The IRS has returned to the issue of qualified transportation fringes, including more detailed guidance on the implementation of the “parking lot tax,” in proposed regulations.[1] The parking lot tax portion of the regulations build on the safe harbor calculation the IRS provided in Notice 2018-99, adding two additional simplified computations for disallowed parking costs.

The regulations cover any qualified transportation fringe which is defined as any of the following:

Transportation in a commuter highway vehicle if such transportation is in connection with travel between the employee’s residence and place of employment (as described in sections 132(f)(1)(A) and 132(f)(5)(B));
Any transit pass (as described in sections 132(f)(1)(B) and 132(f)(5)(A)); or
Qualified parking (as described in sections 132(f)(1)(C) and 132(f)(5)(C))[2]

Under §274(a)(4), enacted as part of the Tax Cuts and Jobs Act, no income tax deduction is allowed “for the expense of any qualified transportation fringe (as defined in section 132(f)) provided to an employee of the taxpayer.”

Determining the amount of the denied expense deduction is the purpose of these proposed regulations. Proposed Reg. §1.274-13 deals primarily with qualified parking expenses, while Proposed Reg. §1.274-14 deals with other transportation and commuting expenses.

Effective Date

Although these regulations would only mandatorily apply to taxable years beginning on or after the date the rules are published as final in the Federal Register, the preamble provides that, pending issuance of final regulations:

… a taxpayer may rely on these proposed regulations for QTF expenses and transportation and commuting expenses, as applicable, that are paid or incurred in taxable years beginning after December 31, 2017. Alternatively, a taxpayer may choose to rely on the guidance in Notice 2018-99 until these proposed regulations are finalized.[3]

Definitions

The proposed regulations start with the following key definitions that apply generally for parking QTFs, with key portions highlighted:

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. Partners, 2-percent shareholders of S corporations, sole proprietors, and independent contractors are not employees of the taxpayer for purposes of this section.[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 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]
Total parking expenses - The term total parking expenses means all expenses of the taxpayer related to total parking spaces in a parking facility including, but not limited to, repairs, maintenance, utility costs, insurance, property taxes, interest, snow and ice removal, leaf removal, trash removal, cleaning, landscape costs, parking lot attendant expenses, security, and rent or lease payments or a portion of a rent or lease payment (if not broken out separately). A deduction for an allowance for depreciation on a parking facility owned by a taxpayer and used for parking by the taxpayer’s employees is an allowance for the exhaustion, wear and tear, and obsolescence of property, and not included in total parking expenses for purposes of this section. Expenses paid or incurred for nonparking facility property, including items related to property next to the parking facility, such as landscaping or lighting, also are not included in total parking expenses.[6]

Qualified Transportation Fringe (QTF) Parking Expenses General Special Rules

Either or both of the following special rules can be used when computing total parking expenses and total parking spaces under either the Primary Use Methodology or Cost per Space Methodology for computing disallowed QTF parking expenses under IRC §274(e). The aggregation of spaces by geographic location special rule can also be used under the General Rule for computing disallowed QTF parking expense.[7]

Calculation of Mixed Parking Expenses

One of the key questions that often came up when dealing with the safe harbor found in Notice 2018-99 was how a taxpayer was supposed to separate out costs that weren’t separately stated when leasing a building with a parking lot, or the taxpayer simply owned the building and parking lot and paid various expenses related to the overall property.

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.[8]

The proposed regulations provide two options for determining how much of the mixed costs represent the parking facility’s portion of the mixed facility expenses:

A taxpayer may use a reasonable methodology to allocate the applicable portion of mixed parking expenses to a parking facility.
A taxpayer may choose to allocate 5 percent of the following mixed parking expenses to a parking facility:
- Lease or rental agreement expenses,
- Property taxes,
- Interest expense, and
- Expenses for utilities and insurance.[9]

The second method is simple to use and likely will be what many taxpayers gravitate to, since the overall impact may not be material. However, a taxpayer can use another method so long as it is reasonable.

