IRS finalizes regulations on non-deductibility of certain transportation fringe expenses, including employee parking

For years after 2017, IRC Section 274(a)(4) denies a federal income tax deduction for any “qualified transportation fringe” (QTF) provided by an employer to its employee on a non-taxable basis under IRC Section 132(a)(5). Due to the 2018-2025 non-QTF status of qualified bicycle commuting reimbursements, QTFs are currently limited to (1) qualified parking, (2) transit passes, and (3) transportation in a commuter highway vehicle between the employee’s residence and place of employment.

The IRS has now finalized its June 2020 proposed regulations under Section 274 (Proposed Regulations). The Final Regulations generally adopt the Proposed Regulations with certain modifications and clarifications, the most significant of which are noted below. The Final Regulations will generally be effective for employers’ 2021 tax years, although there is an optional exception for parking facilities located in federally declared disaster areas that will be available for their 2020 tax years. 

QTF expenses in general

General rule: If an employer pays a third party for its employee’s QTF, the disallowed deduction amount is the employer’s total annual cost for providing the QTF (not its value to the employee).


Deductions are allowed for:

  • Any amount treated as compensation to the employee for federal income and payroll tax purposes on the employer’s income tax return as originally filed.
  • Any QTF made available to the “general public” – This group includes but is not limited to customers, clients, visitors, individuals delivering goods or services to the employer, and patients of a healthcare facility. Unless the employer owns or leases space in a multi-tenant building, it does not include employees, partners, 2% shareholders of S corporations, sole proprietors, or independent contractors of the employer or customers of unrelated tenants in the building. Independent contractors of the taxpayer are excluded regardless of whether the taxpayer owns or leases space in a multi-tenant building. The Final Regulations add that parking spaces used to park vehicles owned by members of the general public while the vehicles await repair or service by the taxpayer are treated as made available to the general public.
  • Any QTF sold to customers “in a bona fide transaction for an adequate and full consideration in money or money’s worth.”

Employee commuting: The employer’s deduction is generally disallowed for expenses incurred for providing employees with transportation between an employee’s residence and place of employment. The Final Regulations clarify that “temporary or occasional” places of employment are not considered an employee’s place of employment.

“Safety of the employee” exception: The employer’s deduction is preserved where employee commuting transportation is provided “for the safety of the employee.” For this purpose, the Proposed Regulations used the standard under Treas. Reg. Section 1.132-5(m): threat of death, kidnapping, or serious bodily harm, or a recent history of violent terrorist activity in the area (and under which a general concern for employee safety would not qualify). Alternatively, the Final Regulations utilize the far more generous standard under Treas. Reg. Section 1.61-21(k)(5): “Unsafe conditions exist if a reasonable person would, under the facts and circumstances, consider it unsafe for the employee to walk to or from home, or to walk or use public transportation at the time of day the employee must commute” (e.g., one example factor given is a history of crime near the employee’s workplace or home at the time the employee must commute).

Employed-provided employee parking

The Final Regulations continue to provide that (1) if the employer pays a third party for employee parking, the employer’s disallowance amount is generally the employer’s annual cost paid to the third party, or (2) if the employer owns or leases all or a portion of the parking facility(ies), the “General Rule” or any of three alternative “simplified methodologies” may be used to determine the disallowed amount. 

General Rule: Under the Final Regulations, the General Rule standard is satisfied by any methodology that encompasses a “reasonable interpretation” of the disallowance provision, provided that (1) the employer’s cost rather than the value provided to the employee is utilized, (2) parking expenses are allocated to reserved employee spaces, and (3) the exception for qualified parking made available to the public is not improperly applied (e.g., an employer cannot treat a parking facility regularly used by employees as available to the public because the public has access to the facility).

Three simplified methodologies

Qualified Parking Limit Methodology: For each month in the employer’s tax year, the disallowed amount is determined by multiplying the monthly value-based employee tax-free parking limit under IRC Section 132(f)(2) – $270 for 2020 –  by either (1) the total number of parking spaces used by employees during the “peak demand period” (the time period on a typical business day when the greatest number of employees are parking in employer-provided spaces), or (2) the total number of the employer’s employees. 

To provide relief to taxpayers affected by the COVID-19 pandemic, the Final Regulations provide that in defining their “peak demand period,” employers that own or lease a parking facility located in a federally declared disaster area have the option to use a typical business day in their tax year prior to the date the taxpayer’s operations were impacted by the disaster (e.g., a restaurant that transitioned from dine-in to take-out service could use a typical business day prior to the transition). Alternatively, they can use a typical business day in the same month(s) of their tax year immediately preceding their tax year in which the disaster first occurred. 

As the value of employer-provided employee parking that exceeds the monthly limit is taxable to the employee as compensation, the use of this methodology permits the employer to deduct all excess amounts it pays or reimburses without regard to any amount by which the value of the space to the employee exceeds the monthly nontaxable limit, provided that the excess value is included on the employer’s federal income tax return as compensation paid to the employee for federal income and payroll tax purposes.

Primary Use Methodology: In this methodology, the employer identifies the number of available parking spaces used by employees during the peak demand period, and costs allocated to reserved employee spaces are disallowed regardless of their actual use. No disallowance applies to reserved employee spaces 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 in the parking facility.” 

Even though they may be used by employees, parking spaces reserved for drivers with disabilities are not considered “reserved employee spaces.” Also, “inventory/unusable spaces” – defined as those generally not available for use by employees or the general public, such as spaces for inventoried vehicles of an auto dealership; “qualified non-personal use vehicles” (e.g., clearly marked police cars, ambulances, hearses, and various types of trucks); and fleet vehicles used in the employer’s business – are not considered to be “available parking spaces” or “reserved nonemployee spaces,” but are considered for purposes of “total parking spaces.” 

The Final Regulations provide that “taxpayers may use any reasonable methodology to determine the number of inventory/unusable spaces in the parking facility,” including the average of monthly inventory counts.

Cost Per Space Methodology: The disallowed amount is determined by multiplying the “cost per parking space” by the total number of parking spaces used by employees during the peak demand period. The Final Regulations changed this from the total number of “available parking spaces.” 

“Cost per parking space” is calculated by dividing “total parking expenses” by the number of total parking spaces (with both figures including costs for/number of inventory/unusable spaces.) “Total parking expenses” includes all expenses 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. Not included are depreciation and expenses related to property next to the parking facility.

Determination of expenses allocable to a parking facility where invoice does not separate parking facility expenses from non-parking facility expenses: Under the Proposed Regulations, for purposes of the Primary Use and Cost Per Space Methodologies only, in cases where the employer’s lease does not specify the portions of the rent payment applicable to office versus parking (“mixed parking expense”), the employer was able to choose to allocate to the parking facility 5% of (1) mixed parking expenses related to payments under a lease or rental agreement, and (2) payments for utilities, insurance, interest and property taxes. The Final Regulations extend the availability of this option to the General Rule, and, solely for purpose of determining total parking expenses, to the Qualified Parking Methodology. Consequently, this optional rule will be available to determine total parking expenses for purposes of all the parking methodologies. The Final Regulations also clarify that if the optional 5% rule is used, it is not required to be used for all eligible mixed parking expenses.

What does CohnReznick think?

The denial of a federal income tax deduction for certain employer-provided employee QTFs for the period 2018-2025 has been in place since the Tax Cuts and Jobs Act (TCJA). With limited exceptions reflecting public comments, the Final Regulations generally follow the Proposed Regulations. Unfortunately, the rules under the Final Regulations continue to be quite detailed and complex.


Dana Fried, JD, LLM, Managing Director, National Tax Services


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