Simplified Calculations for Disallowed Deductions for IRC 132(f) Qualified Transportation Fringe Benefits
Simplified Calculations for Disallowed Deductions for IRC 132(f) Qualified Transportation Fringe Benefits
Qualified transportation fringe (QTF) benefits under Internal Revenue Code Section 132(f) are transit passes, transportation in commuter highway vehicles and qualified parking (or a combination thereof) provided by an employer to an employee. Subject to monthly limits, QTF benefits can be tax-free to employees. For 2020, the monthly limit is $270 (up from $265 in 2019).
The Tax Cuts and Jobs Act of 2017 (TCJA) disallowed employer deductions for the cost of providing QTFs. Accordingly, employers that filed a federal income tax return for a tax year beginning January 1, 2018, or later must determine if they had nondeductible QTF expenses under Section 274(a)(2). (For a general overview of this TCJA change in the law, see our January 2019 tax alert). The disallowed deduction for payments to third parties was relatively straightforward, but the calculations needed to eliminate the deduction (especially for owned or leased parking facilities), were tedious, even when using the four-step methodology that the IRS provided in December 2018 in Notice 2018-99.
Many taxpayers providing QTF benefits requested shortcuts to avoid detailed data gathering. The IRS took heed and in recently published proposed regulations included a flat rate expense calculation, as well as other shortcuts, as discussed below.
Permissible Methods for Determining QTF Disallowed Deductions
“Qualified Parking Limit” Methodology
The proposed regulations include two variations of a flat rate calculation for determining the amount of the lost QTF benefit deduction. In each case, employers would use the applicable maximum monthly dollar amount under Section 132(f)(2) (i.e., $270 for 2020) as the monthly total cost.
In the simplest method, employers could multiply the maximum monthly amount by the number of employees to determine the amount of the disallowed deduction. This avoids data gathering (other than total employee headcount, which is typically at hand). But such simplicity comes at a price. This method will likely result in a higher lost deduction than other available methods because it is calculated based on total employee headcount, regardless of whether an employee used the QTF benefits.
A modified version of this shortcut method allows employers to multiply that same monthly flat rate by the number of employees who park in the facility during the “peak demand period.” Peak demand period is the time during a typical business day when the greatest number of the taxpayer’s employees are using the parking spaces. Parking facilities for shift workers should use the largest shift for the count but disregard shift overlaps.
In Notice 2018-99, the IRS originally said that employers should calculate the lost deduction by determining the actual (or estimated) parking space usage “during normal business hours on a typical business day.” The proposed regulations differ from the notice in that employers would now have to identify the number of parking spaces used by employees during the peak demand period. In determining the number of spaces used by employees during the peak demand period, any reasonable method can be used, such as periodic inspections, employee survey or statistical sampling in accordance with Rev. Proc. 2011-42.
The proposed regulations define “parking facility” as one or more indoor or outdoor garages and other structures, as well as parking lots and other areas, where employees may park (but excluding parking spaces on or near property used by the employee for residential purposes). Parking facilities in a single geographic location may be aggregated, but the proposed regulations eliminate some combinations once thought reasonable. The proposed regulations narrowly define “geographic location” as contiguous (i.e., sharing a common boundary but for the interpositions of a road, street, railroad, stream, etc.) tracts or parcels of land owned or leased by the taxpayer.
If the actual per space expense exceeds the maximum monthly Section 132(f)(2) amount, either variation of the qualified parking limit methodology can only be used if the excess value is timely reported to the employee as taxable compensation in Box 1 of Form W-2.
“Primary Use” Methodology
The proposed regulations adopt the four-step method that was included in Notice 2018-99. Before applying the four steps, employers must first determine the total expenses attributable to the parking facility. Direct parking facility expenses are added to a reasonable allocation of expenses that are shared between parking and non-parking facilities. Allocation of shared expenses can be made using either a reasonable basis or a new, special rule included in the proposed regulations that allows the allocation of 5% for lease or rental payments, utilities, insurance, interest and property taxes. Remember, depreciation of an owned facility is not considered an expense for these purposes.
