

inventory/unusable spaces) by total

parking spaces (including inventory/

unusable spaces). The proposed

regulations also permitted special rules

for allocating certain mixed parking

expenses and aggregating parking spaces

by geographic location to be used with

the cost per space methodology.

Finally, the proposed regulations

provided that the deduction

disallowance under section 274(a)(4)

does not apply to expenditures for QTFs

that meet the requirements of section

274(e)(2), (7), or (8), the three exceptions

in section 274(e) that are relevant for

QTFs. Pursuant to section 274(e)(2), the

proposed regulations provided that the

disallowance under section 274(a) does

not apply to expenditures for QTFs to

the extent the taxpayer properly 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 of the Code (chapter 24) relating to

collection of Federal income tax at

source on wages. The proposed

regulations also provided, in accordance

with section 274(e)(7), 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) 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.

Finally, consistent with section

274(e)(8), the proposed regulations

provided 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 final regulations substantially

adopt the proposed regulations, with

certain modifications and clarifications,

as discussed in this Summary of

Comments and Explanation of

Revisions. In applying the final

regulations, taxpayers may continue to

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.

B. Definitions

As described in this part 1.B., the

final regulations generally include the

definitions from the proposed

regulations, modified and clarified in

response to comments.

i. Qualified Transportation Fringe

The final regulations adopt the

proposed regulations’ 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. 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.

Because qualified bicycle commuting

reimbursements are not QTFs,

deductions for qualified bicycle

commuting reimbursements are not

disallowed under section 274(a)(4) for

taxable years beginning after December

31, 2017 and before January 1, 2026.

Thus, the final regulations provide that

the term ‘‘qualified transportation

fringe’’ means any of the following

provided by an employer to an

employee: (1) 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 section 132(f)(1)(A) and (f)(5)(B)), (2)

any transit pass (as described in section

132(f)(1)(B) and (f)(5)(A)), or (3)

qualified parking (as described in

section 132(f)(1)(C) and (f)(5)(C)).

Under section 132(f)(1)(C) and

(f)(5)(C), the term ‘‘qualified parking’’

includes parking provided by an

employer to an employee on or near the

business premises of the employer. A

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commenter requested that the final

regulations define ‘‘parking provided to

an employee’’ to include only parking

spaces that are reserved or otherwise set

aside exclusively for employee use. The

Treasury Department and the IRS

decline to adopt this suggestion. Section

1.132–9, Q/A–4(d) provides that parking

is provided by an employer to an

employee if the parking is on property

that the employer owns or leases, the

employer pays for the parking, or the

employer reimburses the employee for

parking expense. Thus, the definition of

qualified parking as a QTF under

section 132(f) is not limited to parking

that is reserved or otherwise set aside

exclusively for employee use.

Another commenter suggested that

parking with no objective value to an

employee, such as parking in industrial,

remote, or rural areas (that is, areas

where the general public would not pay

to park) is not a QTF and therefore, that

section 274(a)(4) should not disallow

the deduction of the expenses. The

Treasury Department and the IRS note

that there is nothing in section 132 or

§ 1.132–9 that supports the proposition

that the value of parking to an employee

is relevant in determining whether the

parking itself constitutes qualified

parking and a QTF. Thus, the Treasury

Department and the IRS do not agree

with the commenter that qualified

parking with no objective value to an

employee is not a QTF. However, see

part 1.E.iii. of this Summary of

Comments and Explanation of Revisions

section for a discussion of the

applicability of the section 274(e)(8)

exception to parking with no objective

value to an employee.

ii. Employee

The proposed regulations defined the

term ‘‘employee’’ based on definitions

in §§ 1.132–1(b)(2)(i) and 1.132–9(b), Q/

A–5 and Q/A–24. The term ‘‘employee’’

for Federal tax purposes generally is

understood to refer to a common-law

employee. 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.,

§ 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 regulations under section

132 also include certain statutory

employees such as officers of

corporations in the definition of

employee for purposes of QTFs. No

comments were received on the

proposed definition of ‘‘employee’’.

Thus, the final regulations adopt this

definition without modification.

iii. General Public

Commenters on Notice 2018–99

raised concerns that, for taxpayers that

lease space in a multi-tenant building,

the Notice did not include employees,

partners, 2-percent shareholders of S

corporations (as defined in section

1372(b)), 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

provided that ‘‘general public’’ includes

employees, partners, 2-percent

shareholders of S corporations (as

defined in section 1372(b)), 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.

A commenter on the proposed

regulations raised concerns that the

definition of the term ‘‘general public’’

in the proposed regulations gives

tenants of multi-tenant buildings an

unfair advantage in comparison to

tenants in buildings with only one

tenant and suggested all tenants be

treated the same. The Treasury

Department and the IRS decline to

adopt this suggestion because any

alternative would likely impose an

undue administrative burden on

taxpayers in a multi-tenant building to

determine the use of the parking facility

by numerous other tenants.

A commenter also asked why

taxpayers that own or lease space in a

multi-tenant building may include

independent contractors in the

definition of general public. The

Treasury Department and the IRS note

that the proposed regulations defined

general public to include independent

contractors of unrelated taxpayers in a

multi-tenant building because unlike

independent contractors of the taxpayer,

independent contractors of unrelated

tenants do not have a relationship with

the taxpayer. The final regulations

continue to provide that independent

contractors of unrelated tenants in

multi-tenant buildings are included in

the general public. However,

independent contractors of the taxpayer

continue to be excluded from the

general public regardless of whether the

taxpayer owns or leases space in a

multi-tenant building.

A commenter requested that a car

dealership’s parking spaces occupied by

customers’ vehicles being repaired or

serviced be excluded from the definition

of inventory/unusable spaces and

instead be included in the definition of

spaces available to the general public

because the parking spaces are used by

customers and are not available for

employee parking. The Treasury

Department and the IRS agree with the

commenter and have revised the

definition of general public in the final

regulations accordingly. Thus, the final

regulations follow the definition of the

term general public as provided in the

proposed regulations with the

clarification that parking spaces that are

used to park vehicles owned by

members of the general public while the

vehicles await repair or service by the

taxpayer also are treated as provided to

the general public.

iv. Parking Facility

The final 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 on

Notice 2018–99 suggested that because

qualified parking as defined in section

132(f)(5)(C) and § 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’’ in the proposed

regulations should exclude such spaces.

In response to these comments, the

proposed regulations specifically

excluded parking spaces on or near

property used by the employee for

residential purposes from the definition

of parking facility. The final regulations

adopt this definition, without

modification.

v. Geographic Location

Consistent with the proposed

regulations, the final regulations allow

the taxpayer 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.

The proposed regulations defined 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

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road, street, railroad, stream, or similar

property. Tracts or parcels of land

which touch only at a common corner

are not contiguous.

A commenter suggested that the

definition of geographic location be

expanded to allow parking lots located

within reasonable distance (

1

⁄

4

mile) of

a principal parking lot to be aggregated

as part of a single geographic location.

The commenter explained that

automotive dealers often have overflow

parking lots not designated for any

purpose available relatively close to the

business location in the event the

inventory levels exceed the spaces

available at the principal location.

