Qualified Transportation Fringe, Transportation and Commuting Expenses under Section 274, 37599-37615 [2020-13506]

Agencies

• Internal Revenue Service
• Department of Treasury

[Federal Register Volume 85, Number 121 (Tuesday, June 23, 2020)]
[Proposed Rules]
[Pages 37599-37615]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-13506]


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DEPARTMENT OF TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-119307-19]
RIN 1545-BP49


Qualified Transportation Fringe, Transportation and Commuting 
Expenses under Section 274

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations to implement 
legislative changes to section 274 of the Internal Revenue Code (Code) 
effective for taxable years beginning after December 31, 2017. 
Specifically, the proposed regulations address the elimination of the 
deduction under section 274 for expenses related to certain 
transportation and commuting benefits provided by employers to their 
employees in taxable years beginning after December 31, 2017. The 
proposed regulations provide guidance to determine the amount of such 
expenses that is nondeductible and apply certain exceptions under 
section 274(e) that may allow such expenses to be deductible. These 
proposed regulations affect taxpayers who pay or incur such expenses.

DATES: Written or electronic comments and requests for a public hearing 
must be received by August 24, 2020. Requests for a public hearing must 
be submitted as prescribed in the ``Comments and Requests for a Public 
Hearing'' section.

ADDRESSES: Commenters are strongly encouraged to submit public comments 
electronically. Submit electronic submissions via the Federal 
Rulemaking Portal at www.regulations.gov (indicate IRS and REG-119307-
19) by following the online instructions for submitting comments. Once 
submitted to the Federal Rulemaking Portal, comments cannot be edited 
or withdrawn. The IRS expects to have limited personnel available to 
process public comments that are submitted on paper through mail. Until 
further notice, any comments submitted on paper will be considered to 
the extent practicable. The Department of the Treasury (Treasury 
Department) and the IRS will publish for public availability any 
comment submitted electronically, and to the extent practicable any 
comment submitted on paper, to its public docket. Send paper 
submissions to: CC:PA:LPD:PR (REG-119307-19), room

[[Page 37600]]

5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, 
Washington, DC 20044.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
call Patrick Clinton of the Office of Associate Chief Counsel (Income 
Tax and Accounting), (202) 317-7005; concerning the submission of 
comments and/or requests for a public hearing, Regina L. Johnson, (202) 
317-5177 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    This notice of proposed rulemaking contains proposed amendments to 
the Income Tax Regulations (26 CFR part 1) under section 274 of the 
Code.

1. Statutory Framework

    Section 274 was added to the Code by section 4 of the Revenue Act 
of 1962, Public Law 87-834 (76 Stat. 960) and has been amended numerous 
times over the years. In general, section 274 limits or disallows 
deductions for certain expenditures that otherwise would be allowable 
under chapter 1 of the Code (chapter 1), primarily under section 
162(a), which allows a deduction for ordinary and necessary expenses 
paid or incurred during the taxable year in carrying on any trade or 
business.
    On December 22, 2017, section 274 was amended by section 13304 of 
Public Law 115-97 (131 Stat. 2054), commonly referred to as the Tax 
Cuts and Jobs Act (TCJA), to disallow a deduction for the expense of 
any qualified transportation fringe (QTF) as defined in section 132(f) 
provided to an employee of the taxpayer, effective for amounts paid or 
incurred after December 31, 2017.
    The TCJA also added section 512(a)(7) providing that a tax-exempt 
organization's unrelated business taxable income (UBTI) is increased by 
the amount of the QTF expense for which a deduction is not allowable 
under section 274, effective for amounts paid or incurred after 
December 31, 2017. However, on December 20, 2019, section 512(a)(7) was 
repealed retroactive to the original date of enactment of the TCJA by 
section 302 of the Taxpayer Certainty and Disaster Tax Relief Act of 
2019, enacted as part of the Further Consolidated Appropriations Act, 
2020, Public Law 116-94, 133 Stat. 2534, Div. Q, Title III (2019). 
Although section 512(a)(7) was retroactively repealed, the rules of 
section 274 and these proposed regulations apply to tax exempt 
organizations to the extent the amount of the QTF expenses paid or 
incurred by an exempt organization is directly connected with an 
unrelated trade or business conducted by the exempt organization. In 
such case, the amount of the QTF expenses directly connected with the 
unrelated trade or business is subject to the disallowance under 
section 274(a)(4) and, thus, is disallowed as a deduction in 
calculating the UBTI attributable to such unrelated trade or business 
under the general rule of section 512(a)(1). While the examples set 
forth in proposed Sec.  1.274-13 involve taxable entities, tax exempt 
organizations with unrelated trades or businesses may use the examples 
to assist in determining the amount of the section 274(a)(4) 
disallowance for purposes of calculating their UBTI under section 
512(a)(1).
    Finally, the TCJA added section 274(l), which provides that no 
deduction is allowed under chapter 1 for any expense incurred for 
providing any transportation, or any payment or reimbursement, to an 
employee of the taxpayer in connection with travel between the 
employee's residence and place of employment, except as necessary for 
ensuring the safety of the employee, effective for transportation and 
commuting expenses paid or incurred after December 31, 2017.