Step 1 – Identify employee reserved spaces and allocate expense to those spaces. A new safe harbor that applies to allocations to employee reserved spaces allows for zero deduction disallowance if: (1) the primary use of the available spaces is to provide public parking; and (2) there are five or fewer reserved employee spaces that equal 5% or less of the total spaces.
Step 2 – Determine whether the primary use is for public parking by dividing the number of spaces typically available to the general public by the available spaces. If the result is greater than 50%, the primary use test is satisfied, and no additional expense is disallowed. If the result is 50% or less, continue with Step 3 and Step 4.
Step 3 – Calculate the deduction for reserved nonemployee spaces such as visitors, customers, employee partners, 2% S corporation shareholders and sole proprietors.
Step 4 – Allocate the remaining expenses to spaces used by employees during the peak demand period by dividing the number of non-reserved parking spaces used by employees by the total available parking spaces and then multiply the results by the remaining unallocated expenses to determine the disallowed deduction in addition to Step 1.
In response to comments that the four-step method was cumbersome and complex, the proposed regulations provide an alternative that allows the amount of the disallowed deduction to be calculated by multiplying the cost-per-space by the number of spaces used by employees during the peak demand period. Cost-per-space is calculated by dividing the total parking expenses (including expense related to inventory/unusable spaces) by the total number of spaces (including inventory/unusable spaces).
The 5% allocation of shared expenses described in the primary use methodology (above) can also be used when determining total parking expenses for this methodology.
Instead of the three methods described above, taxpayers may use any reasonable interpretation of Section 274(a)(4) to determine the amount of nondeductible parking expense. The proposed regulations allow employers using any reasonable method to allocate mixed expenses to the parking facility using a 5% safe harbor. A methodology is not reasonable if:
- The value (including the fair market value) of the parking is disallowed instead of the related expenses;
- Deductions are taken for expenses allocable to reserved employee spaces; or
- The general public exception is misapplied.
The proposed regulations introduce the concept of inventory/unusable spaces, which are spaces used for inventoried vehicles, qualified nonpersonal vehicles, fleet vehicles used in the trade of business, or parking spaces otherwise not usable for parking by employees, such as spaces needed for loading docks or temporary parking of transport vehicles. Parking expenses allocable to these unusable spaces are excluded from the total parking expenses used under any of the methodologies outlined to calculate the deduction disallowed in connection with QTF.
Comparison of the New Methodologies
Facts: During 2020, ABC owns or leases space in an office building with a parking facility with 100 parking spaces. Five spaces are reserved for ABC employees and 10 spaces are reserved for ABC’s customers and visitors. The general public (including employees and owners of other tenants in the same office building as ABC) can park in the facility. ABC currently has 80 employees, and 70 of those employees typically park during peak demand periods. Total expenses properly allocated or incurred for parking are $25,000 per year, $250 per space. For 2020, the IRS monthly qualified parking dollar limit is $270.
|Methodology||Description||Amount of Disallowed Deduction|
|Qualified Parking Limit Method
(Counting All Employees)
|$270 x 80 (total number of employees)||$21,600|
|Qualified Parking Limit Method
(Counting Employees Who Park)
|$270 x 70 (number of employees who park during peak demand period)||$18,900|
|Cost Per Space Method||Total parking expense ($25,000) divided by 100 (total number of spaces) = $250 per space. Multiply $250 (cost per space) by 90 (available parking spaces for ABC’s employees, since there are 10 spaces reserved for ABC’s customers/visitors)||$22,500|
|Primary Use Method||Step 1 – Identify employee reserved spaces and allocate expense to those spots. Here, 5 reserved employee spaces x $250 (cost per space) = $1,250
Determine if the safe harbor for reserved employee spaces applies (this disallowance is ignored if the primary use of the available spaces is to provide public parking, there are 5 or fewer reserved employee spaces and the spaces reserved for employees are 5% or less of the total spaces). Here the safe harbor does not apply because the 5 employee reserved spaces are 5% of the spaces.