The Treasury Department and the IRS

considered this comment and decline to

adopt it because the term ‘‘reasonable

distance’’ is difficult to define and, as

the commenter explained, overflow

parking facilities are typically utilized

for excess inventory vehicles, instead of

parking for the general public. The

Treasury Department and the IRS

believe that expanding the definition of

geographic location to include

noncontiguous tracts or parcels of land

would introduce unnecessary

complexity without providing a

meaningful benefit to taxpayers. Thus,

the final regulations adopt the proposed

regulations’ definition of geographic

location, without modification.

vi. Total Parking Spaces

The proposed regulations defined the

term ‘‘total parking spaces’’ as the total

number of parking spaces, or the

taxpayer’s portion thereof, in the

parking facility. No comments were

received on this definition, and the final

regulations adopt it without

modification.

vii. Reserved Employee Spaces

A commenter on Notice 2018–99

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, in the

proposed regulations, provided that

costs allocated to reserved employee

spaces would be disallowed regardless

of actual use of the reserved spaces.

However, the proposed regulations also

included a special rule 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. The final regulations

adopt the disallowance of costs

allocated to reserved employee spaces

and the special rule in step 1 of the

primary use methodology provided in

the proposed regulations, without

modification.

viii. Reserved Nonemployee Spaces

A commenter on Notice 2018–99

suggested that parking spaces reserved

for drivers with disabilities be treated as

‘‘reserved nonemployee spaces’’ and

thus, any related expenses not be

disallowed under section 274(a)(4).

After considering the comment, the

Treasury Department and the IRS

declined to include parking spaces

reserved for drivers with disabilities

from the definition of reserved

nonemployee spaces in the proposed

regulations. The Treasury Department

and the IRS reasoned that 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. The proposed

regulations also did not include parking

spaces reserved for drivers with

disabilities in ‘‘reserved employee

spaces’’ because they may or may not be

exclusively reserved for employees. The

final regulations adopt the proposed

regulations’ definitions of reserved

nonemployee spaces and reserved

employee spaces, without modification.

ix. Inventory/Unusable Spaces

The Treasury Department and the IRS

received questions and comments in

response to Notice 2018–99 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 added a new definition for

the term ‘‘inventory/unusable spaces’’

that includes parking spaces used

exclusively for inventoried vehicles,

qualified nonpersonal use vehicles (as

described in § 1.274–5(k)), other fleet

vehicles used in a taxpayer’s trade or

business, or otherwise not usable for

parking by employees.

A commenter on the proposed

regulations suggested that inventory

spaces should be included in the

definition of spaces available to the

general public in cases where inventory

spaces may at times be used by

customers and are not available for

employee parking. The Treasury

Department and the IRS note that spaces

used by customers should not be

included in inventory/unusable spaces.

Therefore, the final regulations adopt

the definition of ‘‘inventory/unusable

spaces’’ included in the proposed

regulations, with the clarification that

inventory/unusable spaces are

otherwise not usable for parking by the

general public.

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 final regulations.

The final regulations exclude inventory/

unusable spaces because those spaces

are not available to employees or the

general public but are instead used

exclusively 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.

A commenter on the proposed

regulations requested that a safe harbor

be added to the final regulations to

determine the number of inventory

spaces at a car dealership because of

extreme fluctuations of inventory over a

car dealer’s tax year. The commenter

suggested that the safe harbor should be

based on an annualization of the

number of spaces occupied by inventory

vehicles at the end of the month during

the tax year with lowest inventory, or

alternatively, based on the average

number of spaces occupied by inventory

vehicles at the end of each month. The

commenter further suggested that

inventory per month should be

determined based on inventory levels a

car dealer reports to the vehicle

manufacturer on monthly financial

reporting.

The Treasury Department and the IRS

note that the proposed regulations did

not specifically describe how taxpayers

should determine the number of

inventory/unusable spaces in the

parking facility. Thus, the Treasury

Department and the IRS have added a

rule in these final regulations providing

that taxpayers may use any reasonable

methodology to determine the number

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of inventory/unusable spaces in the

parking facility. In addition, in response

to the commenter’s alternative

suggestion, the final regulations provide

that a reasonable methodology may

include using the average of monthly

inventory counts.

x. Available Parking Spaces

The proposed regulations included a

definition of ‘‘available parking spaces’’

to clarify that reserved employee spaces

and inventory/unusable spaces are not

included in determining primary use

under the primary use methodology. No

comments were received on this

definition, and the final regulations

adopt it without modification.

xi. Primary Use

The proposed regulations provided

that for purposes of the primary use test

of the primary use methodology,

‘‘primary use’’ means greater than 50

percent of actual or estimated usage of

the parking spaces in the parking

facility by the general public. A

commenter on the proposed regulations

suggested that the final regulations

provide that primary use should mean

30 percent or greater for healthcare

facilities, including skilled nursing and

assisted living healthcare facilities,

because the employees at these types of

healthcare businesses provide essential

and life-saving care services to the

public, especially during the ongoing

Coronavirus Disease (COVID–19)

pandemic.

After considering this comment, the

Treasury Department and the IRS have

decided to retain the primary use test as

described in the proposed regulations.

The Treasury Department and the IRS

continue to believe that this primary use

test is a reasonable interpretation of the

exception in section 274(e)(7) for

parking made available to the general

public. Further, this interpretation is

consistent with recent final regulations

addressing the application of the section

274(e)(7) exception to the limitation on

the deduction for meals and

entertainment expenses, which apply

the section 274(e)(7) exception to food

and beverages ‘‘primarily consumed’’ by

the general public, meaning greater than

50 percent of actual or reasonably

estimated consumption. See TD 9925,

85 FR 64026 (October 9, 2020).

The Treasury Department and the IRS

understand that the primary use of a

parking facility could be affected by a

federally declared disaster such as the

COVID–19 pandemic. Thus, as

discussed in part 1.B.xiv. of this

Summary of Comments and Explanation

of Revisions section, the final

regulations modify the definition of

‘‘peak demand period’’ to provide

flexibility for taxpayers affected by a

federally declared disaster to determine

the primary use of parking spaces used

by employees during the peak demand

period.

xii. Total Parking Expenses

Commenters on Notice 2018–99

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.’’ Commenters reasoned that

including the expenses may encourage

unsafe parking conditions and neglect of

care in maintaining the parking

facilities. Commenters on the Notice

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 on the

Notice 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 determined that the proposed

regulations should include the

definition of the term ‘‘total parking

expenses’’ from Notice 2018–99, and the

final regulations adopt this definition

without modification. 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,

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 on Notice

2018–99 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 included in the

proposed regulations a definition for the

term ‘‘mixed parking expense’’ and a

special rule for allocating certain mixed

parking expenses. The proposed

regulations defined ‘‘mixed parking

expense’’ 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 proposed

regulations provided that mixed parking

expenses may be allocated using any

reasonable methodology but provided a

special rule for allocating certain mixed

costs that taxpayers could chose to

apply in conjunction with certain of the

methodologies for determining

disallowed parking expenses.

The final regulations adopt the

definition of ‘‘mixed parking expenses’’

included in the proposed regulations, as

well as the rule allowing the use of any

reasonable methodology to allocate

mixed parking expenses. However, the

final regulations make certain

modifications to the allowance of the

special rule in the proposed regulations

for allocating certain mixed parking

expenses. The special rule for allocating

certain mixed parking expenses to a

parking facility and the modifications

made in the final regulations is

explained in part 1.C of this Summary

of Comments and Explanation of

Revisions section.