Aggregation of Spaces for Multiple Facilities in a Single Geographic Location

If two parking facilities meet the test described below for being located in a single geographic location, a taxpayer may aggregate the number of spaces in those facilities for purposes of calculating the disallowance of deductions for QTF parking expenses.[10]

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.[11]

The proposed regulations provide:

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.[12]

Methods for Calculating Disallowed QTF Parking Expenses

The proposed regulations provide five different methods for computing the disallowed portion of QTF parking expenses:

A method that must be used if the taxpayer pays a third party for the parking QTF
Four methods from which a taxpayer may select if the taxpayer owns or leases a parking facility at which it provides the parking QTF:
- General rule;
- Qualified parking limit methodology;
- Primary use methodology (very similar to the Notice 2018-99 safe harbor method);
- Cost per space methodology.[13]

If the taxpayer owns or leases parking facilities, the taxpayer can select the general rule or any of the other methodologies for each taxable year and for each parking facility.[14]

Third-Party Paid for Parking QTF

If the employer pays a third party for the parking QTF (such as paying for use of spaces by employees in a public parking garage), the disallowance “generally is calculated as the taxpayer’s total annual cost of employee parking qualified transportation fringes paid to the third party.”[15]

Example 1, Proposed Reg. §1.274-13(f)

Taxpayer A pays B, a third party who owns a parking garage adjacent to A's place of business, $100 per month per parking space for each of A's 10 employees to park in B's garage, or $12,000 for parking in 2020 (($100 x 10) x 12 = $12,000). The $100 per month paid for each of A's 10 employees for parking is excludible under section 132(a)(5), and none of the exceptions in section 274(e) or paragraph (e) of this section are applicable. Thus, the entire $12,000 is subject to the section 274(a)(4) disallowance under paragraphs (a) and (d)(1) of this section.

Example 2, Proposed Reg. §1.274-13(f)

Assume the same facts as in paragraph (f)(1) of this section (Example 1), except A pays B $300 per month for each parking space, or $36,000 for parking for 2020 (($300 x 10) x 12 = $36,000). Of the $300 per month paid for parking for each of 10 employees, $270 is excludible under section 132(a)(5) for 2020 and none of the exceptions in section 274(e) or paragraph (e) of this section are applicable to this amount. A properly treats the excess amount of $30 ($300 - $270) per employee per month as compensation and wages. Thus, $32,400 (($270 x 10) x 12 = $32,400) is subject to the section 274(a)(4) disallowance under paragraphs (a) and (d)(1) of this section.

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.

General Rule for Owned or Leased Parking Facilities

The general rule provides that the taxpayer must compute the disallowed QTF parking expense under IRC §274(a)(4) for each employee using a reasonable method. The taxpayer can use the aggregation of spaces special rule described earlier as part of its general rule computation, but is not allowed to use the special mixed cost rule. [16]

While this appears to give the taxpayer a lot of freedom to choose a method, the IRS does provide certain restrictions in developing an acceptable reasonable method:

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.[17]
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.[18]
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.[19]

A taxpayer who owns or leases a parking facility may, in lieu of using the general method, use one of the three following simplified methodologies.

For all three methodologies, the peak demand period is a key concept that must be applied. The regulations define the term as follows:

The term peak demand period refers to the period of time on a typical business day when the greatest number of the taxpayer’s employees are utilizing parking spaces in the taxpayer’s parking facility. If a taxpayer’s employees work in shifts, the peak demand period would take into account the shift during which the largest number of employees park in the taxpayer’s parking facility. However, a brief transition period during which two 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.[20]

Qualified Parking Limit Methodology

If a taxpayer elects to use the qualified parking limit methodology, the taxpayer must multiply:

The total number of spaces used by employees during the peak demand period, or the total number of the taxpayer’s employees,
By the IRC §132(f)(2) monthly per employee limit on exclusion ($270[21] for 2020) for each month in the tax year

to determine the amount disallowed under IRC §274(a)(4).[22]

But there’s a catch—the employer must determine the value of the parking QTF provided to each employee, and include the excess of that value over the monthly limit (if any) as wages for the employee and as compensation expense on the taxpayer’s income tax return.[23]

The regulation also provides:

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.[24]

Essentially, if you use this method you can’t simply add $270 to the employee’s compensation each month subject to tax each month and then obtain a full deduction for the parking expense.

