Tax Strategy: Proposed regs on qualified transport fringe benefits
The Tax Cuts and Jobs Act amended Code Sec. 274 to disallow a deduction for the expense of any qualified transportation fringe benefit as defined in Code Sec. 132(f) provided to an employee of the taxpayer, effective for amounts paid or incurred after Dec. 31, 2017. The TCJA also provided that no deduction is allowed for any expense incurred for providing any transportation, or any payment or reimbursement, to an employee in connection with travel between the employee’s residence and place of employment, except as necessary for ensuring the safety of the employee.
Code Sec. 132 generally excludes from gross income of an employee the value of certain fringe benefits, up to a maximum monthly excludable amount, $270 for 2020. These fringe benefits include transportation in a commuter highway vehicle between the employee’s residence and place of employment, any transit pass, qualified parking, and any qualified bicycle commuting reimbursement. However, qualified bicycle commuting reimbursements are excluded from the definition of QTF for tax years beginning after Dec. 31, 2017, and before Jan. 1, 2026.
Code Sec. 274 also lists three exceptions to the disallowance of the deduction of QTF expenses. QTF expenses are included in the exception to the extent that the fair market value of the QTF exceeds the Code Sec. 132 statutory limitation on exclusion and such excess amount is treated by the taxpayer as compensation to the employee on the taxpayer’s tax return and as wages to the employee. Another exception applies for expenses for goods, services and facilities made available by the taxpayer to the general public. A third exception applies to expenses for goods or services that are sold by the taxpayer in a bona fide transaction for an adequate and full consideration in money or money’s worth.
On Dec. 24, 2018, the Treasury and the IRS published Notice 2018-99 to address how to determine the amount of parking expense that is nondeductible or treated as unrelated business taxable income. Under Notice 2018-99, the nondeductible amount of qualified parking 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. In the case of a third-party facility, the disallowance generally is calculated as the taxpayer’s total annual cost of employee parking paid to the third party. If this amount exceeds the monthly limitation on the exclusion, the excess amount generally must be treated as compensation and wages to the employee.
In the case of a taxpayer who owns or leases the parking facility, a four-step process is identified for determining a reasonable method for calculating the disallowance. Step 1 is to calculate the disallowance for reserved employee spaces and then determine the percentage of reserved employee spaces in relation to total parking spaces and multiply the percentage by total parking expenses, resulting in the amount of the deduction for total parking expenses disallowed for reserved employee spaces. Step 2 determines the primary use of the remaining spaces and whether it is provided to the general public. Step 3 calculates the allowance for reserved nonemployee spaces. And Step 4 determines the remaining use and allocable expenses of any remaining parking spaces.
The Treasury and the IRS received an extensive number of comments in response to Notice 2018-99, many of which are addressed in and have resulted in modifications reflected in the newly proposed regulations.
The proposed regulations were published on June 23, 2020. They follow Notice 2018-99 with respect to a parking facility where the taxpayer pays the cost to a third party. The proposed regulations modify Notice 2018-99 to provide 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. The general rule allows the taxpayer to calculate the disallowance based on a reasonable interpretation of Code Sec. 274 (a)(4); however, taxpayers must use the expense paid or incurred in providing a QTF, not the value of the QTF to the employee. The general rule also requires allocating parking expense to reserved employee spaces and addressing the exception for parking made available to the general public.
The first simplified methodology, the “qualified parking limit methodology,” requires the taxpayer to calculate the disallowance by multiplying the total number of parking spaces used by the employees during the peak demand period, or alternatively, the total number of the taxpayer’s employees, by the monthly per-employee limitation ($270 for 2020) for each month in the tax year.
The second simplified methodology, the “primary use methodology,” is largely based on the four-step method deemed reasonable in Notice 2018-99, modified for some new issues addressed such as mixed parking expenses and aggregation by geographic location. The third, the “cost per space methodology,” allows taxpayers to calculate the disallowance by multiplying the cost per parking space by the number of available parking spaces to be used by employees during the peak demand period. Cost per space is calculated by dividing the total parking expenses by total parking spaces, again with special rules for addressing mixed parking expenses and aggregation by geographic location.
The proposed regulations include a number of definitions, some of which are new and some of which modify definitions included in Notice 2018-99. With respect to mixed parking expense, the proposed regulations provide an option for taxpayers to choose to allocate 5 percent of certain mixed parking expenses to the parking facility. With respect to geographic location, the proposed regulations state that the aggregation rules may be used with the general rule, the primary use methodology, and the cost-per-space methodology, but may not be used with the qualified parking limit methodology.
The proposed regulations go beyond 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. They address when these fall into the exception for being made available to the general public or sold to customers.
The proposed regulations also address issues raised in comments with respect to transportation and commuting expenses, where the definitions of “residence” and “safety of employee” are relevant.
The regulations are proposed to apply for tax years beginning on or after the date the regulations are published as final regulations in the Federal Register. Pending the issuance of the final regulations, taxpayers may rely on the proposed regulations for QTF expenses and transportation, and commuting expenses, as applicable, that are paid or incurred in tax years beginning after Dec. 31, 2017. Alternatively, a taxpayer may choose to rely on the guidance in Notice 2018-99 until final regulations are issued.