A commenter on the proposed

regulations suggested using property tax

assessments and/or acreage to determine

the amount of mixed parking expenses

allocable to a parking facility. The

Treasury Department and the IRS note

that taxpayers may use any reasonable

methodology to allocate mixed parking

expenses. However, the Treasury

Department and the IRS decline to

adopt a specific methodology as

reasonable for this purpose. The

Treasury Department and the IRS

further note that the methodology must

be reasonable for the expense being

allocated. Thus, one methodology for

multiple expenses may be used only if

the methodology is reasonable for all

such expenses.

xiv. Peak Demand Period

In the 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

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peak demand period for employee

parking on a typical business day. The

proposed regulations provided that for

purposes of § 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.

A commenter on the proposed

regulations explained that it is overly

burdensome for taxpayers at healthcare

facilities to determine how many

employees are at each location 24 hours

a day, 7 days a week and instead

suggested using an average based on the

primary location of each employee and

the amount of time each employee

typically works each week. The

Treasury Department and the IRS

considered the comment and have

determined that the proposed rules

regarding ‘‘peak demand period’’ should

be adopted in the final regulations,

subject to an optional rule for parking

facilities located in a federally declared

disaster area as discussed later in this

part 1.B.xiv. of this Summary of

Comments and Explanation of Revisions

section. However, the Treasury

Department and the IRS note that the

definition of peak demand period

allows for flexibility based on taxpayer

facts and circumstances by allowing

taxpayers to choose a typical business

day during the taxable year and to use

any reasonable methodology to

determine the total number of spaces

used by employees. For example, a

taxpayer may determine the total

number of spaces used by employees

based on periodic inspections or

employee surveys.

The ongoing 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. In the preamble

to the proposed regulations, the

Treasury Department and the IRS

requested comments on what additional

rules, if any, are needed to address

significant variations in employee

parking during the taxable year due to

the COVID–19 pandemic. One

commenter suggested that the final

regulations allow for a COVID–19

exception for employees not working at

the workplace location and thus not

using employee parking during the

period of the COVID–19 pandemic.

Specifically, the commenter requested

that taxpayers be permitted to calculate

their disallowance under one of the

simplified methodologies in § 1.274–

13(d)(2), and then reduce their

disallowance by a certain amount based

on the taxpayer’s ‘‘COVID relief period’’

and the reduction in their workforce

during that period.

Although the commenter’s example

would not be permitted under any of the

simplified methodologies in the

proposed or final regulations because

taxpayers must use one methodology for

the entire year, taxpayers may achieve a

similar result using any reasonable

method under the general rule.

Taxpayers also may achieve a similar

result by using a monthly computation

method such as the qualified parking

limit methodology or the cost per space

methodology. A taxpayer using the cost

per space methodology generally

computes the cost per space and

multiplies it by the number of spaces

used by employees during the peak

demand period. Although the proposed

regulations did not specify whether the

cost per space must be based on one

peak demand period in the taxable year,

these final regulations clarify that the

cost per space calculation may be

performed on a monthly basis.

A taxpayer using the primary use

methodology would be allowed a full

deduction for parking expenses (except

for expenses related to reserved

employee spaces) if the primary use of

the parking facility during the peak

demand period is for the general public.

The proposed regulations defined ‘‘peak

demand period’’ as 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. As

discussed previously in this part

1.B.xiv. of this Summary of Comments

and Explanation of Revisions section,

the final regulations retain this general

definition. However, to provide relief to

taxpayers affected by the COVID–19

pandemic or other federally declared

disasters, the final regulations add an

optional rule in the definition of ‘‘peak

demand period’’ for taxpayers who own

or lease a parking facility that is located

in a federally declared disaster area, as

defined in section 165(i)(5). A taxpayer

that uses this rule may identify a typical

business day for the taxable year in

which the disaster occurred by reference

to a typical business day in that taxable

year prior to the date that the taxpayer’s

operations were impacted by the

federally declared disaster. For example,

a restaurant that transitioned from a

dine-in restaurant to take-out service

due to the COVID–19 pandemic could

determine its parking disallowance

under the primary use test based on the

usage of parking on a typical business

day prior to its transition to take-out

service. Alternatively, under this rule, a

taxpayer may choose to identify a

typical business day for the month(s) of

the taxable year in which the disaster

occurred by reference to a typical

business day in the same month(s) of

the taxable year immediately preceding

the taxable year in which the disaster

first occurred. For purposes of this rule,

the taxable year in which the disaster

occurred is determined without regard

to whether the taxpayer makes an

election under section 165(i). In order to

allow taxpayers affected by the COVID–

19 pandemic to benefit from this rule,

the final regulations allow a taxpayer to

apply this rule to taxable years ending

after December 31, 2019. This rule is

intended to provide relief to both

calendar and fiscal year taxpayers, as

well as taxpayers with a seasonal

business, that are affected by a federally

declared disaster.

C. Optional Rules for QTF Parking

Expenses

The proposed regulations included a

special rule for allocating certain mixed

parking expenses to reduce

administrative burdens for taxpayers

and simplify calculations in complying

with section 274(a)(4). Specifically, the

proposed regulations provided that a

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. However, the proposed

regulations provided that the special

rule for allocating certain mixed parking

expenses may only be used in applying

the primary use methodology and cost

per space methodology and may not be

used in applying the general rule or the

qualified parking limit methodology.

The proposed regulations did not

require taxpayers to use the special rule

for allocating certain mixed parking

expenses and provided that taxpayers

may instead use any reasonable

methodology for mixed parking

expenses.

A commenter on the proposed

regulations requested that the final

regulations allow taxpayers to use this

special rule for applicable mixed

parking expenses when using the

general rule to calculate the

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disallowance of deductions for QTFs

based on a reasonable interpretation of

section 274(a)(4). In response to the

commenter’s request, these final

regulations have extended the 5 percent

optional rule for allocating certain

mixed parking expenses to the general

rule as a further attempt to reduce

administrative burdens for taxpayers

and to simplify calculations in

complying with section 274(a)(4). The

optional rule for allocating certain

mixed parking expenses in these final

regulations may therefore be used in

applying the general rule, the primary

use methodology, and the cost per space

methodology. In addition, this optional

rule may be used by taxpayers using the

qualified parking methodology, but

solely for the purpose of determining

total parking expenses. As revised, this

optional rule may be used to determine

total parking expenses under any of the

parking methodologies permitted in the

proposed and final regulations. Thus,

the final regulations relocate this rule

from § 1.274–13(c) to the definition of

total parking expenses in § 1.274–

13(b)(12).

A commenter suggested that the 5

percent special rule for allocating mixed

parking expenses be expanded to

include any parking expense that is not

allocated by a service provider to a

parking facility or is not accounted for

separately on the taxpayer’s books,

including expenses for maintenance,

snow and ice removal, landscape costs,

security, cleaning. The Treasury

Department and the IRS continue to

believe that this optional rule should

apply only to mixed parking expenses

related to payments under a lease or

rental agreement, and payments for

utilities, insurance, interest and

property taxes, and therefore, decline to

adopt this comment. However, the final

regulations clarify that a taxpayer who

chooses to apply the 5 percent optional

rule is not required to apply the rule to

allocate all eligible mixed parking

expenses. Thus, a taxpayer may choose

to apply the 5 percent optional rule to

allocate one or more of the eligible

mixed parking expenses, while using a

reasonable methodology to allocate

remaining eligible mixed parking

expenses. Certain types of expenses,

such as parking facility maintenance,

snow and ice removal, landscape costs,

security, and parking facility cleaning

are more likely to be separately billed

and/or primarily allocable to the

parking facility. Taxpayers may,

however, continue to use any reasonable

methodology to allocate these mixed

parking expenses.

