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December 18, 2020

Final regulations on qualified transportation fringe benefits have few changes

The IRS and Treasury Department released final regulations (TD 9939) on determining the nondeductible amount of qualified transportation fringe (QTF) and taxable commuting expenses. The Tax Cuts and Jobs Act (TCJA) applied the IRC Section 274 deduction disallowance to expenses for QTF and other commuting benefits offered by employers to their employees, beginning in 2018. The final regulations mostly follow the proposed regulations (see Tax Alert 2020-1680), with a few taxpayer-favorable modifications.


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.

In December 2018, the IRS released Notice 2018-99, providing interim guidance on determining QTF parking expenses under IRC Section 274(a)(4) and asking for comments (see Tax Alert 2018-2497). In June 2020, the IRS released proposed regulations (REG-119307-19) (see Tax Alert 2020-1680). The IRS and Treasury Department received 12 comments on the proposed regulations.

Final rules for QTF expenses

IRC Section 132(f) generally excludes the value of a QTF from an employee's gross income up to an indexed monthly limit ($270/month in 2020 and 2021). The deduction disallowance under IRC Section 274(a)(4) defines a QTF by cross-reference to IRC Section 132(f).

The final regulations adopt the proposed regulations' definition of a QTF. Under that definition, a QTF is one of the following three 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, or (3) qualified parking. The QTF definition under IRC Section 132(f) also includes any qualified bicycle commuting reimbursement, but the final regulations do not include this fourth benefit in the QTF definition because the IRC Section 132 income exclusion for this benefit is suspended until 2026.

Although the IRC Section 274(a)(4) deduction disallowance applies to all QTFs, the final regulations (like the proposed regulations and Notice 2018-99) focus on parking. An employer that provides transit passes or transportation in a commuter highway vehicle (such as a bus or van) ordinarily pays a third party to provide those benefits. In that context, the amount of the employer's QTF expense subject to disallowance is straightforward, and there is little need for guidance. Thus, the final regulations do not specifically address allocation of expenses for those QTFs. Along the same lines, if an employer pays a third party to provide qualified parking, the final regulations generally treat the employer's total annual cost paid to the third party as the amount of the employer's deduction disallowance. Regardless of the type of QTF, however, if the amount paid to the third party exceeds the applicable dollar limitation under IRC Section 132(f), the excess is not excludable from income and must be included in the employee's income and wages. The employer may claim a compensation deduction for that excess amount.

Rules for parking facilities owned or leased by the taxpayer

For an employer that owns or leases parking facilities, calculating the IRC Section 274(a)(4) disallowance can be challenging because QTF expenses are often difficult to identify.

The proposed rules permitted taxpayers to use two optional rules — an aggregation rule and a mixed-expense rule — for certain purposes. The aggregation rule allowed an employer that owned or leased more than one parking facility in a single geographic location to aggregate the parking spaces across those facilities, but only if the tracts or parcels of land shared common boundaries (or would share them but for the interposition of a road, stream, etc.). The mixed-expense rule allowed 5% of certain specific expenses that included both parking facility and non-parking facility expenses (such as rent or property taxes) to be treated as parking facility expenses.

Both rules are carried forward to the final regulations intact, but their availability was broadened. In finalizing each of the optional rules, Treasury and the IRS declined to adopt changes suggested by commenters. Specifically, commenters asked that the aggregation rule be loosened to allow aggregation of nearby properties rather than limiting the rule to contiguous land. This suggestion was rejected as too complex. Commenters also asked that the mixed-parking-expense rule be modified to allow any unallocated expense to be eligible for the rule. Treasury and the IRS declined to make this change, explaining that the rule is available only for lease or rental agreement expenses, property taxes, interest expense and expenses for utilities and insurance to a parking facility because other expenses may be separately billed or primarily allocable to parking. The final regulations do, however, clarify that the optional mixed-expense rule is not required to be used for all eligible mixed-parking expenses but rather may be elected for specific eligible mixed-parking expenses while using a reasonable methodology for the other eligible expenses.

Rules and methodologies for calculating parking QTF deduction disallowance

The final regulations allow taxpayers to calculate their parking QTF deduction disallowance using a general rule or any one of three simplified methodologies for each tax year and each parking facility. These rules are based on the proposed regulations, with only minor changes. As in the proposed rule, there is no duty of consistency to use a single methodology across a taxpayer's different parking facilities or from one tax year to the next.

General rule

Under the general rule, taxpayers use a reasonable interpretation of IRC Section 274(a)(4), subject to three limiting principles: (1) the value of the parking may not be used to determine the taxpayer's expense; (2) the taxpayer must disallow the expense associated with any reserved employee spaces (which include not only individual parking spaces identified as reserved for specific employees but also areas of parking lots or garages that only employees may use); and (3) if a parking facility is regularly used by employees, the taxpayer cannot apply the IRC Section 274(e)(7) exception for items made available to the general public merely because the general public also has access to the parking facility. The proposed rule did not allow taxpayers using the general rule to use the optional mixed-expense rule, but the final rule eliminates this prohibition.

