Qualified transportation fringe benefit under tax reform

Mar 31, 2019

The Internal Revenue Code allows employers to offer nontaxable qualified transportation fringe (QTF) benefits under section 132(f). These benefits include mass transit benefits, van pools, qualified parking, and some other commuter benefits. QTF benefits can be provided directly to employees as tax-free benefits (free parking, free transit passes, reimbursements for parking, etc.), or the employee can pay for the benefits tax-free using a salary reduction arrangement. Those benefits are also exempt from Federal Insurance Contributions Act, Medicare, and Federal Unemployment Tax Act taxes. Transit pass and van pool benefits are limited to an inflation-adjusted maximum amount ($260 per month for 2018 and $265 per month for 2019), and qualified parking is subject to a separate limit of the same amount. Parking or transit benefits that exceed the monthly limits are taxable as compensation to the employees (e.g., where the fair market value of parking is $300 per month in 2018, only $260 per month is excluded from employee compensation).

Employers had been generally allowed to deduct their costs for providing employees QTF benefits. Effective Jan. 1, 2018, the law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, amended section 274 to limit or eliminate tax deductions for expenses related to QTF benefits. The TCJA did not eliminate the tax-favored status of QTF benefits from employees or the ability to pay for the expenses with pretax dollars.

Additionally, because tax-exempt entities do not take tax deductions for providing transportation benefits but do benefit from section 132(f), Congress amended section 512(a) to require a tax-exempt organization to pay unrelated business income tax (UBIT) to the extent the employer provides QTF benefits and a taxable employer would have a loss of deduction based on the same QTF benefits.

The IRS provided early guidance in IRS Publication 15-B, Employer's Tax Guide to Fringe Benefits, clarifying that QTF benefit expenses paid for by employees using salary reduction elections are not deductible because the amounts are excluded under section 132(f):

[N]o deduction is allowed for qualified transportation benefits (whether provided directly by [the employer], through a bona fide reimbursement arrangement, or through a    compensation reduction agreement) incurred or paid after [Dec. 31,] 2017.

However, a number of significant questions remained, especially regarding the types and amounts of deductions that would be limited. Most of these issues relate to qualified parking because, in some cases, qualified parking can be provided without any specific identified costs, unlike transit passes or van pool costs, which typically are provided by third parties and are specifically purchased or paid for by the employer.

Further guidance under Notice 2018-99

On Dec. 10, 2018, the IRS released Notice 2018-99 providing further guidance on determining the loss of the deduction under certain qualified parking fact patterns. As a general rule, the IRS provides that the employer may use any reasonable method for determining the nondeductible parking expenses (and the calculation of increased UBIT attributable to qualified parking) until proposed regulations are published. The notice also provides guidance that may solve the parking valuation issues (and protect the tax deduction) under some fact patterns, and assists in determining the nondeductible costs for other fact patterns, but does not address certain valuation issues.

The notice states that the determination of the loss of the deduction, or the equivalent UBIT from employer-provided qualified parking fringe benefits, relates to the expense of providing a QTF benefit, not its fair market value. However, this may not be entirely correct once employers delve into some of the remaining valuation issues. The method of determining the nondeductible amount depends on whether the taxpayer pays a third party to provide parking for its employees or the taxpayer owns or leases a parking facility where its employees park. Notice 2018-99 provides the following explanations:

  1. Employer pays a third party to provide parking for its employees: If an employer pays a third party an amount to allow employees to park at the third party's lot or garage, generally, the total annual cost of the employee parking paid to the third party is the nondeductible amount. However, the notice reiterates that if the amount the taxpayer pays to a third party for an employee's parking exceeds the section 132(f) monthly limitation per parking spot, the employer should treat the amount above $260 (or the increased indexed amount for future years) as compensation and can then take a tax deduction for the reported compensation.
  2. Employer leases a parking facility where its employees park: Until further guidance is issued, if a taxpayer owns or leases all or a portion of one or more parking facilities where its employees park, the section 274(a)(4) disallowance may be calculated using any reasonable method. The notice provides a four-step methodology that is deemed to be a reasonable method:
  • Step 1. Calculate the nondeductible expenses for reserved employee spots in the parking facility; 
  • Step 2. Determine the primary use of the remaining spots in the parking facility (the primary-use test) to determine if the expenses for the remaining spots must be allocated between deductible and nondeductible expenses;
  • Step 3. Calculate the expenses allocated to reserved nonemployee spots in the parking facility that are deductible; and
  • Step 4. Determine the use of the remaining spots in the facility and the expenses allocable to employee spots (nondeductible) and nonemployee spots (deductible).