Consistent with the proposed

regulations, the final regulations permit

taxpayers using certain methodologies

to aggregate the number of parking

spaces in a single geographic location if

they so choose. The final regulations

adopt the proposed definition of the

term ‘‘geographic location,’’ which is

based on tracts or parcels of land that

are contiguous. The optional rule for

aggregation of parking spaces in a single

geographic location may be used in

applying the general rule, primary use

methodology, and cost per space

methodology, but may not be used with

the qualified parking limit methodology.

The final regulations clarify that a

taxpayer that chooses to apply this

optional aggregation rule must treat the

aggregated parking spaces as one

parking facility for purposes of

determining total parking expenses.

D. Calculation of Disallowance of QTF

Parking Expenses

Like the proposed regulations, the

final regulations 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. The Treasury Department and

the IRS determined that amounts paid to

a third party for qualified parking

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 final regulations

continue to provide that a 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. The

general rule and three simplified

methodologies are substantially the

same as those provided in the proposed

regulations, with the following

modifications based on comments

received.

i. General Rule

Consistent with the proposed

regulations, under the general rule

provided in the final regulations

taxpayers may calculate the

disallowance 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).

In response to the proposed

regulations, a commenter recommended

that taxpayers be permitted to elect to

use historic information to calculate the

current year disallowance to reduce the

compliance burden of annually

calculating the disallowance under

section 274(a)(4). For example, the

commenter suggested that the average

disallowed amount for the prior two

years may be used as the disallowance

for the next five years or, alternatively,

if the primary use of the available

parking spaces is to provide parking to

the general public for two out of three

years, then the taxpayer may treat the

primary use of the available parking

spaces as providing parking to the

general public for the next five years.

The Treasury Department and the IRS

considered this comment and do not

believe that section 274(a)(4) permits

taxpayers to compute the amount of a

permanently disallowed deduction for a

taxable year based on the amount of the

disallowance in one or more different

taxable years.

ii. Qualified Parking Limit Methodology

Consistent with the proposed

regulations, the final regulations

provide 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. Taxpayers using the qualified

parking limit methodology 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, 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.

A commenter recommended the

adoption of an alternative monthly rate

of $25 per parking space, instead of the

maximum monthly dollar amount under

section 132(f)(2), to estimate a

taxpayer’s monthly total cost per

parking space for parking facilities

located outside the city limits of the 20

most populous cities in the United

States. The commenter explained that

this will encourage the use of the

qualified parking limit methodology by

manufacturers and employers with

parking spaces in less populous areas.

The Treasury Department and the IRS

decline to adopt this comment because

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the commenter provided no evidence

that the monthly rate of $25 per parking

space is the appropriate cost for all

parking spaces located outside the city

limits of the 20 most populous cities in

the United States.

Section 274(e)(2) provides 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. Under

§ 1.274–13(e)(2)(i) of the proposed

regulations, 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 could 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, the

proposed regulations provided that the

qualified parking limit methodology

could 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). The final regulations adopt this

rule from the proposed regulations

without change.

iii. Primary Use Methodology

The Treasury Department and the IRS

received numerous comments on Notice

2018–99 related to the four-step method

provided in the Notice. The proposed

regulations adopted the four-step

method provided in the Notice, with

revisions in response to comments, and

renamed it the ‘‘primary use

methodology.’’ No comments were

received on the primary use

methodology included in the proposed

regulations, and the final regulations

adopt the primary use methodology

without modification.

iv. Cost Per Space Methodology

The proposed regulations also

provided a cost per space methodology,

which allows taxpayers to calculate the

disallowance by multiplying the cost

per space by the number of available

parking spaces used by employees.

Taxpayers must identify the number of

total 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

total parking spaces (including

inventory/unusable spaces).

In response to the proposed

regulations, a commenter pointed out

that a taxpayer using the cost per space

methodology calculates the

disallowance of deductions for QTF

parking expenses by multiplying the

cost per space by the total number of

‘‘available parking spaces’’ used by

employees during the peak demand

period rather than the ‘‘total parking

spaces’’ used by employees. The

commenter suggested that ‘‘total parking

spaces’’ should be used instead of

‘‘available parking spaces’’ because

reserved spaces are excluded from the

definition of ‘‘available parking spaces.’’

The Treasury Department and the IRS

agree with this suggestion and modify

the cost per space methodology

provided in the proposed regulations by

specifying that ‘‘total parking spaces’’ is

used to calculate the disallowance

under the final regulations. In addition,

as discussed in part 1.B.xiv. of this

Summary of Comments and Explanation

of Revisions section, the final

regulations clarify that the cost per

space calculation may be performed on

a monthly basis.

v. Expenses for Transportation in a

Commuter Highway Vehicle and Transit

Pass QTFs

Consistent with the proposed

regulations, the final 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). The general rules

are unchanged from those in the

proposed regulations.

E. Specific Exceptions to Section 274(a)

for QTF Expenses

Section 274(e) provides that the

deduction disallowance under section

274(a) does not apply to any expense

described in section 274(e). Consistent

with the proposed regulations, the final

regulations provide that the deduction

disallowance does not apply to

expenditures for QTFs that meet the

requirements of section 274(e)(2), (7), or

(8), which are the three exceptions in

section 274(e) that are relevant for

QTFs.

A commenter suggested that the IRS

implement a moratorium on

enforcement of the deduction

disallowance for the expense of QTFs

during the ongoing COVID–19

pandemic. In addition, a commenter

requested that healthcare facilities,

including skilled nursing and assisted

living healthcare facilities, be excepted

from the section 274(a)(4) disallowance

because the employees at these types of

healthcare businesses provide essential

and life-saving care services to the

public.

The Treasury Department and the IRS

note that exceptions for QTFs during the

COVID–19 pandemic or for healthcare

facility 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

that the Treasury Department and the

IRS may allow. However, as discussed

in part 1.B.xiv. of this Summary of

Comments and Explanation of Revisions

section, the Treasury Department and

the IRS are modifying the definition of

‘‘peak demand period’’ to provide

additional flexibility for taxpayers

affected by the COVID–19 pandemic or

other federally declared disaster in

applying the methodologies for

determining the section 274(a)(4)

disallowance for parking facilities.

i. Certain QTF Expenses Treated as

Compensation Under Section 274(e)(2)

Section 274(e)(2) provides an

exception to section 274(a) for 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. Pursuant to section

274(e)(2), the proposed regulations

provided that the disallowance under

section 274(a) does not apply to

expenditures for QTFs to the extent the

taxpayer properly 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. Because section 132(a)(5)

excludes the value of QTFs from an

employee’s gross income up to the

limitations on exclusion provided by

section 132(f)(2), the proposed

regulations provided 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 proposed regulations

further provided that section 274(e)(2)

applies to expenses paid or incurred for

QTFs, 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

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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.

