IRS has issued proposed reliance regs that reflect the 2017 Tax Cut and Jobs Act (P.L. 115-97, TCJA) rules that eliminate the deduction for expenses regarding some employer-provided transportation and commuting benefits.
Background.
As amended by the TCJA, Code Sec. 274(a)(4) disallows deductions for the expense of any qualified transportation fringe (QTF) as defined in Code Sec. 132(f) provided to an employee of the taxpayer, effective for amounts paid or incurred after December 31, 2017.
Code Sec. 274(e) enumerates nine specific exceptions to Code Sec. 274(a), three of which, Code Sec. 274(e)(2), Code Sec.274 (e)(7), and Code Sec. 274(e)(8), are relevant for QTFs. Deductions for expenses that are within any of the three exceptions in Code Sec. 274(e) are not disallowed under Code Sec. 274(a)(4). Code Sec. 274(e)(7) applies to expenses for goods, services, and facilities made available by the taxpayer to the general public. Code Sec. 274(e)(8) applies to expenses for goods or services (including the use of facilities) that are sold by the taxpayer in a bona fide transaction for an adequate and full consideration in money or money’s worth.
QTFs are defined in Code Sec. 132(f)(1) to mean any of the following provided by an employer to an employee: (1) transportation in a commuter highway vehicle (as defined in Code Sec. 132((f)(5)(B)) between the employee’s residence and place of employment, (2) any transit pass, (3) qualified parking, and (4) any qualified bicycle commuting reimbursement. Code Sec. 132(f)(2) provides that the amount of QTFs provided by an employer to any employee that can be excluded from gross income under Code Sec. 132(a)(5) cannot exceed a maximum monthly dollar amount, adjusted for inflation. The adjusted maximum monthly excludable amount for 2020 is $270.
Although Code Sec. 132(f)(1) includes qualified bicycle commuting reimbursements as a QTF, Code Sec. 132(f)(8) provides that the inclusion of qualified bicycle commuting reimbursements in the definition of a QTF is suspended for tax years beginning after December 31, 2017, and before January 1, 2026.
Notice 2018-99, 2018-52 IRB 1067, provided interim guidance for taxpayers to determine the amount of parking expenses for qualified QTFs that is nondeductible under Code Sec. 274(a)(4). That Notice had a four-step method for making that determination where the taxpayer owned or leased the parking facilities. Those four steps are summarized as:
Step 1. Calculate the disallowance for reserved employee spots.
Step 2. Determine the primary use of remaining spots (the “primary use test”).
Step 3. Calculate the allowance for reserved nonemployee spots.
Step 4. Determine remaining use and allocable expenses.
The TCJA also added Code Sec. 274(l), which provides that 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, except as necessary for ensuring the safety of the employee, effective for transportation and commuting expenses paid or incurred after December 31, 2017.
Proposed reg under Code Section 274(a)(4).
New Prop Reg §1.274-13 restates the statutory rules under Code Sec. 274(a)(4), defines relevant terms, and modifies certain guidance in Notice 2018-99, providing a general rule and three simplified methodologies to determine the amount of nondeductible parking expenses when a parking facility is owned or leased by the taxpayer.