Using the value of employee parking to determine expenses allocable to employee parking in a parking facility owned or leased by the taxpayer is not a reasonable method by itself because section 274(a)(4) disallows a deduction for the expense of providing a QTF benefit, regardless of its value. However, in determining the proportion of a lease payment that needs to be allocated to parking spaces, considering the parking values in the area may be part of the overall valuation process.

For purposes of Notice 2018-99, a "parking facility" includes parking lots, indoor and outdoor garages, and other structures on or near the employer's business premises, or on or near a location from which the employee commutes to work.

The notice provides that an employer's total parking expense for providing parking for employees is nondeductible. "Total parking expenses" under Notice 2018-99 include, but are not limited to, repairs, maintenance, utility costs, insurance, property taxes, interest, snow and ice removal, leaf removal, trash removal, cleaning, landscape costs, parking lot attendant expenses, security, and rent or lease payments or a portion of a rent or lease payment (if not broken out separately). However, the costs of maintaining landscaped areas or ingress/egress lanes surrounding the parking spaces can be broken out and excluded from the cost for parking spaces subject to the section 274 loss of the deduction. The notice also specifically states that depreciation is not a parking expense for purposes of the notice.

Where an employer provides specific parking spaces or reserved areas for employee parking, the allocated cost of the provided employee parking spots is nondeductible. Likewise, where there are both spaces specifically unavailable for employees and other spaces dedicated for employees, the employer allocates a reasonable portion of the total cost to the nonemployee spots and can deduct those expenses.

The primary-use test in the four-step methodology described above can greatly simplify the determination of the nondeductible expenses of a parking facility in certain fact patterns. Where the employer has noticeably more parking spaces than are needed on a regular basis for employees, there are no spaces reserved for employees, and the lot otherwise meets the primary-use test, then all the costs for the lot are deductible. For an employer to meet this rule, more than 50% of the parking spaces in the lot must be available for the general public (customers, etc.) on a typical business day during normal business hours. The notice provides that the employer can aggregate the parking in a geographic area (such as a metropolitan area) for the primary-use test.

Example: A branch of a bank has 15 parking spots in its parking lot. No parking spaces are designated as employee spaces, and the bank generally has four to six employees    working in the branch on a typical business day. Under these facts, even if all six employees are working on a typical day, there are nine spots (more than 50% of the spaces)    routinely available for customers/general use.

Of course, if more than 50% of the use of the parking spaces is by employees on a typical business day during normal business hours, then the employer's cost of the unallocated spots is likely subject to the loss of the deduction under section 274(a)(4).

In some cases, determining the allocated cost of the parking spaces may require consideration of the overall property lease value and a determination much like a real estate appraisal or cost-segregation analysis for separating the cost of the office space and other amenities from the cost of the parking spaces.

As noted above, section 512(a)(7) requires tax-exempt employers that provide QTF benefits to employees to pay UBIT on the amount by which a deduction is not allowable under section 274. This includes any disallowed deduction for QTF benefits (as defined under section 132(f)) and any parking facility used in connection with qualified parking (as defined in section 132(f)(5)(C)). The notice provides examples of the calculation of the deduction disallowed under section 274(a)(4) for the increase in UBIT for tax-exempt organizations.

Subsequent to Notice 2018-99, the IRS released Notice 2018-100. Notice 2018-100 provides transition relief for underpayment of estimated income tax for certain tax-exempt organizations. The addition to tax under section 6655 for underpayment of estimated income tax payments required to be made on or before Dec. 17, 2018, is waived to the extent the underpayment of estimated tax results from the changes under the TCJA. To claim the waiver under Notice 2018-100, the tax-exempt organization must write "Notice 2018-100" on the top of its Form 990-T, Exempt Organization Business Income Tax Return.


The lost tax deduction creates some tax complexity for employers. Employers should review the IRS guidance and determine a reasonable method for calculating parking expenses. Employers should consider reviewing their payroll systems and consulting with their payroll vendors to ensure proper coding of QTF benefit amounts and that payroll accurately reflects the tax treatment of these deductions.

Given the complexity of determining the amount of the loss of the deduction and allocating the costs of the deduction, some employers may consider moving to an after-tax transit benefit program for their employees. However, a few cities require employers to offer commuting benefits to employees and may further require the benefits to be provided on a pretax basis. Therefore, employers in cities with these types of ordinances should make sure to consult local law before revising their QTF benefit strategy. Tax-exempt organizations should review the transportation fringe benefits they provide to employees and determine whether their QTF benefits will result in UBIT (or an increase in UBIT).

Employers may rely on Notice 2018-99 until the IRS issues further guidance.

Excerpted from the April 2019 issue of The Tax Adviser. Copyright © 2019 by the American Institute of Certified Public Accountants, Inc.

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