Section 1.61–21(b)(1) provides rules

for the valuation of fringe benefits and

requires that an employee must include

in gross income the amount by which

the fair market value of the fringe

benefit exceeds the sum of the amount

paid for the benefit by or on behalf of

the recipient and the amount, if any,

specifically excluded from gross income

under the Code. Thus, in the case of

reimbursements by a recipient, the

amount of the reimbursement is taken

into account in determining the amount

properly includible in the recipient’s

income and does not affect the

taxpayer’s ability to use the exception in

section 274(e)(2).

To prevent taxpayers from

inappropriately claiming a full

deduction under section 274(e)(2) by

including a value that is less than the

amount required to be included under

§ 1.61–21, the proposed regulations

provided that the exception in section

274(e)(2) does not apply to expenses for

QTFs for which the taxpayer calculates

a value that is less than the amount

required to be included in gross income

under § 1.61–21.

Commenters on the proposed

regulations under section 274 limiting

deductions for meals and entertainment

expenses (proposed §§ 1.274–11 and

1.274–12 (REG–100814–19)) asserted

that a rule disallowing the application

of section 274(e)(2) to expenses for

which an improper amount is included

in compensation and wages or in gross

income, as applicable, is unduly harsh

given the difficulty in determining the

value of a fringe benefit under § 1.61–21

and the possibility of good faith errors.

See TD 9925, 85 FR 64026, 64031

(October 9, 2020). In addition, a

commenter noted that the ‘‘to the extent

that’’ language in section 274(e)(2)(A)

does not support applying an ‘‘all or

nothing’’ rule against the taxpayer.

The Treasury Department and the IRS

agree that the ‘‘all or nothing’’ rule in

proposed §§ 1.274–13 and 1.274–14 may

lead to unduly harsh results. Therefore,

in response to these comments, the

Treasury Department and the IRS have

revised the rules in proposed § 1.274–

13(e)(2)(i) to allow a taxpayer to apply

section 274(e)(2) even if the taxpayer

includes less than the proper amount in

compensation and wages as required

under § 1.61–21. In such a case,

however, the amount of a taxpayer’s

deduction is limited to the amount

included in compensation and wages,

taking into account the amount, if any,

reimbursed to the taxpayer by the

employee (referred to as the ‘‘dollar-for-

dollar’’ methodology in this preamble).

This is consistent with the rule

provided in section 274(e)(2)(B) for

QTFs provided to specified individuals.

The final regulations also provide that

if the value of a QTF exceeds the

monthly per employee limitations on

exclusion provided by section 132(f)(2)

($270 per employee for 2020), so that

only a portion of the value is included

in the employees’ wages, the taxpayer

may apply section 274(e)(2). However,

in this case, the taxpayer must use the

dollar-for-dollar methodology.

ii. Expenses for Transportation in a

Commuter Highway Vehicle, Transit

Pass, or Parking Made Available to the

Public

Section 274(e)(7) provides an

exception to section 274(a) for expenses

for goods, services, and facilities made

available by the taxpayer to the general

public. Pursuant to section 274(e)(7), the

proposed regulations provided 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) 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. No

comments were received on this

provision, and the final regulations

adopt it without modification. As

described further in part 1.B.iii. of this

Summary of Comments and Explanation

of Revisions section, ‘‘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 (as

defined in section 1372(b)), 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 (as

defined in section 1372(b)), 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

Section 274(e)(8) provides an

exception to section 274(a) for 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. Pursuant to

section 274(e)(8), the proposed

regulations provided 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 provided 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. The final regulations

adopt these provisions.

A commenter requested guidance in

the final regulations for a situation in

which employees are charged for

parking at a parking facility. If a

taxpayer charges its employees for

parking at its parking facilities in a bona

fide transaction for adequate and full

consideration in money or money’s

worth, the employees are the taxpayer’s

customers for this purpose and the

exception in section 274(e)(8) and

§ 1.274–13(e)(2)(iii) would apply. On

the other hand, if an employee pays less

than adequate and full consideration,

this exception would not apply because

the parking was not sold to the

employee for full consideration. In this

case, however, the taxpayer may apply

the exception in section 274(e)(2) and

§ 1.274–13(e)(2)(i) to the extent of the

reimbursement.

Another commenter suggested that

the deduction disallowance for the

expense of any QTF should not apply to

expenses for parking that has no

objective value to the taxpayer’s

employees, such as parking in

industrial, remote, or rural areas (that is,

areas where the general public would

not pay to park). In response to this

comment, the Treasury Department and

the IRS have determined that the

exception in section 274(e)(8) and the

final regulations at § 1.274–13(e)(2)(iii)

should apply if in a bona fide

transaction, the adequate and full

consideration for qualified parking is

zero. The final regulations provide that

to apply the exception in such a case,

the taxpayer bears the burden of proving

that the fair market value of the

qualified parking is zero. However, a

taxpayer will be treated as satisfying

this burden if the qualified parking is

provided in a rural, industrial, or remote

area in which no commercial parking is

available and an individual other than

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an employee ordinarily would not pay

to park. The final regulations also

provide an example illustrating the

application of this rule.

2. Transportation and Commuting

Expenses

Section 274(l)(1), as added by the

TCJA, 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. The provision applies to

expenses paid or incurred after

December 31, 2017. Section 274(l)(2)

provides that 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,

which, also for such period, are not

excluded from an employee’s income

under section 132(f)(8), are not

disallowed under section 274(l).

Section 1.274–14 addresses the

disallowance of deductions under

section 274(l). Section 1.274–14 of the

proposed regulations provided that

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.

A commenter suggested that the final

regulations clarify that section 274(l)

applies to commuting expenses only

and does not apply to business travel.

The commenter further requested that

the concept of transportation originating

at a hub near the employee’s residence

or place of employment be removed

from the proposed regulations because it

may disallow business travel between

two places of employment. In addition,

the commenter noted that it is incorrect

to describe a commute as originating at

a transportation hub because an

individual’s commute will always begin

at the residence, even if the individual

first travels from the residence to the

transportation hub. Thus, the

commenter suggested that instead of the

hub reference, the final regulations

provide that the application of section

274(l) to travel between a residence and

place of employment is not affected by

the use of different modes of

transportation on the trip.

The Treasury Department and the IRS

agree with these suggestions. The final

regulations do not include a reference to

a transportation hub and instead explain

that travel between the employee’s

residence and place of employment is

not affected by the use of different

modes of transportation, or by whether

the employer pays for all modes of

transportation during the commute. The

final regulations also state that the

disallowance under section 274(l) does

not apply to business expenses under

section 162(a)(2) paid or incurred while

traveling away from home.

A commenter suggested that only the

marginal cost of commuting should be

disallowed, similar to spouse and

dependent travel in section 274(m)(3).

The Treasury Department and the IRS

decline to adopt this suggestion because

the language of section 274(l) broadly

refers to ‘‘any expense’’ incurred for the

provision of commuting to an employee.

Further, the Treasury Department and

the IRS are not aware of any evidence

that Congress intended to disallow only

the marginal cost of commuting.

A commenter requested that the final

regulations include a definition of

‘‘employee’’ for purposes of section

274(l). In response to this comment, the

Treasury Department and the IRS

include a definition of employee in the

final regulations. Under the final

regulations, the term ‘‘employee’’ means

an employee of the taxpayer as defined

in section 3121(d)(1) and (2) (that is,

officers of a corporate taxpayer and

employees of the taxpayer under the

common law rules).