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" during a tax year when employee use is at its peak (but disregards the overlapping transition period between employee shifts). Employers may use any reasonable method to determine employee usage during the peak demand period, including periodic inspections or employee surveys.

The final regulations modify the definition of "peak demand period" to add an optional rule allowing flexibility to taxpayers in a federally-declared disaster area under IRC Section 165(i)(5). (For COVID-19, such a disaster was declared on March 13, 2020, for all states, tribes, territories and the District of Columbia.) Under this new optional rule, a taxpayer in a federally-declared disaster area may use a typical business day in the same tax year before the impact of the disaster or identify a day in the same month of the prior tax year for purposes of determining employee usage during the peak demand period. For many employers, there will be less employee parking usage during the disaster (resulting in a smaller disallowance if a typical business day during the disaster is used to determine employee usage during the peak demand period). For other taxpayers, however, the absence of customers but continued presence of employees could reduce the public-use percentage, causing a taxpayer to lose eligibility for the public-use exception (described later). This latter case appears to be the focus of the optional rule -the Preamble observes, "[f]or example, a restaurant that transitioned from a dine-in restaurant to take-out service due to the COVID-19 pandemic could determine its parking disallowance under the [primary-use] test based on the usage of parking on a typical business day prior to its transition to take-out service."

Qualified parking limit methodology: Under the qualified parking limit methodology, taxpayers determine a monthly deduction disallowance by multiplying the monthly dollar limitation on the income exclusion under IRC Section 132(f) 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. The proposed regulations prohibited taxpayers from using either the mixed-parking-expense rule or the aggregation rule with this methodology; this makes sense given that this methodology simply imports a specified dollar amount and multiplies it by a specified factor, ignoring actual expenses. Although the final regulations allow the mixed-expense rule to be used in allocating expenses in connection with this methodology, the effect of this change is unclear because expenses are not relevant to the underlying formula. In any event, the qualified parking limit methodology is unlikely to be used by any taxpayer because, although easy to apply, it maximizes the disallowance of the taxpayer's deduction.

Primary-use methodology: Under the primary-use methodology, taxpayers use the following four-step method: (1) do not deduct the cost of reserved employee spaces (unless greater than 50% of available spaces are used by the general public, and there are five or fewer reserved spaces that constitute 5% or less of the total parking spaces); (2) deduct all other expenses if use of available spaces by the general public is greater than 50%; (3) deduct the cost of any reserved non-employee spaces; and (4) do not deduct, from the remaining expenses, the percentage that equals employee usage in the peak demand period. This methodology was finalized without substantive change but clarifying text underscores that a taxpayer is not bound to use this methodology, or any methodology, consistently across parking facilities. As under the proposed regulations, either or both of the special optional rules (the aggregation rule and the mixed-expense rule) may be used with the primary-use methodology.

The final regulations generally carry forward the definition of "general public" as proposed, which includes customers, clients, visitors, individuals delivering goods or services to the taxpayer, patients of a health care facility and students of an educational institution. The final regulations also add that parking spaces used to park customer vehicles while the vehicles await service by the taxpayer are provided to the "general public." The proposed regulations had expanded the term "general public" to allow employers sharing multi-tenant parking facilities to include in the "general public" individuals associated with neighboring tenants, namely, the neighboring tenants' employees, partners, 2% shareholders of S corporations, sole proprietors, independent contractors, clients or customers. A commenter criticized this aspect of the proposed rule on the grounds that it gives unfair advantage to taxpayers with employees in multi-tenant buildings. Treasury and the IRS declined to modify the rule, explaining that an alternative rule would unduly burden taxpayers in multi-tenant buildings.

Cost per space methodology: Under the cost per space methodology, taxpayers multiply the cost per space by the number of total spaces used by employees during the peak demand period. The proposed regulations had referred to available parking spaces, which would have excluded reserved spaces. In addition, the final regulations clarify that the cost per space calculation may be performed on a monthly basis. As under the proposed regulations, either or both of the special optional rules (the aggregation rule and the mixed-expense rule) may be used with the cost per space methodology.


Under IRC Section 274(e)(2), QTF expenses are not disallowed to the extent the employer treats the expenses as compensation to the employee. The proposed regulations specified that the exception in IRC Section 274(e)(2) would not apply to expenses for QTFs for which the taxpayer calculated a value that was less than the amount required to be included in gross income under Treas. Reg. Section 1.61-21. This interpretation of IRC Section 274(e)(2) had also been proposed in relation to now final regulations at Treas. Reg. Section 1.274-12, applying IRC Section 274 to meal expenses. That proposal was modified in the recent finalization of Treas. Reg. Section 1.274-12 (see Tax Alert 2020-2412). The same modification was applied in the final QTF regulations. Specifically, the final regulations allow taxpayers to apply IRC Section 274(e)(2) even if they include such a lesser amount, but "then the deduction is limited to the amount included in compensation and wages, taking into account the amount, if any, reimbursed to the taxpayer by the employee (referred to as the 'dollar-for-dollar' methodology)," according to the Preamble.