Additionally, Prop Reg §1.274-13 builds on Notice 2018-99 to include rules addressing the deduction disallowance for expenses related to providing employees transportation in a commuter highway vehicle and transit pass QTFs. (Prop Reg §1.274-13(d)(3))
Where the taxpayer pays a third party for the QTF. The proposed regs provide that if the taxpayer pays a third party for its employee’s QTF, the Code Sec. 274(a)(4) disallowance is generally calculated as the taxpayer’s total annual cost of the QTF paid to the third party. (Prop Reg §1.274-13(d)(1))
IRS considered a situation where a taxpayer pays a third party for parking spaces that are not assigned to specific employees, some of which are not used (for example, taxpayer leases 10 spaces and only has 8 employees). The disallowance should be limited to parking spaces actually used by employees on a typical business day. IRS determined that amounts paid to a third party for qualified parking in such situations should be disallowed regardless of actual employee use of the spaces because the taxpayer paid or incurred the expense for its employees’ QTFs regardless of employee use. (Preamble to Prop Reg REG-119307-19)
Where the taxpayer owns or leases parking facilities. With regard to QTF parking expenses, the proposed regs provide that if the taxpayer owns or leases all or a portion of one or more parking facilities, the Code Sec. 274(a)(4) disallowance may be calculated using a general rule or any one of three simplified methodologies. (Prop Reg §1.274-13(d)(2))
Under the general rule, taxpayers may use a calculation based on a reasonable interpretation of Code Sec. 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). (Prop Reg §1.274-13(d)(2)(i))
Under the first simplified method, the qualified parking limit method, the maximum monthly dollar amount under Code Sec. 132(f)(2), adjusted for inflation, may be used as a simple estimate of the taxpayer’s monthly total cost per parking space. The adjusted maximum monthly excludable amount for 2020 is $270 per employee. Using the qualified parking limit methodology, taxpayers may determine the disallowance by multiplying the Code Sec. 132(f)(2) monthly per employee limitation on the exclusion by the total number of spaces used by employees during the peak demand period. Alternatively, the proposed regs provide that taxpayers using this methodology may instead multiply the Code Sec. 132(f)(2) monthly per employee limitation on the exclusion by the total number of the taxpayer’s employees. (Prop Reg §1.274-13(d)(2)(i)(A))
The second simplified method, the primary use method, follows the method in Notice 2018-99 with one significant change. The four-step method in Notice 2018-99 provides that employee use of parking spaces is determined by identifying the actual or estimated usage of the parking spaces during normal business hours on a typical business day. The proposed regs provide that taxpayers must identify the number of available parking spaces used by employees during the peak demand period. (Prop Reg §1.274-13(d)(2)(i)(B))
The third simplified method, the cost per space method, allows taxpayers to calculate the disallowance by multiplying the cost per space by the number of spaces used by employees. Taxpayers must identify the number of available parking spaces used by employees during the peak demand period. Cost per space is calculated by dividing total parking expenses (including expenses related to inventory/unusable spaces) by the total number of spaces (including inventory/unusable spaces). (Prop Reg §1.274-13(d)(2)(i)(C))
Application of Code Section 274(e) exceptions. The proposed regs provide that expenses for transportation in a commuter highway vehicle, any transit pass, and parking that otherwise qualify as QTFs and are made available to the general public, are within the Code Sec. 274(e)(7) exception. (Prop Reg §1.274-13(e)(2)(ii)) However, goods, services, and facilities are not made available to the general public if they are made available only to an exclusive list of guests. (Preamble to Prop Reg REG-119307-19)
“General public” includes, but is not limited to, customers, clients, visitors, individuals delivering goods or services to the taxpayer, and patients of a health care facility. The general public does not include employees, partners, 2-percent shareholders of S corporations, sole proprietors, or independent contractors of the taxpayer. If a taxpayer owns or leases space in a multi-tenant building, employees, partners, 2-percent shareholders of S corporations, sole proprietors, independent contractors or customers of unrelated tenants in the building are included in the definition of general public. (Preamble to Prop Reg REG-119307-19)
Pursuant to Code Sec. 274(e)(8), the proposed regs provide that any taxpayer expense for transportation in a commuter highway vehicle, a transit pass, or parking that otherwise qualifies as a QTF under Code Sec. 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 Code Sec. 274(a). The proposed regs also provide that for purposes of this rule, 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. (Prop Reg §1.274-13(e)(2)(iii))
Proposed reg under Code Section 274(l).
Prop Reg §1.274-14 provides rules under Code Sec. 274(l). It provides a definition for an employee’s “residence,” referencing the definition of the term “residence” in Reg §1.121-1(b)(1). Under Reg §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. (Prop Reg §1.274-14(a))
The proposed regs also define the term “safety of the employee,” referencing the description of a bona fide business-oriented security concern in Reg §1.132-5(m). (Prop Reg §1.274-14(b))
Effective date and reliance.
The regs are proposed to apply for tax years beginning on or after the date the regs are finalized. (Prop Reg §1.274-13(d); Prop Reg §1.273-14(c)) Until the final regs are issued, a taxpayer may rely on the proposed regs for QTF expenses and transportation and commuting expenses, as applicable, that are paid or incurred in tax years that begin after December 31, 2017. Alternatively, a taxpayer may choose to rely on the guidance in Notice 2018-99 until the proposed regs are finalized. (Preamble to Prop Reg REG-119307-19)
To continue your research on qualified parking as a QTF, see FTC 2d/FIN ¶ H-2213; United States Tax Reporter ¶ 1324.08.
Subscribe to our Checkpoint Daily Newsstand email to get all the latest tax, accounting, and audit news delivered to your inbox each weekday. It’s free!