The proposed regulations provided a

definition for an employee’s

‘‘residence,’’ referencing the definition

of the term ‘‘residence’’ in § 1.121–

1(b)(1). Under § 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.

A commenter requested that the final

regulations limit the definition of

‘‘residence’’ to the residence to or from

which the employee regularly

commutes, which generally is the

employee’s principal residence. The

Treasury Department and the IRS

decline to adopt this comment because

nothing in the language of section 274(l)

indicates that commuting is limited to

transportation from a principal

residence. An employee could, for

example, regularly commute from a

vacation home to the workplace. Thus,

the final regulations continue to define

‘‘residence’’ by referencing the

definition of the term ‘‘residence’’ in

§ 1.121–1(b)(1), and specifically provide

that this definition may include a

residence that is not a principal

residence.

The proposed regulations also defined

the term ‘‘safety of the employee,’’

referencing the description of a bona

fide business-oriented security concern

in § 1.132–5(m). Several commenters

suggested that the proposed rules for

determining when transportation

provided by an employer is necessary

for the safety of the employee were too

narrow and should be expanded to

apply beyond a bona fide business-

oriented security concern in § 1.132–

5(m). These commenters generally

suggested that the final regulations

should instead define ‘‘safety of the

employee’’ by reference to § 1.61–

21(k)(5). Section 1.61–21(k)(5) provides

that unsafe conditions exist if a

reasonable person would, under the

facts and circumstances, consider it

unsafe for the employee to walk to or

from home, or to walk to or use public

transportation at the time of day the

employee must commute. One of the

factors indicating whether it is unsafe is

the history of crime in the geographic

area surrounding the employee’s

workplace or residence at the time of

day the employee must commute.

The Treasury Department and the IRS

agree with this suggestion. Accordingly,

the final regulations clarify that a

transportation or commuting expense is

necessary for ensuring the safety of the

employee if unsafe conditions, as

described in § 1.61–21(k)(5), exist for

the employee.

To further clarify the exception, a

commenter also suggested that examples

be included illustrating situations in

which transportation provided by an

employer is necessary for the safety of

the employee. The Treasury Department

and the IRS believe that further

clarification is unnecessary in light of

the final regulations’ reference to unsafe

conditions as described in § 1.61–

21(k)(5).

A commenter suggested that

temporary or occasional places of

employment should not be considered

an employee’s place of employment for

purpose of section 274(l). The

commenter pointed to prior guidance

issued by the IRS as well as to case law

that provides that travel to a temporary

place of employment is not treated as

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commuting. The Treasury Department

and the IRS agree with this comment

and have modified the final regulations

to explain that temporary or occasional

places of employment are not an

employee’s place of employment under

section 274(l). However, the final

regulations provide that an employee

must have at least one regular or

principal place of business.

The Treasury Department and the IRS

have determined that the exceptions in

section 274(e) do not apply to

deductions disallowed by section 274(l),

because the statutory language in

section 274 applies the exceptions in

274(e) only to expenses that are

otherwise disallowed or limited by

section 274(a), (k), and (n). A

commenter pointed out that although

the exceptions in section 274(e) are

applicable only to expenses disallowed

or limited by section 274(a), (k), and (n),

the Treasury Department and the IRS

have previously extended the

exceptions in 274(e)(2) to expenses

otherwise disallowed by other

subsections of section 274. Specifically,

the commenter noted that the exception

in section 274(e)(2) was extended to the

spouse travel disallowance in

§ 274(m)(3), pursuant to §1.274–

2(f)(2)(iii).

The Treasury Department and the IRS

considered this comment but do not

believe that the exception in section

274(e)(2) should be extended to

commuting expenses disallowed by

section 274(l). The Joint Committee on

Taxation’s ‘‘Bluebook’’ describing 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.

Joint Committee on Taxation, General

Explanation of Public Law 115–97 (JCS–

1–18), at 190 (December 20, 2018).

Thus, the final regulations do not apply

the section 274(e) exceptions, including

section 274(e)(2), to commuting

expenses disallowed by section 274(l).

Applicability Date

These regulations apply to taxable

years beginning on or after December

16, 2020. Notwithstanding the

preceding sentence, taxpayers may

choose to apply § 1.274–13(b)(14)(ii) of

these final regulations to taxable years

ending after December 31, 2019.

Taxpayers may continue to rely on

proposed §§ 1.274–13 through 1.274–14,

which were issued in a notice of

proposed rulemaking (REG–119307–19)

and published on June 23, 2020, in the

Federal Register (85 FR 37599) or the

guidance provided in Notice 2018–99

for parking expenses, other QTF

expenses, and transportation and

commuting expenses, as applicable,

paid or incurred in taxable years

beginning after December 31, 2017 and

before December 16, 2020.

Special Analyses

These final 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.

Pursuant to the Regulatory Flexibility

Act (5 U.S.C. chapter 6), it is hereby

certified that this final 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 may

affect entities that incur QTF or

commuting expenses. The economic

impact of these regulations is not likely

to be significant, however, because these

final regulations substantially

incorporate prior guidance and

otherwise clarify the application of the

TCJA changes to section 274 related to

QTF and commuting expenses. These

final regulations will assist taxpayers in

understanding the changes to section

274 and make it easier for taxpayers to

comply with those changes.

Accordingly, the Secretary of the

Treasury’s delegate certifies that the rule

will not have a significant economic

impact on a substantial number of small

entities. 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 final

regulations have been submitted to the

Chief Counsel for the Office of

Advocacy of the Small Business

Administration for comment on their

impact on small business. No comments

on the proposed regulations were

received from the Chief Counsel for the

Office of Advocacy of the Small

Business Administration.

Effect on Other Documents

The following publications are

obsolete as of December 16, 2020.

Notice 2018–99 (2018–52 I.R.B. 1067).

Statement of Availability of IRS

Documents

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 final

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.

Adoption of Amendments to the

Regulations

Accordingly, 26 CFR part 1 is

amended as follows:

PART 1—INCOME TAX

■Paragraph 1. The authority citation

for part 1 is amended by adding entries

in for §§ 1.274–13 and 1.274–14 in

numerical order to read in part as

follows:

Authority: 26 U.S.C. 7805.

* * * * *

Section 1.274–13 also issued under 26

U.S.C. 274.

Section 1.274–14 also issued under 26

U.S.C. 274.

* * * * *

■Par. 2. Section 1.274–13 is added to

read as follows:

§ 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:

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(i) 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));

(ii) Any transit pass (as described in

sections 132(f)(1)(B) and 132(f)(5)(A)); or

(iii) 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 § 1.132–

9 Q/A–5. Partners, 2-percent

shareholders of S corporations (as

defined in section 1372(b)), sole

proprietors, and independent

contractors are not employees of the

taxpayer for purposes of this section.

See § 1.132–9 Q/A–24.

(3) General public. (i) In general. 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. The term general

public does not include individuals that

are employees, partners, 2-percent

shareholders of S corporations (as

defined in section 1372(b)), sole

proprietors, or independent contractors

of the taxpayer. Also, an exclusive list

of guests of a taxpayer is not the general

public. Parking spaces that are available

to the general public but empty are

treated as provided to the general

public. Parking spaces that are used to

park vehicles owned by the general

public while the vehicles await repair or

service by the taxpayer are also treated

as provided to the general public.

