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June 26, 2020

IRS issues proposed regulations on qualified transportation fringe benefit expense deductions eliminated by TCJA

The IRS released proposed regulations (REG-119307-19) clarifying how to determine the amount of qualified transportation fringe (QTF) expenses that are nondeductible. The Tax Cuts and Jobs Act (TCJA) applied the IRC Section 274 deduction disallowance to QTF expenses for certain transportation and commuting benefits offered by employers to their employees, beginning in 2018.

Written comments should be submitted (electronically if possible) to the IRS by August 24, 2020. Until final regulations are issued, taxpayers may rely on the proposed regulations or the guidance in Notice 2018-99.


IRC Section 274(a)(4) disallows any otherwise available income tax deduction for the expense of providing a QTF to employees. IRC Section 274(l) separately disallows any income tax deduction for the cost of funding any employee travel between the employee's residence and place of employment (subject to a safety exception), without regard to whether the benefit is a QTF. IRC Section 274(a)(4) (but not IRC Section 274(l)) is subject to exceptions, such as amounts treated as compensation, items available to the general public and expenses for goods or services sold to customers.

A QTF is one of the following four benefits provided by an employer to an employee: (1) transportation in a commuter highway vehicle between the employee's residence and place of employment, (2) any transit pass, (3) qualified parking or (4) a bicycle commuting reimbursement (the IRC Section 132 exclusion for which is currently suspended until 2026). IRC Section 132(f) excludes the value of a QTF from an employee's gross income up to an indexed monthly limit (in 2020, this limit is $270/month).

Parking is a QTF if the parking is provided by an employer to an employee on or near the business premises of the employer or on or near a location from which the employee commutes to work.

In December 2018, the IRS released Notice 2018-99, with interim guidance on determining QTF parking expenses under IRC Section 274(a)(4) and asking for comments (see Tax Alert 2018-2497). The Preamble to the proposed regulations said the Treasury Department and the IRS received approximately 500 comments in response.

Proposed regulations address parking, transportation and commuting expenses

The proposed regulations would create Treas. Reg. Section 1.274-13 to address QTF parking expenses paid or incurred by an employer (along with certain exceptions in IRC Section 274(e)). In addition, they would create Treas. Reg. Section 1.274-14 to address expenses incurred to provide 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.


The proposed regulations would define the terms "qualified transportation fringe" and "employee" by reference to the definitions under IRC Section 132(f) and its regulations.

Parking expenses

As in Notice 2018-99, if the employer pays a third party for its employee's QTF, the nondeductible amount under IRC Section 274(a)(4) is generally calculated as the employer's total annual cost of the QTF paid to the third party. If the amount paid to the third party exceeds the IRC Section 132(f)(2) limitation, the excess must be included in the employee's income and wages, and the employer may claim a compensation deduction for that excess, provided that the employer timely includes the value on its originally filed Federal income tax return.

If the taxpayer owns or leases parking facilities, the nondeductible amount may be calculated using a general rule or any one of three simplified methodologies (listed below) for each tax year and each parking facility. Taxpayers may use statistical sampling with all four methods if they follow the procedures in Revenue Procedure 2011-42.

General rule: Use a reasonable interpretation of IRC Section 274(a)(4), subject to three limiting principles. First, the value of the parking may not be used to determine the expense. Second, the taxpayer must disallow the expense associated with any reserved employee spaces. Notably, the definition and examples make clear that restricted access to an area (such as a floor confined to employee badge access) will cause the spaces in the area to be treated as reserved. Third, in determining whether the IRC Section 274(e)(7) exception for items made available to the general public applies, a taxpayer must not treat public access as sufficient if the facility is regularly used by employees.

Simplified methodologies

Each of the three simplified methodologies relies on a determination of employee usage during a peak demand period. This period is the time in a typical business day when employee use is at its peak but disregards the overlapping transition period between employee shifts. Employers may use any reasonable methodology to determine employee usage during the peak demand period, including periodic inspections or employee surveys.

Qualified parking limit methodology: Determine a monthly disallowance by multiplying the monthly per-employee-limitation on the income exclusion (under IRC Section 132(f)(2)) by either (1) the total number of spaces used by employees during the peak demand period or (2) the total number of the taxpayer's employees.

Primary-use methodology: Use the four-step method in Notice 2018-99 (as modified by the proposed regulations) to determine the actual or estimated usage of the parking spaces during the peak demand period on a typical business day. Under this method, the taxpayer (1) disallows the cost of reserved employee spaces (unless the public use exception is met, and there are five or fewer reserved spaces that constitute 5% or less of the total parking spaces), (2) allows all other expenses if use by the general public is greater than 50%, (3) allows the cost of reserved non-employee spaces, and (4) from the remaining expenses, disallows the percentage that equals employee usage in the peak demand period.