Example 3, Proposed Reg. §1.274-13(f)

Taxpayer C leases 200 parking spaces from a third party at a rate of $500 per space, per month in 2020. C’s annual lease payment for the parking spaces is $1,200,000 ((200 x $500) x 12 = $1,200,000). The number of available parking spaces used by C’s employees during the peak demand period is 200.

C uses the qualified parking limit methodology described in paragraph (d)(2)(ii)(A) of this section to determine the disallowance under section 274(a)(4). Under this methodology, the section 274(a)(4) disallowance is calculated by multiplying the number of available parking spaces used by employees during the peak demand period, 200, the section 132(f)(2) monthly per employee limitation on exclusion, $270, and 12, the number of months in the applicable taxable year. The amount subject to the section 274(a)(4) disallowance is $648,000 (200 x $270 x 12 = $648,000). This amount is excludible from C’s employees’ gross incomes under section 132(a)(5) and none of the exceptions in section 274(e) or paragraph (e) of this section are applicable to this amount. The excess $552,000 ($1,200,000 - $648,000) for which C is not disallowed a deduction under 274(a)(4) is included in C’s employees’ gross incomes because it exceeds the section 132(f)(2) monthly per employee limitation on exclusion.

Primary Use Methodology

The primary use methodology is very similar to the method first provided as a safe harbor in Notice 2018-99. A taxpayer uses a four-step calculation to compute the amount of disallowed deduction under §274(a)(4) for parking QTF expenses. As was true under Notice 2018-99, while the costs assigned to any reserved employee spaces must be treated as disallowed, if over ½ of the spaces are generally available for use by the general public, no additional disallowance is required.

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 primary use (as defined in paragraphs (b)(11) and (d)(2)(ii)(B)(2) of this section) of the available parking spaces is to provide parking to the general public, and there are five or fewer reserved employee spaces in the parking facility and the reserved employee spaces are 5 percent or less of the total parking spaces.
Step 2 - Determine the primary use of available parking spaces. A taxpayer must identify the available parking spaces in the parking facility and determine whether their primary use is to provide parking to the general public. If the primary use of the available parking spaces in the parking facility is to provide parking to the general public, then total parking expenses allocable to available parking spaces at the parking facility are excepted from the section 274(a)(4) disallowance by the general public exception under section 274(e)(7) and paragraph (e)(2)(ii) of this section. Primary use of available parking spaces is based on the number of available parking spaces used by employees during the peak demand period. Nonreserved parking spaces that are available to the general public but empty during normal business hours on a typical business day are treated as provided to the general public.
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.
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.[25]

The proposed regulations provide the following key definitions for applying this methodology:

General public - The term general public includes, but is not limited to, customers, clients, visitors, individuals delivering goods or services to the taxpayer, students of an educational institution, and patients of a health care facility. If a taxpayer owns or leases space in a multi-tenant building, the term general public includes employees, partners, 2-percent shareholders of S corporations, sole proprietors, independent contractors, clients, or customers of unrelated tenants in the building. The term general public does not include individuals that are employees, partners, 2-percent shareholders of S corporations, sole proprietors, or independent contractors of the taxpayer. Also, an exclusive list of guests is not the general public.[26]
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.[27]
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.[28]
Reserved nonemployee spaces - The term reserved nonemployee spaces means the spaces in the parking facility, or the taxpayer’s portion thereof, exclusively reserved for nonemployees. For example, such parking spaces may include, but are not limited to, spaces reserved exclusively for visitors, customers, partners, sole proprietors, 2-percent shareholders of S corporations, vendor deliveries, and passenger loading/unloading. Nonemployee spaces in the parking facility, or portion thereof, may be exclusively reserved for nonemployees by a variety of methods, including, but not limited to, specific signage (for example, “Customer Parking Only”) or a separate facility, or portion of a facility, segregated by a barrier to entry or limited by terms of access. Inventory/unusable spaces are not included in reserved nonemployee spaces.[29]
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.[30]
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. 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).[31]
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.[32]

Example 4, Proposed Reg. §1.274-13(f)

Facts. Taxpayer D, a big box retailer, owns a surface parking facility adjacent to its store. D incurs $10,000 of total parking expenses for its store in the 2020 taxable year. D’s parking facility has 510 spaces that are used by its customers, employees, and its fleet vehicles. None of D’s parking spaces are reserved. The number of available parking spaces used by D’s employees during the peak demand period is 50. Approximately 30 nonreserved parking spaces are empty during normal business hours on a typical business day. D’s fleet vehicles occupy 10 parking spaces.

