United States

IRS delivers simplification methods in proposed 'parking' regulations


Amidst a very busy season of putting forth coronavirus-related authority, the IRS released proposed regulations covering the disallowance for qualified transportation benefits and commuting expenses. The regulations largely follow previous guidance in Notice 2018-99 (the Notice), with notable clarifications and additional simplified methods that will be welcomed by many taxpayers.

The Tax Cuts and Jobs Act (TCJA) amended section 274(a) to eliminate or limit the tax deductions for expenses related to certain employer-provided qualified transportation fringe (QTF) benefits under section 132(f). With the repeal of section 512(a)(7), these regulations affect exempt organizations only to the extent that they provide qualified transportation benefits and commuting expenses in their unrelated trades or businesses. Relying on the definition of QTF from section 132(f) causes a relationship between the two provisions, but nonetheless, section 274(a)(4) is a completely new expense disallowance that many taxpayers have been struggling to calculate since its passage. In addition to providing simplified methods that taxpayers can optionally use, the proposed regulations define many terms that will make complying with those methods easier.

Relationship to section 132(f)

It is important to remember that section 274(a)(4) and section 132(f) both apply strictly to employees. This means the rules apply to common law employees, which under the proposed regulations does not include partners, 2% S corporation shareholders, sole proprietors or independent contractors. Thus, many taxpayers must break these groups out when analyzing the disallowance.

QTF benefits are generally still excludable from employees’ income up to a monthly limit ($270 per month for 2020) under section 132(f), but the employer can no longer take a deduction for the expenses incurred to provide those benefits. Reiterating its stance since early after the TCJA addition of section 274(a)(4), the IRS points out in the proposed regulations that the expense the employer incurs is not the same as the value the employee receives from these benefits, and section 274(a) focuses on the expenses. 

The other important aspect found in section 132(f) that has great implications for section 274(a) is the definition of qualified parking. Section 132(f) broadly defines qualified parking, and does so in a way that many taxpayers who have parking available for employees on or near their premises are subject to the disallowance under section 274(a)(4). This is despite the fact that the expenses are part of their overall expenses for owning or leasing the property that primarily covers the space in which the taxpayer conducts its business.

While section 274(e)(2) allows an exception to the disallowance in section 274(a)(4) for amounts included in employees’ income, the proposed regulations specify that QTF benefits up to the limit provided in section 132(f)(2) cannot be included in employee’s income. Thus, taxpayers cannot avoid an expense disallowance by treating an amount that falls within the definition under section 132(f) as taxable to employees. In addition, the proposed regulations clarify that if the value to be included in income under section 132(f)(2) is zero (which may be appropriate in certain instances), the exception for under section 274(e)(2) is not available. Essentially, only amounts included in employees’ income because they exceed the monthly limitation in section 132(f)(2) will qualify to be excluded from the disallowance calculation via the exception in section 274(e)(2).

Third party payments for QTF benefits 

In some instances, taxpayers pay a third party for employees’ QTF benefits such as parking in a facility not owned or leased by the taxpayer, transportation in a highway vehicle or transit pass expenses. In these instances, the disallowance is calculated simply by the amount paid to the third party. The disallowance does not include any excess over the monthly taxable income exclusion in section 132(f)(2), though, as that amount must be included in taxable income for the employees.

Owned or leased parking facilities

Notice 2018-99 provided taxpayers with helpful guidance for the determination of expenses for parking facilities by defining parking expenses and including a general rule and a four step safe harbor process for calculating which of those expenses were disallowed. The proposed regulations retain the definition of parking expenses from Notice 2018-99 which include, but are not limited to, repairs, maintenance, utilities, insurance, property taxes, interest, removal of snow, leaves, trash, cleaning, parking attendant costs and the actual lease or rental payments for the garage or lot or portion thereof. Notably, depreciation is not considered a cost of parking.

Additional definitions

The proposed regulations add a number of definitions not included in the Notice that add clarity and will make administering the methods to calculate the disallowance easier in many instances.

  • “Total parking spaces” is the total number of parking spaces in a parking facility.
  • “Available parking spaces” is total parking spaces excluding certain reserved and inventory/unusable spaces.
  • “Inventory/unusable spaces” includes vehicles to be sold or leased to customers, qualified nonpersonal use vehicles, other fleet vehicles or otherwise unusable parking spaces.
  • “Peak demand period” is 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 (disregarding shift overlaps).
  • “Geographic location” for purposes of aggregating parking facilities is restricted to contiguous tracts or parcels of land owned or leased by the taxpayer.

Multi-tenant definitions

One of the uncertainties for the disallowance calculation related to taxpayers who share parking facilities with other taxpayers in multi-tenant locations. The proposed regulations add taxpayer favorable definitions for these situations. Specifically, they expanded the definition of general public to include (among others) employees, clients or customers of unrelated tenants in multi-tenant buildings. Many taxpayers believed this to be a reasonable interpretation prior to the release of the proposed regulations, but the confirmation is reassuring for its applicability to the general public exception in section 274(e)(7).