Notice 2018-99 defined "general public" to include customers, clients, visitors, individuals delivering goods or services to the taxpayer, patients of a health care facility, students of an educational institution, and congregants of a religious organization. The proposed regulations would modify the definition, allowing the term general public to include, in the case of multi-tenant buildings, employees, partners, 2% shareholders of S corporations, sole proprietors, independent contractors, clients, or customers of a neighboring tenant as the general public. Congregants were also removed from the list in light of the repeal of IRC Section 512(a)(7) (related to tax-exempt organizations).

Cost per space methodology: Multiply the cost per space by the number of spaces used by employees during the peak demand period.

Special rules

In many cases, an employer's parking expenses are combined with other expenses such that it may be difficult to identify the parking portion of the expense. For purposes of the primary-use methodology and the cost-per-space methodology, the proposed regulations would allow "mixed parking expenses" (lease or rental agreement expenses, property taxes, interest expense, and expenses for utilities and insurance) to be allocated to a parking facility using any reasonable methodology, with a 5% safe harbor.

Notice 2018-99 permitted a taxpayer using the primary-use methodology to aggregate spaces in the same geographic location. The proposed regulations would also allow this aggregation for the general rule, the primary use methodology, and the cost per space methodology, but would specify that a geographic location is generally limited to contiguous tracts of land.

Some expenses still deductible

Under the proposed regulations, certain expenses would be deductible if they meet the requirements of:

  • IRC Section 274(e)(2) (expenses treated as compensation)
  • IRC Section 274(e)(7) (expenses for goods, services and facilities made available to the general public)
  • IRC Section 274(e)(8) (expenses for goods or services, including the use of facilities, that are sold by the taxpayer in a bona fide transaction)

Compensation: QTF expenses are deductible to the extent the employer treats the expenses as compensation to the employee on the taxpayer's federal income tax return, and as wages to the employee for purposes of withholding.

General public: Employers may deduct expenses under IRC Section 274(a) for transportation in a commuter highway vehicle, a transit pass, or parking that otherwise qualifies as a QTF under IRC Section 132(f)(1), to the extent such transportation, transit pass, or parking is made available to the general public.

Sold to customers: Employers that sell transportation in a commuter highway vehicle, transit passes and parking in bona fide transactions may deduct those expenses, as long as the benefits qualify as QTFs. The proposed regulations would treat an employer's employees as customers for purposes of this exception.

Other commuting expenses

The proposed regulations specify that the disallowance for employee commuting expenses will apply to travel between transportation hubs near the employee's residence and place of employment. That is, long-distance commuting by train or plane is implicated by the rule. In addition, the proposed regulations do not apply the IRC Section 274(e) exceptions — such as the exception for expenses treated as compensation — to IRC Section 274(l) commuting expenses, so the commuting expenses are nondeductible, subject only to the statutory safety exception.

Tax-exempt organizations

The TCJA added IRC Section 512(a)(7), which increased a tax-exempt organization's unrelated business taxable income (UBTI) by the amount of the QTF expense for which a deduction is not allowed under IRC Section 274. That provision was repealed by the Taxpayer Certainty and Disaster Tax Relief Act of 2019. IRC Section 274 and the proposed regulations, however, may disallow the deduction of a QTF expense by a tax-exempt organization to the extent the QTF expenses are directly connected with an unrelated trade or business conducted by the exempt organization.


Many employers will benefit from the flexibility provided in the proposed regulations. In most locations, however, the qualified parking limit methodology will probably yield a considerably higher nondeductible expense than using actual costs. Furthermore, although the primary-use and the cost-per-space methods do not appear particularly useful concerning cost identification, the special rule allowing allocation of 5% of mixed use parking expenses may be used with each of those methods.

Some employers will be disappointed that the proposed regulations, like Notice 2018-99, do not allow the deduction disallowance to be based on the value of the QTF. In many cases, that amount will be lower than the employer's allocable QTF expenses (and may even be zero). On the other hand, the proposed regulations retain the taxpayer-favorable rule in Notice 2018-99 that depreciation deductions are not subject to disallowance under IRC Section 274(a)(4). The Preamble's endorsement of statistical sampling may be beneficial, particularly for employers with multiple parking facilities.

The proposed regulations' clarification that the deduction disallowance under IRC Section 274(l) does not apply to QTF expenses, to which an exception under IRC Section 274(e) applies, is helpful. However, the proposed regulations' application of IRC Section 274(l) to transportation originating at a transportation hub near the employee's residence will be unwelcome to employers whose employees commute by airplane. If this rule is retained in the final regulations, employers may choose to stop paying these expenses and instead pay additional compensation that is not conditioned on any particular use. Alternatively, employers may consider exploring use of the safety exception for these expenses.


Contact Information
For additional information concerning this Alert, please contact:
National Tax Compensation and Benefits Group
   • Christa Bierma (
   • Stephen Lagarde (
   • Rachael Walker (
   • Bing Luke (
   • Andrew Leeds (
Accounting Periods, Methods & Credits
   • Angela Spencer-James (
Workforce Advisory Services - Employment Tax Advisory Services
   • Debera Salam (