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).

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.
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.

Example 5, Proposed Reg. §1.274-13(f)

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.

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).

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.
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.
Step 3. Because 5% (25 / 500 = 5%) of E’s available parking spaces are reserved nonemployee spaces, up to $9,500 ($10,000 x 95% = $9,500) of E’s total parking expenses are subject to the section 274(a)(4) disallowance under this step as provided in paragraph (d)(2)(ii)(B)(3) of this section. The remaining $500 ($10,000 x 5% = $500) of expenses allocable to reserved nonemployee spaces is excepted from the section 274(a) disallowance and continues to be deductible.
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.

Example 6, Proposed Reg. §1.274-13(f)

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.

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).

Step 1. Because F reserved 50 spaces for management, $1,000 ((50 / 500) x $10,000 = $1,000) is the amount of total parking expenses that is nondeductible for reserved employee spaces under section 274(a)(4) and paragraphs (a) and (d)(2)(ii)(B)(1) of this section. None of the exceptions in section 274(e) or paragraph (e) of this section are applicable to this amount.
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.
Step 3. Because 2% (10 / 450 = 2.22%) of F’s available parking spaces are reserved nonemployee spaces, the $180 allocable to those spaces (($10,000 - $1,000) x. 2%) is not subject to the section 274(a)(4) disallowance and continues to be deductible under paragraph (d)(2)(ii)(B)(3) of this section.
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.

Example 7, Proposed Reg. §1.274-13(f)

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.

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).

Step 1. Because G has 100 reserved spaces for employees, $1,000 ((100 / 1,000) x $10,000 = $1,000) is the amount of total parking expenses that is nondeductible for reserved employee spaces under section 274(a)(4) and paragraph (d)(2)(ii)(B)(1) of this section. None of the exceptions in section 274(e) or paragraph (e) of this section are applicable to this amount.
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).

Example 8, Proposed Reg. §1.274-13(f)

Facts. Taxpayer H, an accounting firm, leases a parking facility adjacent to its office building. H incurs $10,000 of total parking expenses related to the lease payments in 2020. H’s leased parking facility has 100 spaces that are used by its clients and employees. None of the parking spaces are reserved. The number of available parking spaces used by H’s employees during the peak demand period is 60.

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).

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.
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.
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.
Step 4. H must reasonably determine the use of the parking spaces and the related expenses allocable to employee parking. Because the number of available parking spaces used by H’s employees during the peak demand period is 60, H reasonably determines that 60% (60 / 100 = 60%) of H’s total parking expenses or $6,000 ($10,000 x 60% = $6,000) is subject to the section 274(a)(4) disallowance under paragraph (d)(2)(ii)(B)(4) of this section.

Example 9, Proposed Reg. §1.274-13(f)

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.

Methodology. I uses the primary use methodology in paragraph (d)(2)(ii)(B) of this section to determine the amount of parking expenses that are disallowed under section 274(a)(4). I chooses to apply the special rule in paragraph (c)(2) of this section to aggregate all parking facilities in the geographic location that comprises its complex in city X. However, I may not aggregate parking facilities in other cities with its parking facilities in city X because they are in different geographic locations.

Step 1. Because 500 spaces are reserved for management, $2,500 ((500 / 10,000) x $50,000 = $2,500) is the amount of total parking expenses that is nondeductible for reserved employee spaces for I’s parking facilities in city X under section 274(a)(4) and paragraphs (a) and (d)(2)(ii)(B)(1) of this section.
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.
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.
Step 4. I must reasonably determine the use of the remaining parking spaces and the related expenses allocable to employee parking for its parking facilities in city X. Because the number of available parking spaces used by I’s employees during the peak demand period in city X during an average workday is 8,000, I reasonably determines that 84.2% (8,000 / 9,500 = 84.2%) of I’s remaining parking expense or $39,900 (($50,000 - $2,500) x 84% = $39,900) is subject to the section 274(a)(4) disallowance under paragraph (d)(2)(ii)(B)(4) of this section.