(ii) Multi-tenant building. 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 (as

defined in section 1372(b)), sole

proprietors, independent contractors,

clients, or customers of unrelated

tenants in the building.

(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.

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 (as

defined in section 1372(b)), 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 § 1.274–5(k), or

other fleet vehicles used in the

taxpayer’s business, or that are

otherwise not usable for parking by

employees or the general public.

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).

Taxpayers may use any reasonable

methodology to determine the number

of inventory/unusable spaces in the

parking facility. A reasonable

methodology may include using the

average of monthly inventory counts.

(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—(i) In

general. 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 taxpayer may use any reasonable

methodology to allocate mixed parking

expenses to a parking facility. 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.

(ii) Optional rule for allocating certain

mixed parking expenses. A taxpayer

may choose to allocate 5 percent of any

the following mixed parking expenses to

a parking facility: Lease or rental

agreement expenses, property taxes,

interest expense, and expenses for

utilities and insurance.

(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—(i) In

general. The term peak demand period

refers to the period of time on a typical

business day during the taxable year

when the greatest number of the

taxpayer’s employees are utilizing

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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. A

reasonable methodology may include

periodic inspections or employee

surveys.

(ii) Optional rule for federally

declared disasters. If a taxpayer owns or

leases a parking facility that is located

in a federally declared disaster area, as

defined in section 165(i)(5), the taxpayer

may choose to identify a typical

business day for the taxable year in

which the disaster occurred by reference

to a typical business day in that taxable

year prior to the date that the taxpayer’s

operations were impacted by the

federally declared disaster.

Alternatively, a taxpayer may choose to

identify a typical business day during

the month(s) of the taxable year in

which the disaster occurred by reference

to a typical business day during the

same month(s) of the taxable year

immediately preceding the taxable year

in which the disaster first occurred. For

purposes of applying the optional rule

for federally declared disasters, the

taxable year in which the disaster

occurs is determined without regard to

whether an election under section 165(i)

is made with respect to the disaster.

(c) Optional aggregation rule for

calculating total parking spaces;

taxpayer owned or leased parking

facilities. For purposes of determining

total parking spaces in calculating the

disallowance of deductions for qualified

transportation fringe parking expenses

under the general rule in paragraph

(d)(2)(i) of this section, the primary use

methodology in paragraph (d)(2)(ii)(B)

of this section, or the cost per space

methodology in paragraph (d)(2)(ii)(C)

of this section, a taxpayer that owns or

leases more than one parking facility in

a single geographic location may

aggregate the number of spaces in those

parking facilities. 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. A taxpayer that chooses to

aggregate its parking spaces under this

paragraph (c) must determine its total

parking expenses, including the

allocation of mixed parking expenses, as

if the aggregated parking spaces

constitute one parking facility.

(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 use the aggregation rule in

paragraph (c) of this section for

determining total parking spaces. 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). In applying this

methodology, a taxpayer calculates the

disallowed amount as required under

this paragraph (d)(2)(ii)(A), regardless of

the actual amount of the taxpayer’s total

parking expenses. 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) as compensation paid to the

employee under chapter 1 of the Code

(chapter 1) and as wages to the

employee for purposes of withholding

under chapter 24 of the Code (chapter

24), 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 the

aggregation rule in paragraph (c) of this

section.

(B) Primary use methodology. A

taxpayer that uses the primary use

methodology in this paragraph

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(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 for which the

taxpayer uses the primary use

methodology. A taxpayer using this

methodology may use the aggregation

rule in paragraph (c) of this section for

determining 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

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 following

conditions are met:

(i) 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;

(ii) There are five or fewer reserved

employee spaces in the parking facility;

and

(iii) 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.

(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

number of total 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. This

calculation may be performed on a

monthly basis. A taxpayer using this

methodology may use the aggregation

rule in paragraph (c) of this section for

determining 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) Expenses includible

in income of persons who are employees

and are not specified individuals. In

accordance with section 274(e)(2)(A),

and except as provided in paragraph

(e)(2)(i)(C) of this section, an expense

paid or incurred by a taxpayer for a

qualified transportation fringe, if an

employee who is not a specified

individual is the recipient of the

qualified transportation fringe, is not

subject to the disallowance of

deductions provided for in paragraph (a)

of this section to the extent that the

taxpayer—

(1) Properly treats the expense

relating to the recipient of the qualified

transportation fringe as compensation to

an employee under chapter 1 and as

wages to the employee for purposes of

chapter 24; and

(2) Treats the proper amount as

compensation to the employee under

§ 1.61–21.

(B) Specified Individuals. In

accordance with section 274(e)(2)(B), in

the case of a specified individual (as

defined in section 274(e)(2)(B)(ii)), the

disallowance of deductions provided for

in paragraph (a) of this section does not

apply to an expense for a qualified

transportation fringe of the specified

individual to the extent that the amount

of the expense does not exceed the sum

of—

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(1) The amount treated as

compensation to the specified

individual under chapter 1 and as wages

to the specified individual for purposes

of chapter 24; and

(2) Any amount the specified

individual reimburses the taxpayer.

(C) Expenses for which an amount is

excluded from income or is less than the

proper amount. Notwithstanding

paragraph (e)(2)(i)(A) of this section, in

the case of an expense paid or incurred

by a taxpayer for a qualified

transportation fringe for which an

amount is wholly or partially excluded

from a recipient’s income under subtitle

A of the Code (other than because the

amount is reimbursed by the recipient),

or for which an amount included in

compensation and wages to an

employee is less than the amount

required to be included under § 1.61–21,

the disallowance of deductions

provided for in paragraph (a) of this

section does not apply to the extent that

the amount of the expense does not

exceed the sum of—

(1) The amount treated as

compensation to the recipient under

chapter 1 and as wages to the recipient

for purposes of chapter 24; and

(2) Any amount the recipient

reimburses the taxpayer.

(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 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

transportation in a commuter highway

vehicle, a transit pass, or parking in a

bona fide transaction for an adequate

and full consideration in money or

money’s worth. If in a bona fide

transaction, the adequate and full

consideration for qualified parking is

zero, the exception in this paragraph

(e)(2)(iii) applies even though the

taxpayer does not actually sell the

parking to its employees. To apply the

exception in this case, the taxpayer

bears the burden of proving that the fair

market value of the qualified parking is

zero. However, solely for purposes of

this paragraph (e)(2)(iii), a taxpayer will

be treated as satisfying this burden if the

qualified parking is provided in a rural,

industrial, or remote area in which no

commercial parking is available and an

individual other than an employee

ordinarily would not pay to park in the

parking facility.

(f) Examples. The following examples

illustrate the provisions of this section

related to parking expenses for qualified

transportation fringes. For each

example, unless otherwise stated,

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; the fair market value of the

qualified parking is not $0; 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 ×

10) × 12 = $12,000). The $100 per month

paid for each of A’s 10 employees for

parking is excludible from the

employees’ gross income 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 ×

10) × 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 × 10) × 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

from a third party a parking facility that

includes 200 parking spaces 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 × $500) × 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

× $270 × 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

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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 D’s peak demand period. 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 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 × 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 × 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) × $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) × 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) × $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

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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 ×

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 aggregation rule in

paragraph (c) 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) × $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.