2. Qualified Transportation Fringes

    Section 132 generally excludes from employees' gross income the 
value of certain fringe benefits. Section 132(a)(5) generally provides 
that gross income does not include any fringe benefit that qualifies as 
a QTF under section 132(f). QTFs are defined in section 132(f)(1) to 
mean any of the following 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, and (4) any qualified bicycle commuting reimbursement. Section 
132(f)(5)(A), (B), (C), and (F)(i) define transit pass, commuter 
highway vehicle, qualified parking, and qualified bicycle commuting 
reimbursement, respectively. Section 132(f)(2) provides that the amount 
of QTFs provided by an employer to any employee that can be excluded 
from gross income under section 132(a)(5) cannot exceed a maximum 
monthly dollar amount, adjusted for inflation. The adjusted maximum 
monthly excludable amount for 2020 is $270.
    Although section 132(f)(1) includes qualified bicycle commuting 
reimbursements as a QTF, section 132(f)(8) provides that the inclusion 
of qualified bicycle commuting reimbursements in the definition of a 
QTF is suspended for taxable years beginning after December 31, 2017, 
and before January 1, 2026. Accordingly, for such taxable years, 
qualified bicycle commuting reimbursements are not excluded from an 
employee's income as a QTF.
    Section 274(a)(4), as added by the TCJA, provides that no deduction 
is allowed under chapter 1 for the expense of any QTF (as defined in 
section 132(f)) provided by taxpayers to their employees for expenses 
paid or incurred after December 31, 2017. Although the value of a QTF 
is relevant in determining the exclusion under section 132(f) and 
whether the section 274(e)(2) exception for expenses treated as 
compensation applies, the deduction disallowed under section 274(a)(4) 
relates to the expense of providing a QTF, not its value. In addition, 
the disallowance of a deduction for commuting and transportation 
expenses under section 274(l) is suspended for any qualified bicycle 
commuting reimbursement (described in section 132(f)(5)(F)) paid or 
incurred after December 31, 2017, and before January 1, 2026. Thus, for 
such period, deductions for qualified bicycle commuting reimbursements 
are not disallowed under sections 274(a)(4) and 274(l).
A. Section 274(e) Exceptions to Section 274(a)(4)
    Section 274(e) enumerates nine specific exceptions to section 
274(a), three of which, sections 274(e)(2), (e)(7), and (e)(8), are 
relevant for QTFs. Deductions for expenses that are within any of the 
three exceptions in section 274(e) are not disallowed under section 
274(a)(4).
    Section 274(e)(2) applies to expenses for goods, services, and 
facilities, to the extent that the expenses are treated by the 
taxpayer, with respect to the recipient of the entertainment, 
amusement, or recreation, as compensation to its employees under 
chapter 1 and as wages to its employees under chapter 24 of the Code 
(chapter 24). Although the language in section 274(e)(2) refers to a 
recipient of entertainment, amusement, or recreation, it applies as a 
specific exception to the application of section 274(a), which, as 
amended by the TCJA, includes the QTF expense disallowance in section 
274(a)(4). Thus, the Treasury Department and the IRS have determined 
that QTF expenses are included in this exception to the extent that the 
fair market value of the QTF exceeds the section 132(f)(2) limitation 
on exclusion and such excess amount is treated by the taxpayer as 
compensation to the employee on the taxpayer's return of tax under 
chapter 1 and wages to