Cost per Space Methodology

The final simplified method is the cost per space methodology. The taxpayer determines the cost per space in the lot and then computes the disallowed amount by “multiplying the cost per space by the total number of available parking spaces used by employees during the peak demand period.”[33]

The regulation provides “a taxpayer may calculate cost per space by dividing total parking expenses by total parking spaces.”[34]

This method simply eliminates the intermediate tests in the primary use methodology that might serve to reduce the disallowance of deductions for parking expenses. The taxpayer gains simplicity, but at the potential cost of a higher disallowance than would exist under the other method.

Example 10, Proposed Reg. §1.274-13(f)

Taxpayer J, a manufacturer, owns a parking facility and incurs mixed parking expenses along with other parking expenses. J uses the special rule in paragraph (c)(1) of this section to allocate 5% of certain mixed parking expenses to its parking facility. Applying the special rule, J determines that it incurred $100,000 of total parking expenses in 2020. J's parking facility has 500 spaces that are used by its visitors and employees. The number of available parking spaces used by J's employees during the peak demand period is 475.

J uses the cost per space methodology described in paragraph (d)(2)(ii)(C) of this section to determine the amount of parking expenses that are disallowed under section 274(a)(4). Under this methodology, J multiples the cost per space by the number of available parking spaces used by J's employees during the peak demand period. J calculates the cost per space by dividing total parking expenses by the number of parking spaces ($100,000 / 500 = $200). J determines that $95,000 ($200 x 475 = $95,000) of J's total parking expenses is subject to the section 274(a)(4) disallowance and none of the exceptions in section 274(e) or paragraph (e) of this section are applicable.

Expenses for Transportation in a Commuter Highway Vehicle or Transit Pass

The proposed regulation at Proposed Reg. §1.274-13(d)(3) provides that:

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).[35]

The regulation bars the taxpayer from using the value of the transit pass to the employee, rather than the cost incurred by the employer, to compute the disallowed deduction under IRC §274(a)(4).[36]

Exceptions to Disallowance Under §274(a)(4)

If the expenditures listed below are otherwise deductible under the IRC, they are not treated as barred from deduction under IRC §274(a)(4).[37]

Certain QTF Expenses Treated as Compensation

Expenses otherwise paid for QTFs are not treated as disallowed for deduction by IRC §274(a)(4) if the expense is treated by the taxpayer:

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).[38]

However, this exception is subject to the following limitation:

The exception in section 274(e)(2) and paragraph (e)(2)(i) of this section does not apply to expenses paid or incurred for qualified transportation fringes the value of which (including a purported value of zero) is less than the sum of the amount, if any, paid by the employee for the fringe benefits and any amount excluded from gross income under section 132(a)(5). Thus, if an employer provides an employee with qualified transportation fringes the value of which is less than the applicable statutory monthly per employee limit under section 132(a)(5), the exception in section 274(e)(2) and paragraph (e)(2)(i) of this section does not apply to expenses paid or incurred for the fringe benefits.[39]

The preamble provides the following explanation for this limitation:

However, section 132(a)(5) excludes the value of QTFs from an employee’s gross income subject to the limitations on exclusion provided by section 132(f)(2). Therefore, in determining whether the section 274(e)(2) exception for expenses treated as compensation applies, the proposed regulations provide that the exception in section 274(e)(2) does not apply to expenses paid or incurred for QTFs the value of which (including a purported value of zero) is excluded from an employee’s gross income under section 132(a)(5).[40]

Similarly, the IRS provides the following special rule to shut down another potential loophole:

The exception in section 274(e)(2) and paragraph (e)(2)(i) of this section does not apply to expenses paid or incurred for qualified transportation fringes for which the value that is included in gross income of the employee is less than the amount required to be included in gross income under §1.61-21. Similarly, if the amount required to be included in gross income under §1.61-21 is purportedly zero, the exception in section 274(e)(2) and paragraph (e)(2)(i) of this section does not apply.[41]

The employer must also follow the proper rules for inclusion of amounts in the employee’s income to make use of the IRC § 274(e) exception to disallowance. Reg §1.274-13(e)(2)(i)(D) provides:

The exception in section 274(e)(2) and paragraph (e)(2)(i) of this section applies to expenses paid or incurred for qualified transportation fringes the value of which exceeds the sum of the amount, if any, paid by the employee for the fringe benefits and any amount excluded from gross income under section 132(a)(5), if treated as compensation on the taxpayer’s Federal income tax return as originally filed and as wages to the employee for purposes of withholding under chapter 24. Thus, assuming no other statutory exclusion applies, if an employer provides an employee with qualified transportation fringes the value of which exceeds the applicable statutory monthly limit and the employee does not make any payment, the value of the benefits provided in excess of the applicable statutory monthly limit must be included in the employee's wages for income and employment tax purposes in accordance with section 274(e)(2) and paragraph (e)(2)(i) of this section. See §1.61-21(b)(1) and §1.132-9(b), Q/A-8.[42]

As the preamble explains:

As noted above, section 132(a)(5) excludes the value of QTFs from an employee’s gross income subject to the monthly per employee limitations on exclusion provided by section 132(f)(2). Section 132(f)(2) provides that the amount of QTFs that can be excluded from gross income cannot exceed a maximum monthly dollar amount, adjusted for inflation. For taxable years beginning in 2020, the monthly per employee limitation under section 132(f)(2)(A) regarding the aggregate fringe benefit exclusion amount for transportation in a commuter highway vehicle and any transit pass is $270 per employee. The monthly limitation under section 132(f)(2)(B) regarding the fringe benefit exclusion amount for qualified parking is $270 per employee. Rev. Proc. 2019- 44, 2019-47 I.R.B. 1093. Therefore, if an employer provides an employee with QTFs, the value of which exceeds the sum of the amount, if any, paid by the employee for the fringe benefits and the applicable statutory monthly per employee limit, then the employer must include the value of the benefits provided in excess of the amount paid by the employee and the applicable statutory per employee monthly limit in the employee's wages for income and employment tax purposes. See §1.61–21(b)(1) and §1.132-9(b), Q/A-8. The proposed regulations provide that the employer must follow this treatment in order to rely on the exception in section 274(e)(2).[43]

Expenses for Transportation in a Commuter Highway Vehicle, Transit Pass or Parking Made Available to the Public

Another exception is found under IRC §274(e)(7) for transportation in a commuter highway vehicle, transit pass or parking made available to the public. As the regulation provides:

Under section 274(e)(7) and this paragraph (e)(2)(ii), any expense paid or incurred by a taxpayer for transportation in a commuter highway vehicle, a transit pass, or parking that otherwise qualifies as a qualified transportation fringe and that is also made available to the general public, is not subject to the disallowance of deductions provided for in paragraph (a) of this section to the extent that such transportation, transit pass, or parking is made available to the general public. With respect to parking, this exception applies to the entire amount of the taxpayer’s parking expense, less any expenses specifically attributable to employees (for example, expenses allocable to reserved employee spaces), if the primary use of the parking is by the general public. If the primary use of the parking is not by the general public, this exception applies only to the costs attributable to the parking used by the general public.[44]

Expenses for Transportation in a Commuter Highway Vehicle, Transit Pass, or Parking Sold to Customers

Finally, no disallowance is required for expenses for transportation in a commuter highway vehicle, transit pass, or parking sold to customers. The regulation provides:

Under section 274(e)(8) and this paragraph (e)(2)(iii), any expense paid or incurred by a taxpayer for transportation in a commuter highway vehicle, a transit pass, or parking that otherwise qualifies as a qualified transportation fringe to the extent such transportation, transit pass, or parking is sold to customers in a bona fide transaction for an adequate and full consideration in money or money’s worth, is not subject to the disallowance of deductions provided for in paragraph (a) of this section. For purposes of this paragraph (e)(2)(iii), the term customer includes an employee of the taxpayer who purchases the transportation in a bona fide transaction for an adequate and full consideration in money or money's worth.[45]

Commuting Expense

Reg. §1.274-14 disallows most deductions for any commuting benefit expenditure to an employee. The general rule provides:

Except as provided in this section, no deduction is allowed for any expense incurred for providing any transportation, or any payment or reimbursement, to an employee of the taxpayer in connection with travel between the employee’s residence, as defined in §1.121-1(b)(1), and place of employment. Travel between the employee’s residence and place of employment includes travel that originates at a transportation hub near the employee’s residence or place of employment. For example, an employee who commutes to work by airplane from an airport near the employee’s residence to an airport near the employee’s place of employment is traveling between the residence and place of employment. These transportation and commuting expenses do not include any expenditure of any qualified transportation fringe (as defined in section 132(f)) provided to an employee of the taxpayer. All qualified transportation fringe expenses are required to be analyzed under section 274(a)(4) and §1.274-13.[46]

However, the TCJA does allow an exception if such expenses are paid for the safety of the employee. The regulation provides:

The disallowance for the deduction for expenses incurred for providing any transportation or commuting in paragraph (a) of this section does not apply if the transportation or commuting expense is necessary for ensuring the safety of the employee. The transportation or commuting expense is necessary for ensuring the safety of the employee if a bona fide business-oriented security concern, as described in §1.132-5(m), exists for the employee.[47]

[1] REG-119307-19, June 19, 2020, https://s3.amazonaws.com/public-inspection.federalregister.gov/2020-13506.pdf?utm_medium=email&utm_campaign=pi+subscription+mailing+list&utm_source=federalregister.gov (retrieved June 19, 2020)

[2] Proposed Reg. §1.274-13(b)(1)

[3] Preamble to REG-119307-19, SUPPLEMENTARY INFORMATION, Proposed Applicability Date

[4] Proposed Reg. §1.274-13(b)(2)

[5] Proposed Reg. §1.274-13(b)(4)

[6] Proposed Reg. §1.274-13(b)(12)

[7] Proposed Reg. §1.274-13(c)

[8] Proposed Reg. §1.274-13(b)(13)

[9] Proposed Reg. §1.274-13(c)(1)

[10] Proposed Reg. §1.274-13(c)(2)

[11] Proposed Reg. §1.274-13(b)(5)

[12] Proposed Reg. §1.274-13(c)(2)

[13] Proposed Reg. §1.274-13(d)

[14] Proposed Reg. §1.247-13(d)(2)

[15] Proposed Reg. §1.274-13(d)(1)

[16] Proposed Reg. §1.274-13(d)(2)(i)

[17] Proposed Reg. §1.274-13(d)(2)(i)(A)

[18] Proposed Reg. §1.274-13(d)(2)(i)(B)

[19] Proposed Reg. §1.274-13(d)(2)(i)(C)

[20] Proposed Reg. §1.274-13(b)(14)

[21] Revenue Procedure 2019-44

[22] Proposed Reg. §1.274-13(d)(2)(ii)(A)

[23] Proposed Reg. §1.274-13(d)(2)(ii)(A)

[24] Proposed Reg. §1.274-13(d)(2)(ii)(A)

[25] Proposed Reg. §1.274-13(d)(1)(ii)(B)

[26] Proposed Reg. §1.274-13(b)(3)

[27] Proposed Reg. §1.274-13(b)(6)

[28] Proposed Reg. §1.274-13(b)(7)

[29] Proposed Reg. §1.274-13(b)(8)

[30] Proposed Reg. §1.274-13(b)(10)

[31] Proposed Reg. §1.274-13(b)(9)

[32] Proposed Reg. §1.274-13(b)(11)

[33] Proposed Reg. §1.274-13(d)(1)(ii)(C)

[34] Proposed Reg. §1.274-13(d)(1)(ii)(C)

[35] Proposed Reg. §1.274-13(d)(3)

[36] Proposed Reg. §1.274-13(d)(3)

[37] Proposed Reg. §1.274-13(e)(1)

[38] Proposed Reg. §1.274-13(e)(2)(i)(A)

[39] Proposed Reg. §1.274-13(e)(2)(i)(B)

[40] Preamble to REG-119307-19, Explanation of Provisions 1.E.i

[41] Proposed Reg. §1.274-13(e)(2)(i)(C)

[42] Proposed Reg. §1.274-13(e)(2)(i)(D)

[43] Preamble to REG-119307-19, Explanation of Provisions 1.E.i

[44] Proposed Reg. §1.274-13(e)(2)(ii)

[45] Proposed Reg. §1.274-13(e)(2)(iii)

[46] Proposed Reg. §1.274-14(a)

[47] Proposed Reg. §1.274-14(b)