(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) × 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 the following mixed parking

expenses (along with other parking

expenses): Property taxes, utilities,

insurance, security expenses, and snow

removal expenses. In accordance with

paragraph (b)(12)(i) and (ii) of this

section, J determines its total parking

expenses by allocating 5% of its

property tax, utilities, and insurance

expenses to its parking facility. J uses a

reasonable methodology to allocate to

its parking facility an applicable portion

of its security and snow removal

expenses. 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 total 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 multiplies

the cost per space by the number of total

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

total parking spaces ($100,000/500 =

$200). J determines that $95,000 ($200

× 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.

(11) Example 11. Taxpayer K operates

an industrial plant with a parking

facility in a rural area in which no

commercial parking is available. K

provides qualified parking at the plant

to its employees free of charge. Further,

an individual other than an employee

ordinarily would not consider paying

any amount to park in the plant’s

parking facility. Although K does not

charge its employees for the qualified

parking, the exception in section

274(e)(8) and this paragraph (e)(3)(iii)

will apply to K’s total parking expenses

if in a bona fide transaction, the

adequate and full consideration for the

qualified parking is zero. In order to

treat the adequate and full consideration

as zero, K bears the burden of proving

that the parking has no objective value.

K is treated as satisfying this burden

because the parking is provided in a

rural area in which no commercial

parking is available and in which an

individual other than an employee

ordinarily would not consider paying

any amount to park in the parking

facility. Therefore, the exception in

paragraph (e)(2)(iii) of this section

applies to K’s total parking expenses

and a deduction for the expenses is not

disallowed by reason of section

274(a)(4).

(g) Applicability date. This section

applies to taxable years beginning on or

after December 16, 2020. However,

taxpayers may choose to apply § 1.274–

13(b)(14)(ii) to taxable years ending after

December 31, 2019.

■Par. 3. Section 1.274–14 is added to

read as follows:

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Federal Register / Vol. 85, No. 242 / Wednesday, December 16, 2020 / Rules and Regulations

§ 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 and

place of employment. The disallowance

is not subject to the exceptions provided

in section 274(e). The disallowance

applies regardless of whether the travel

between the employee’s residence and

place of employment includes more

than one mode of transportation, and

regardless of whether the taxpayer

provides, or pays or reimburses the

employee for, all modes of

transportation used during the trip. For

example, the disallowance applies if an

employee drives a personal vehicle to a

location where a different mode of

transportation is used to complete the

trip to the place of employment, even

though the taxpayer may not incur any

expense for the portion of travel in the

employee’s personal vehicle. The rules

in section 274(l) and this section do not

apply to business expenses under

section 162(a)(2) paid or incurred while

traveling away from home. The rules in

section 274(l) and this section also do

not apply to any expenditure for 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 § 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

unsafe conditions, as described in

§ 1.61–21(k)(5), exist for the employee.

(c) Definitions. The following

definitions apply for purposes of this

section:

(1) Employee. The term employee

means an employee of the taxpayer as

defined in section 3121(d)(1) and (2)

(that is, officers of a corporate taxpayer

and employees of the taxpayer under

the common law rules).

(2) Residence. The term residence

means a residence as defined in § 1.121–

1(b)(1). An employee’s residence is not

limited to the employee’s principal

residence.

(3) Place of employment. The term

place of employment means the

employee’s regular or principal (if more

than one regular) place of business. An

employee’s place of employment does

not include temporary or occasional

places of employment. An employee

must have at least one regular or

principal place of business.

(d) Applicability date. This section

applies to taxable years beginning on or

after December 16, 2020.

Sunita Lough,

Deputy Commissioner for Services and

Enforcement.

Approved: December 4, 2020.

David J. Kautter,

Assistant Secretary of the Treasury (Tax

Policy).

[FR Doc. 2020–27505 Filed 12–15–20; 8:45 am]

BILLING CODE 4830–01–P

DEPARTMENT OF JUSTICE

Office of the Attorney General

28 CFR Part 50

[Docket No. OAG 163; AG Order No. 4927–

2020]

RIN 1105–AB62

Prohibition on Settlement Payments to

Non-Governmental Third Parties

AGENCY

: Department of Justice.

ACTION

: Final rule.

SUMMARY

: This final rule amends the

Department’s regulations to set forth the

principles of the Attorney General’s

Memorandum of June 5, 2017,

prohibiting the inclusion of provisions

in settlement agreements directing or

providing for a payment or loan to a

non-governmental person or entity that

is not a party to the dispute, except in

defined circumstances.

DATES

: Effective Date: December 16,

2020.

FOR FURTHER INFORMATION CONTACT

:

Robert Hinchman, Senior Counsel,

Office of Legal Policy, U.S. Department

of Justice, Room 4252 RFK Building,

950 Pennsylvania Avenue NW,

Washington, DC 20530, telephone (202)

514–8059 (not a toll-free number).

SUPPLEMENTARY INFORMATION

: On June 5,

2017, then-Attorney General Sessions

issued a Memorandum to the Heads of

all Department of Justice Components

and to all United States Attorneys titled,

‘‘Prohibition on Settlement Payments to

Third Parties.’’ In this Memorandum, he

stated: ‘‘Our Department is privileged to

represent the United States and its

citizens in courts across our country.

We take this responsibility seriously. In

the course of this representation, there

may come a time when it is in the best

interests of the United States to settle a

lawsuit or end a criminal prosecution.

Settlements, including civil settlement

agreements, deferred prosecution

agreements, non-prosecution

agreements, and plea agreements, are a

useful tool for Department attorneys to

achieve the ends of justice at a

reasonable cost to the taxpayer. The

goals of any settlement are, first and

foremost, to compensate victims, redress

harm, or punish and deter unlawful

conduct.’’

However, certain previous settlement

agreements involving the Department

included provisions requiring payments

to various non-governmental, third-

party organizations as a condition of

settlement with the United States. Those

third-party organizations were neither

victims nor parties to the lawsuits.

The June 5, 2017, Memorandum

announced that the Department would

no longer engage in this practice.

Pursuant to the June 5, 2017,

Memorandum, except in specific

limited circumstances, ‘‘Department

attorneys may not enter into any

agreement on behalf of the United States

in settlement of federal claims or

charges, including agreements settling

civil litigation, accepting plea

agreements, or deferring or declining

prosecution in a criminal matter, that

directs or provides for a payment or

loan to any non-governmental person or

entity that is not a party to the dispute.’’

This policy is already incorporated into

the Justice Manual at https://

www.justice.gov/jm/jm/1-17000-

settlement-payments-third-parties.

This final rule amends the

Department’s regulations to reflect this

policy, with certain changes from the

June 5, 2017, Memorandum to clarify

the scope of exceptions. This rule

specifically clarifies that the policy

extends to a payment or loan, whether

in cash or in kind, to any non-

governmental person or entity that is

not a party to the dispute. The

Miscellaneous Receipts Act provides

that Government officials ‘‘receiving

money for the Government from any

source shall deposit that money with

the Treasury.’’ See 31 U.S.C. 3302(b).

‘‘Receiving money for the Government’’

includes the ‘‘constructive receipt’’ of

money ‘‘if a federal agency could have

accepted possession and retains

discretion to direct the use of the

money.’’ See Effect of 31 U.S.C. 484 on

the Settlement Authority of the Attorney

General, 4B Op. O.L.C. 684, 688 (1980).

This rule thus similarly forbids

circumvention of the policy reflected in

this statute via the use of in-kind

payments.

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