Proposed regulations address qualified parking fringe benefits

Proposed regulations give employers methods for determining the disallowance of an employer deduction under the transportation fringe benefits rules.

July 09, 2020

The Treasury Department and IRS have issued proposed regulations and accompanying news release for employers that provide their employees with certain qualified transportation fringe benefits. The proposed regulations reflect changes made by the Tax Cuts and Jobs Act (TCJA).

Qualified transportation fringe benefits

The TCJA disallowed business deductions for qualified transportation fringe benefits provided by an employer to an employee after December 31, 2017. However, employers can continue to exclude qualified transportation fringe benefits from employees’ gross income even though the employer will not receive a corresponding deduction.

See Updated IRS Publication Covers Fringe Benefit Changes.

Qualified transportation fringe benefits include:

  • transportation of employees from their residence to the employer’s place of work in a commuter highway vehicle,
  • transit passes, and
  • qualified parking.

The maximum per employee exclusion for transit passes and qualified parking is $270 per month (for 2020). Any amount over the limitation is taxable employee compensation, which is deductible by the employer.

Note: Qualified bicycle commuting reimbursement is suspended from the definition of qualified transportation fringe benefits and included in an employee’s gross income for tax years 2018 to 2025.

Methodology for qualified parking

An employer who owns or leases the qualified parking for part of one or more parking facilities has the choice of following a general rule or one of three simplified methods for each parking facility for each tax year to determine the disallowed amount:

  • General rule: Employers can calculate the disallowance based on a reasonable interpretation of §274(a)(4), the section which says employers cannot take a deduction for qualified transportation fringe benefits provided to employees.
  • Qualified parking limit methodology: Employers multiply the total number of parking spaces used by employees during peak times (or the total number of employees) by the monthly limitation amount to calculate the disallowance.
  • Primary use methodology: Employers follow a four-step method involving allocations to employee and public parking spaces to calculate the disallowance.
  • Cost per space methodology: Employers multiply the cost per space by the number of parking spaces used by employees during a peak demand period to calculate the disallowance. Cost per space is figured by dividing the total parking expenses by the total parking spaces.

See the proposed regulations for details and examples for these calculations.

The proposed regulations reiterate that the general disallowance of a deduction for employer-paid transportation or commuting expenses does not apply if the expense is necessary for a bona-fide business-oriented safety or security concern.

The regulations will be applicable for tax years starting on or after the date these regulations are final. Taxpayers may choose to follow the guidance in Notice 2018-99 or the guidance in the proposed regulations for taxable years beginning after December 31, 2017.

For more information on employer benefits, see the Insights article, "Health savings accounts win the triple crown of tax benefits"

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