[[Page 37601]]

such employee for purposes of chapter 24. See Sec.  1.132-9(b), Q/A-8. 
This interpretation is consistent with Congressional intent. See H.R. 
Rep. No. 115-409, at 266 (2017) (``As part of its broader tax reform 
effort, the Committee believes that certain nontaxable fringe benefits 
should not be deductible by employers if not includible in income of 
employees.'').
    Section 274(e)(7) applies to expenses for goods, services, and 
facilities made available by the taxpayer to the general public. 
Section 274(e)(8) applies to expenses for goods or services (including 
the use of facilities) which are sold by the taxpayer in a bona fide 
transaction for an adequate and full consideration in money or money's 
worth.
B. Qualified Parking
    As explained earlier in part 2 of this Background, QTFs are defined 
in section 132(f)(1) to include qualified parking. The term ``qualified 
parking'' is defined in section 132(f)(5)(C) as parking provided 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. The term does not 
include any parking on or near property used by the employee for 
residential purposes.
    On December 24, 2018, the Treasury Department and the IRS published 
Notice 2018-99, 2018-52 I.R.B. 1067, ``Parking Expenses for Qualified 
Transportation Fringes under Sec.  274(a)(4) and Sec.  512(a)(7) of the 
Internal Revenue Code''. Notice 2018-99 explains that the Treasury 
Department and the IRS have received questions about how to determine 
the amount of parking expenses that is nondeductible or treated as 
UBTI. Notice 2018-99 provides interim guidance for taxpayers to 
determine the amount of parking expenses for QTFs that is nondeductible 
under section 274(a)(4) (nondeductible amount) and for tax exempt 
organizations to determine the corresponding increase in the amount of 
UBTI under section 512(a)(7) attributable to the nondeductible parking 
expenses. Because section 512(a)(7) was retroactively repealed, as 
noted in part 1 of this Background, the following discussion of Notice 
2018-99 focuses only on section 274(a)(4).
    Under Notice 2018-99, the method for determining the nondeductible 
amount depends on whether the taxpayer pays a third party to provide 
parking for its employees or the taxpayer owns or leases a parking 
facility where its employees park. If a taxpayer pays a third party an 
amount so that its employees may park at the third party's parking 
facility, the section 274(a)(4) disallowance generally is calculated as 
the taxpayer's total annual cost of employee parking paid to the third 
party. However, if the amount the taxpayer pays to a third party for an 
employee's parking exceeds the section 132(f)(2) monthly limitation on 
exclusion, which for 2020 is $270 per employee, that excess amount 
generally must be treated by the taxpayer as compensation and wages to 
the employee. As a result, the total of the monthly amount in excess of 
$270 per employee that is treated as compensation and wages is excepted 
from the taxpayer's section 274(a) disallowance amount by section 
274(e)(2).
    Notice 2018-99 provides that if a taxpayer owns or leases all or a 
portion of one or more parking facilities where its employees park, the 
section 274(a)(4) disallowance may be calculated using any reasonable 
method and provides a four-step methodology that is deemed to be a 
reasonable method. However, using the value of employee parking to 
determine expenses allocable to employee parking in a parking facility 
owned or leased by the taxpayer is not a reasonable method because 
section 274(a)(4) disallows a deduction for the expense of providing a 
QTF, regardless of its value. Furthermore, for taxable years beginning 
on or after January 1, 2019, a method under Notice 2018-99 that fails 
to allocate expenses to reserved employee spaces cannot be a reasonable 
method.
    For purposes of Notice 2018-99, a ``parking facility'' includes 
indoor and outdoor garages and other structures, as well as parking 
lots and other areas, where employees may park on or near the business 
