IRS issues proposed regulations on non-deductibility of certain transportation fringe, transportation, and commuting expenses, including employer-provided employee parking

For years after 2017, Internal Revenue Code (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 Section 132(a)(5). After the 2018 elimination through 2025 of qualified bicycle commuting reimbursements as a QTF, a QTF is currently one of the following:

  • Qualified parking
  • Transit passes
  • Transportation in a commuter highway vehicle between the employee’s residence and place of employment

In December 2018, the IRS issued Notice 2018-99 (2018 Notice) to provide interim guidance specific to the determination of the amount of nondeductible employer-provided employee parking expenses. 

The IRS has now issued proposed regulations under Section 274 that relate primarily to the non-deductibility of employer-provided employee parking expenses. The proposed regulations generally follow the guidance provided under the 2018 Notice, with certain modifications intended to clarify and simplify the employee parking-related calculations. They also address employee transit passes and transportation in a commuter highway vehicle, and, of particular interest, the “necessary for ensuring the safety of the employee” exception to the deduction disallowance. 

In the Preamble, the IRS specifies that the proposed regulations generally apply the guidance in the 2018 Notice to all QTF expenses (i.e., even though, by its terms, the 2018 Notice was limited to parking expenses). Until the proposed regulations are finalized, taxpayers may rely upon the proposed regulations or the 2018 Notice.

QTP expenses in general

Consistent with the 2018 Notice but expanded to all QTFs, the proposed regulations provide:

  • 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 the value to the employee).
    • Exceptions from the disallowance rule apply to:
    • 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,” which includes but is not limited to customers, clients, visitors, individuals delivering goods or services to the employer, and patients of a healthcare facility, but, unless the employer owns or leases space in a multi-tenant building, 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.Any QTF “sold to customers in a bona fide transaction for an adequate and full consideration in money or money’s worth.”
  • Employer deduction is generally disallowed for expenses incurred for providing employees with transportation between the employee’s residence and place of employment.
    • “Safety of the Employee” exception – A deduction is preserved where the transportation is provided for “the safety of the employee”:

Per Treas. Reg. Section 1.132-5(m), for “bona fide business-oriented security concerns” – where “the facts and circumstances establish a specific basis for concern regarding the safety of the employee.” (General concern for employee safety is insufficient.) Examples provided in the Section 132 treasury regulations include threat of death, kidnapping, or serious bodily harm, or a recent history of violent terrorist activity in the area.

Employer-provided employee parking

  •  Also consistent with the 2018 Notice, the proposed regulations continue to provide that if the employer 1) pays a third party for employee parking, the employer’s disallowance amount is generally the employer’s annual cost paid to the third party, and 2) owns or leases all or a portion of the parking facility(ies), the “general rule” (a reasonable interpretation of the disallowance provision based on the employer’s cost rather than the value provided to the employee) or any of three alternative “simplified methodologies” may be used to determine the disallowed amount. 

    Special rules and definitions have been provided for the allocation of certain mixed parking expenses, aggregation of spaces on the basis of geographic location, removing inventory/unusable spaces from the employer’s available parking spaces, determining the identity of the “general public,” and disregarding five or fewer reserved spaces where they amount to 5% or less of the total number of spaces. 

    The three simplified methodologies are:
  •  Qualified parking limit methodology
    • For each month in the employer’s tax year, the disallowed amount is determined by multiplying the total number of spaces used by employees during the “peak demand period” (the period of time on a typical business day when the greatest number of employees are parking in employer-provided spaces), or, alternatively, the total number of the employer’s employees, by the monthly value-based employee tax-free parking limit under Section 132(f)(2) ($270 for 2020). 
    • As the value of employer-provided employee parking in excess of the monthly limit is taxable to the employee as compensation, using this methodology the employer can deduct all excess amounts it pays or reimburses without regard to the amount, if any, by which the value of the space to the employee exceeds the monthly nontaxable limit. 
    • This methodology is only available if the excess value is included on the employer’s federal income tax return as originally filed as compensation paid to the employee for federal income and payroll tax purposes.
  • Primary use methodology

    This is a modified version of the four-step method provided under the 2018 Notice, whereby the employer identifies the actual or estimated employee use of parking spaces during normal business hours on a typical business day. The modifications are as follows:
    • Rather than “during normal business hours on a typical business day,” the standard is now the number of available parking spaces used by employees “during the peak demand period.”
    • Costs allocated to reserved employee spaces are disallowed regardless of the actual use of the reserved spaces. However, 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 number of 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.”
    • “Inventory/unusable spaces” – those generally not available for use by employees or the general public but used for other purposes – are not considered to be “available parking spaces” or “reserved nonemployee spaces” but are considered for purposes of “total parking expenses.” This type of spaces includes spaces for inventoried vehicles of an auto dealerships, “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.
  • Cost per space methodology
    • The disallowed amount is determined 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 parking space” is calculated by dividing “total parking expenses” (including expenses for “inventory/unusable spaces”) by the number of total parking spaces (including “inventory/unusable spaces”). 
    • “Total parking expenses” has the same meaning as under the 2018 Notice – “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).” Not included are depreciation and expenses related to property next to the parking facility.

Determination of “mixed parking expenses” – expenses allocable to a parking facility where the invoice does not separate parking facility expenses from non-parking facility expenses (e.g., the lease does not specify portions of rent payment for office and parking purposes): For purposes of the primary use and cost per space methodologies only (not the general rule or the qualified parking limit methodology), the employer may choose to allocate 5% of mixed parking expenses related to payments under a lease or rental agreement, and for payments for utilities, insurance, interest, and property taxes, to the parking facility

What does CohnReznick think?

The denial of a federal income tax deduction for certain employer-provided employee parking-related expenses has been in place since the Tax Cuts and Jobs Act (TCJA). Employers have been confounded by these rules, especially those who lease office space with employee parking where the lease, as is typical, does not provide an allocation of the lease payment to parking and to non-parking. The availability of the 5% allocation to parking for mixed parking expenses will be particularly useful in this regard. Although the proposed regulations generally follow the guidance under the 2018 notice, the numerous additional definitions and the addition of certain (albeit limited) exceptions offer welcome guidance for employers who have been wrestling with these rules.


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

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Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice specific to, among other things, your individual facts, circumstances and jurisdiction. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.