Step 2 - Determine whether the primary use is for public parking. Here, 100 total spaces minus 5 spaces reserved for employees minus 70 spaces typically used by employees = 25 spaces available for public parking. Next, divide the number of spaces available to the general public (i.e., 25 spaces) by 95 (the total spaces available to ABC’s employees and the public, including ABC’s customers/visitors, but excluding spaces reserved for ABC’s employees) = 26%. This facility does not pass the primary use test because the spots available to the general public during peak demand do not exceed 50% of the available parking spaces. Go on to Steps 3 and 4.
Step 3 – Calculate the deduction for reserved nonemployee spaces such as visitors, customer, employee partners, 2% shareholders and sole proprietors. Here, 10 reserved customer/visitor spaces multiplied by $250 cost per space = $2,500.
Step 4 – Allocate the remaining expenses to spaces used by employees during the peak demand period. Employee usage may be based on actual usage or estimates based on number of spots, number of employees, hours of use or other measures. Divide the number of non-reserved parking spaces used by employees (i.e., 70), by the total available parking spaces (i.e., 85), then multiply the result by the remaining unallocated expenses = $17,500 (subtotal) of disallowed deductions, plus $1,250 in disallowed deductions for employee reserved spaces (as determined in Step 1).
Exceptions for QTF Disallowed Deductions
Treat as Taxable Employee Compensation
If the employer includes the value of the QTF benefits in the employee’s taxable compensation, then there is no disallowed deduction. This exception does not apply if the value included in the employees’ taxable income is not timely or is less than the amount required (such as where the purported value for the compensation is zero).
Available to the General Public
Section 274(e)(7) applies to expenses for goods, services, and facilities made available by the taxpayer to the general public. Accordingly, the proposed regulations do not apply the disallowance under Section 274(a) to expenses for transportation in a commuter highway vehicle, any transit pass, and parking that otherwise qualify as QTFs that are made available to the general public. This is the basis for the primary use test described above, but the exception does not apply if the items are available only to an exclusive list of guests.
The definition of general public includes (but is not limited to) customers, clients, visitors, individuals delivering goods or services to the taxpayer, and patients of health care facilities. Not included are employees, partners, 2% S corporation shareholders, sole proprietors or independent contractors of the taxpayer. However, individuals having these relationships with other tenants in a multi-tenant building with a shared parking facility would be included as members of the general public.
Bona Fide Sales
Section 274(e)(8) applies to expenses for goods or services that are sold by the taxpayer in a bona fide transaction. Under the proposed regulations, the bona fide sales exclusion under Section 274(e)(8) applies to the employer’s expense for transportation in a commuter highway vehicle, a transit pass, or parking that otherwise qualifies as a QTF that is sold to customers, including employees who purchase the transportation for an adequate and full consideration in money or money’s worth. However, pre-tax contributions by employees to pay for QTF benefits do not satisfy the requirements for this exclusion, because the employer incurs the QTF expense under a salary reduction agreement (instead of a deductible compensation expense).
New Guidance on Commuting from Personal Residence
The proposed regulations include more information on new Section 274(l), which was created by the TCJA and is effective for expenses paid or incurred after December 31, 2017. Section 274(l) disallows deductions for any expense incurred for providing 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 term ‘‘safety of the employee,’’ includes only a bona fide, business-oriented security concern.
The proposed regulations clarify that the disallowed deduction applies to travel that originates at a transportation hub near the employee’s residence or place of employment. For example, an employee who commutes to work by airplane from an airport near the employee’s residence to an airport near the employee’s place of employment is traveling between the residence and place of employment.
The definition of the employee’s ‘‘residence’’ is also clarified. Whether property is used by the taxpayer as the taxpayer’s residence depends upon all the facts and circumstances and might include a houseboat, a house trailer, or the house or apartment that the taxpayer is entitled to occupy as a tenant-stockholder in a cooperative housing corporation. These provisions are likely to treat part-time or vacation homes as a residence subject to these disallowance rules.
According to the proposed regulations, the exception in Section 274(e)(2) for expenses treated as compensation does not apply to Section 274(l) transportation and commuting expenses, because the exceptions in Section 274(e) apply only to amounts that are disallowed under Section 274(a), and not to those disallowed under Section 274(l).