Final Regulations on Parking Lot Tax Issued by IRS
The IRS has published the final version of the regulations under IRC §274 that eliminates an employer’s deduction for the cost of providing some employer provided transportation and commuting benefits.[1] Proposed regulations were issued on June 23, 2020 and these regulations mainly adopt those regulations, though with some changes.
One interesting change involves an expansion of the exception under IRC §274(e)(8) where the employer can demonstrate the qualified transportation fringe has zero value—that is, the general public would not pay to park a car in the location in question.
Revised regulation §1.274-13(e)(2)(iii) begins:
(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.[2]
The inclusion of employees in the class of customers is crucial for the exception noted, as they may very well be the only “customers” for purchasing the benefit. The regulation goes on to note that if the true fair value is zero, the use by the employee may count as a sale even though the item is not actually sold to the employee.
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.[3]
But the regulation notes the burden will be on the employer to demonstrate that there is truly zero value to the benefit offered, so that paying nothing represents a deemed sale.
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.[4]
The regulation does create a safe harbor for certain employers where the value will be deemed to be zero, thus qualifying the employer to deduct all expenses related to the parking area.
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.[5]
The final regulations add the following example to demonstrate the application of this zero fair market value rule:
Reg. §1.274-13(f)(11) – Example of Zero Fair Value Deemed Sale
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).
Note that it’s not clear how willing the IRS will be to accept an argument of the “worthlessness” of a parking benefit if a taxpayer does not meet the safe harbor where the employer is not located in a rural, industrial or remote area. For instance, would the IRS find “no value” if there are no paid parking lots in a suburban area (so the general public would not normally pay to park in that area), even though it’s highly likely the employer would object to anyone who is not an employee making use of the parking.