Aside from uncertainty on the breadth of the general public exception, taxpayers have struggles with trying to identify expenses for parking facilities that are not separated from expenses that cover other spaces, often through a single lease payment or, for example, property taxes that cover both parking and non-parking areas. The proposed regulations define “mixed parking expenses” as those incurred for both parking and nonparking facilities in the same expense that are not separated such as a property owned or a rent payment for a location that includes some parking with the workspace. Beyond defining these as mixed parking expenses, the proposed regulations allow taxpayers to allocate 5% of certain mixed parking expenses (lease or rent payments, utilities, insurance, interest and property taxes) to the parking facility. This essentially allows a safe harbor which will drastically simplify the calculation of disallowed expenses rather than taxpayers needing to try to build individual cases for what portion of the payments may be attributable to parking. However, taxpayers who did already carefully go through this process for prior tax returns may want to consider whether 5% is beneficial as it is optional and may be higher than actual expenses for parking in some instances.

Methods for calculating the disallowance for QTF benefits

After setting forth definitions, the proposed regulations include a general rule and three simplified methods for calculating the disallowance, one of which is basically the four step process from the Notice. Taxpayers can use different methods per parking facility and per taxable year.

  • Under the general rule, taxpayers can use a reasonable interpretation of the statute based on the expense for providing QTF benefits, not the value of the benefits to employees. Taxpayers must consider reserved employee spaces and apply the general public exception appropriately.
  • Simplified method #1 – Under a new “qualified parking limit methodology”, taxpayers can multiply the total number of spaces used by employees during the peak demand period (or total number of employees instead of employees using parking) by the monthly income exclusion amount under section 132(f)(2) for each month of the year. While this method is very simple, it is likely to lead to a larger disallowed deduction for many taxpayers whose expense per parking spot does not come close to $3,240 per year ($270/month times 12 months for 2020) and will primarily be useful in large metropolitan areas where parking is expensive.
  • Simplified method #2 – the “primary use methodology” is essentially the four-step process provided in the Notice. Those steps are (1) identify reserved employee spaces, (2) calculate whether 50% or more is used by the general public, (3) identify reserved non-employee spaces and (4) allocate remaining expenses; however, the proposed regulations add rules for allocating expenses for “mixed parking expenses” and aggregating multiple geographic locations. As noted above in the definitions, taxpayers can use a 5% of mixed parking expenses safe harbor as attributable to parking which is helpful. The aggregation of only contiguous tracts as a single geographic location is fairly limiting though as it does not allow taxpayers who have locations in two different areas of the same town to aggregate them.

Another helpful step beyond the Notice that is included in the proposed regulations is that there is no disallowance for reserved employee spaces in step 1 of the primary use methodology 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% or less of the total parking spaces.

The proposed regulations also clarify that parking reserved for drivers with disabilities are not considered reserved for employees or nonemployees, but rather are included in total parking spaces as any other unreserved space. 

  • Simplified method #3 – the “cost per space methodology” is another new simplification method added in the proposed regulations in which taxpayers find total parking expenses, divide by total parking spaces and then multiply by the number of available parking spaces to be used by employees during peak demand period. As with the primary use methodology, taxpayers can also use the mixed parking expenses and location aggregation rules with this method.

Commuting expenses

In addition to section 274(a)(4)’s disallowance for expenses incurred for providing QTF benefits, section 274(l) was also enacted as part of the TCJA which disallows expenses for providing transportation (or any payment or reimbursement) to an employee to cover transportation from the employee’s residence to the place of employment, or in other words, commuting expenses. The proposed regulations also cover section 274(l), clarifying that the disallowance does cover expenses incurred for travel from a hub near the employee’s residence such as a nearby airport, and that the exception provided for safety will use the rules of Reg. section 1.132-5(m). This safety exception has a very narrow use, and it will likely preclude many taxpayers who were hoping to have deductible commuting expenses from receiving a deduction. It should also be noted that the preamble to the proposed regulations reiterates that the exceptions in section 274(e) are not applicable to section 274(l); therefore, taxpayers will lose a deduction for these commuting expenses regardless of whether the commuting value is included in employee taxable income.

Action items

The proposed regulations may be relied upon for taxable years beginning after Dec. 31, 2017 even though they are proposed to apply for taxable years beginning after final regulations are published. Alternatively, taxpayers may continue to rely upon Notice 2018-99 until the regulations are final. Many taxpayers who have not yet filed 2019 income tax returns will likely benefit from closely reviewing these proposed regulations. Doing so may eliminate some burden from calculating the disallowance on those returns. 


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