Skip to content

IRS Finalizes Regulations on Disallowance of Employer’s Deduction for Commuting Benefits



Qualified Transportation Fringe, Transportation and Commuting Expenses under Section 274, 26 CFR Part 1, 85 Fed. Reg. 81391 (Dec. 16, 2020)

Available at

The IRS has issued final regulations implementing the Tax Cuts and Jobs Act (TCJA) provisions that disallow employer deductions for qualified transportation fringe benefits and certain other transportation and commuting benefits for taxable years beginning after 2017 (see our Checkpoint article). (Qualified transportation fringes, up to indexed monthly limits (see our Checkpoint article), remain excludable from employees’ income.) The final regulations retain the structure of the IRS’s proposal (see our Checkpoint article), including a general rule and three simplified methods (i.e., the qualified parking limit, primary use, and cost per space methodologies) for calculating the disallowed deduction for qualified parking benefits provided at a parking facility owned or leased by the employer. But some significant modifications and clarifications have been made in response to comments. Here are highlights of the changes:

  • COVID-19 Relief. The preamble observes that adjustments for significant variations in employee parking during the COVID-19 pandemic may be reflected by a reasonable method under the general rule, or by using either the cost per space or the qualified parking limit method on a monthly basis to adjust for COVID-related workforce changes. For employers using the primary use methodology—which requires determining a facility’s primary use during the peak demand period—the final regulations add an optional rule applicable to the COVID-19 pandemic and other federally declared disasters. Under that rule, the peak demand period may be determined by reference to a typical business day in the same year but prior to the date the employer’s “operations were impacted.” Alternatively, peak demand may be determined by a typical business day during a month in the immediately preceding taxable year that corresponds to a disaster-affected month in the current year.
  • Definitions. The definition of “general public” clarifies that parking spaces provided to the general public include those that are empty and those that are used for vehicles owned by the general public that are awaiting repair or service by the employer. The term “inventory/unusable spaces” clarifies that these are limited to spaces that are not usable by the general public. The definition also adds a rule that any reasonable methodology may be used to determine the number of inventory/unusable spaces in a parking facility, including an average of monthly inventory counts (a method that may, for example, be useful to car dealers with fluctuating inventory).
  • Mixed Expenses. The optional rule that allows 5% of specified mixed expenses to be allocated to a parking facility has been extended so it can be used in conjunction with all four methodologies. (Mixed expenses are single amounts that include expenses for both parking and nonparking facilities.) The final regulations also clarify that the mixed expense rule need not be used for all specified expenses (which are limited to payments under a lease or rental agreement, and payments for utilities, insurance, interest, and property taxes).
  • Cost Per Space Method. The final regulations clarify that this calculation to determine the disallowed expense can be performed on a monthly basis. Also, the calculation is revised so the cost per space (i.e., total parking expenses divided by total parking spaces) is multiplied by the number of total parking spaces used by employees during the peak demand period (instead of available parking spaces).
  • Expenses Treated as Compensation. The final regulations allow a deduction for qualified transportation fringe benefit expenses treated as employee compensation up to the amount treated as compensation plus any amount paid by the employee, eliminating the proposal’s “unduly harsh” result of denying the entire deduction when the amount included in compensation is less than the calculated value of the fringe benefit. This rule also applies when qualified transportation fringe benefits are wholly or partially excluded from income (other than because they were reimbursed).
  • Services Sold to Customers. Employers may use the exception to disallowance for services sold for full consideration in a bona fide transaction if they can prove that the fair market value of the parking is zero (e.g., because the parking is in a rural area in which non-employees would not pay to park).
  • Disallowance for Other Commuting Expenses (Code § 274(l)). The final regulations affirm that the provision in Code § 274(l) disallowing deductions for commuting expenses other than qualified transportation fringe benefit expenses is not subject to the three exceptions in Code § 274(e) that can be used to preserve all or a portion of the employer’s deduction for qualified transportation fringe benefit expenses. The safety exception available under Code § 274(l) has been expanded so it applies if “unsafe conditions” exist (referring to regulations under Code § 61 rather than to the term “bona-fide business-oriented security concern” used in regulations under Code § 132). The final regulations also clarify that Code § 274(l) does not apply to expenses incurred while traveling away from home.
  • Applicability Date. The final regulations apply for taxable years beginning on or after December 16, 2020, so they will apply for calendar year 2021. The rule offering relief for the COVID-19 pandemic and other disasters, however, may be applied to taxable years ending after December 31, 2019.

EBIA Comment: The highly detailed provisions of these regulations will require some study to understand and apply. It may help to keep the big picture in mind. Because employers generally can deduct expenses attributable to parking available to the general public but not expenses associated with qualified parking, the IRS requires employers to distinguish between the two types of parking expenses. Employers that provide parking benefits in a facility they own or lease, in particular, may need to model the various methods for calculating their disallowed deduction in order to find the optimal combination of ease and tax benefit. Employers that have been relying on the proposed regulations, or the IRS’s interim guidance in Notice 2018-99 (see our Checkpoint article), may continue to rely on that guidance for expenses paid or incurred in taxable years beginning after 2017 and before December 16, 2020. For more information, see EBIA’s Fringe Benefits manual at Section XX (“Qualified Transportation Plans”).

Contributing Editors: EBIA Staff.

More answers