The final rules introduce a meaningful interpretive expansion to the application of the IRC Section 274(e)(8) exception for parking sold by the taxpayer. Since the enactment of IRC Section 274(a)(4) by the TCJA, taxpayers have argued that expenses for properties with no value under existing QTF guidance (for example, rural parking facilities) should not be subject to the deduction disallowance under IRC Section 274(a)(4). In Notice 2018-99 and again in the proposed regulations, Treasury and the IRS shut the door on that approach, designating any interpretation using value to determine expenses as unreasonable (see Tax Alert 2018-2497). The new interpretation of IRC Section 274(e)(8) in the final regulations effectively opens a window, again allowing such "zero value" facilities to avoid a deduction disallowance. Specifically, the final regulations treat parking as sold in a bona fide transaction for adequate and full consideration if the fair market value of the parking is zero. The taxpayer bears the burden of proving that the value is zero, but the taxpayer is treated as satisfying this burden if the parking is provided in a rural, industrial or remote area in which no commercial parking is available and an individual other than an employee ordinarily would not pay to park in the parking facility.

Unlike prior guidance interpreting IRC Section 274(e)(8), the final regulations expressly equate "adequate and full consideration" with "fair market value," depriving discounted payments of the exception if the discount reduces the payment to below fair market value. While this could be a meaningful exclusion in the case of, for example, discounted post-tax employee payments for parking, the IRS makes clear in the Preamble that such reimbursements will instead reduce the disallowance via IRC Section 274(e)(2) to the extent of the dollar amount of the reimbursement.

Final rules for other commuting expenses

The final regulations modify the proposed regulations on IRC Section 274(l)'s deduction disallowance for transportation expenses between an employee's residence and place of employment.

The proposed regulations had responded to questions concerning air travel by expressly applying the deduction disallowance to travel between transportation hubs. Commenters advocated for removal of this rule, asserting that deductions for business travel could be disallowed. In response, the final rule makes clear that deductions for expenses for business travel away from home within the meaning of IRC Section 162 are not disallowed but that deductions for travel between an employee's residence (principal or otherwise) and the employee's place of employment are disallowed, even if multiple forms of transportation are used (and without regard to whether each is reimbursed). The final regulations further clarify that travel to temporary places of employment is not subject to the deduction disallowance. The final regulations provide clarity by incorporating the familiar "tax home" concept under IRC Section 162, but this does mean that expenses for long-distance commuting — which has become more prevalent over time, particularly among executives — remain subject to the deduction disallowance.

The proposed regulations had interpreted IRC Section 274(l)'s safety exception by reference to a narrow exception for business-oriented security concerns under IRC Section 132, allowing little room for more generalized concerns, such as risks of commercial air travel during the COVID-19 global pandemic. The final rule instead incorporates a more generalized rule under Treas. Reg. Section 1.61-21(k)(5), which evaluates unsafe conditions based on a reasonable assessment of the surrounding facts and circumstances.

Like the proposed regulations, the final regulations do not incorporate any of the IRC Section 274(e) exceptions in the IRC Section 274(l) context. To refute a commenter's arguments to the contrary, the IRS in the Preamble cites the Joint Committee on Taxation Bluebook, which explains that IRC Section 274(l) can apply even if amounts are included in employee compensation.

Effective dates

The regulations apply to tax years beginning on or after the date the regulations are published in the Federal Register (December 16, 2020). Taxpayers may choose to apply the optional rule for federally-declared disasters in Treas. Reg. Section 1.274-13(b)(14)(ii) of the final regulations for tax years ending after December 31, 2019. Taxpayers may continue to rely on the proposed regulations or Notice 2018-99 for parking expenses, other QTF expenses, and transportation and commuting expenses paid or incurred in tax years beginning after December 31, 2017, and before the final regulations are applicable.


For computing the disallowance of qualified parking expenses, the final rules continue to be quite taxpayer friendly, allowing taxpayers flexibility to pick and choose the most advantageous approach for a particular parking facility in a particular year, expressly permitting the use of statistical sampling in determining the disallowance, and allowing many taxpayers in multi-tenant buildings to avoid the disallowance entirely under the primary-use methodology. Additionally, taxpayers owning or leasing "zero value" lots may also avoid the disallowance under the final regulations. That said, the IRS has begun enforcement in this area, challenging allocation of expenses in examinations and proposing adjustments to claimed deductions. As a result, documentation of positions will be important.

The final rules continue to disallow expenses of long-distance commuting travel, which may have previously avoided disallowance under IRC Section 274 by being categorized as personal nonentertainment flights. For private travel on company aircraft by executives, this could be a significant disallowance of large expenses, including allocable depreciation and interest expense. In 2020 and 2021, however, the ongoing global pandemic may qualify these expenses for the safety exception.


Contact Information
For additional information concerning this Alert, please contact:
Compensation and Benefits Group
   • Christa Bierma (
   • Stephen Lagarde (
   • Rachael Walker (
   • Bing Luke (
Workforce Tax Services - Employment Tax Advisory Services
   • Debera Salam (