premises of the employer or on or near a location from which the 
employee commutes to work. The term does not include any parking on or 
near property used by the employee for residential purposes. If a 
taxpayer owns or leases more than one parking facility in a single 
geographic location, the taxpayer may aggregate the number of spaces in 
those parking facilities. However, if a taxpayer owns or leases parking 
facilities in more than one geographic location, the taxpayer may not 
aggregate the spaces in parking facilities that are in different 
geographic locations.
    Also for purposes of Notice 2018-99, ``total parking expenses'' 
include, but are not limited to, repairs, maintenance, utility costs, 
insurance, property taxes, interest, snow and ice removal, leaf 
removal, trash removal, cleaning, landscape costs, parking lot 
attendant expenses, security, and rent or lease payments or a portion 
of a rent or lease payment (if not broken out separately). A deduction 
for an allowance for depreciation on a parking structure owned by a 
taxpayer and used for parking by the taxpayer's employees is an 
allowance for the exhaustion, wear and tear, and obsolescence of 
property, and not a parking expense for purposes of Notice 2018-99. 
Compare section 274(a)(1) (disallowing deductions for any ``item'' with 
respect to entertainment activities or facilities) with section 
274(a)(4) (disallowing deductions for the ``expense'' of any QTF). See 
also W.L. Schautz v. United States, 567 F.2d 373, 376 (Ct. Cl. 1977) 
(noting that section 274(a)(1) applies to deductions broadly, not to 
expenses), and Gordon v. Commissioner, 37 T.C. 986, 987 (1962) (``Any 
allowance for depreciation is not an `expense paid' or `amount paid.' 
''). Expenses paid or incurred for items not located on or in the 
parking facility, including items related to property next to the 
parking facility, such as landscaping or lighting, also are not 
included.
    The term ``employee,'' as used in Notice 2018-99, is defined in 
Sec. Sec.  1.132-1(b)(2)(i) and 1.132-9(b), Q/A-5, as any individual 
who is currently employed by the employer; the term includes common law 
employees and other statutory employees, such as officers of 
corporations. Section 1.132-9(b), Q/A-24, explains that partners, 2-
percent shareholders of S corporations, sole proprietors, and 
independent contractors are not employees for purposes of section 
132(f).
    Notice 2018-99 provides a four-step method deemed to be a 
reasonable method for calculating the amount of parking expenses that 
is nondeductible under section 274(a)(4).
i. Step 1
    First, the taxpayer calculates the disallowance for reserved 
employee spaces. A taxpayer that owns or leases all or a portion of one 
or more parking facilities must identify the number of spaces in the 
parking facility, or the taxpayer's portion thereof, exclusively 
reserved for the taxpayer's employees (reserved employee spaces). 
Employee spaces in the parking facility, or portion thereof, may be 
exclusively reserved for employees by a variety of methods, including, 
but not limited to, specific signage (for example, ``Employee Parking 
Only'') or a separate facility or portion of a facility segregated by a 
barrier to entry or limited by terms of access.
    The taxpayer must then determine the percentage of reserved 
employee spaces in relation to total parking spaces and

[[Page 37602]]

multiply that percentage by the taxpayer's total parking expenses for 
the parking facility. The product is the amount of the deduction for 
total parking expenses that is disallowed under section 274(a)(4) for 
reserved employee spaces.
ii. Step 2
    Second, the taxpayer determines the primary use of remaining spaces 
(primary use test). The taxpayer may identify the remaining parking 
spaces in the parking facility and determine whether their primary use 
is to provide parking to the general public. If the primary use of the 
remaining parking spaces in the parking facility is to provide parking 
to the general public, then the remaining total parking expenses for 
the parking facility are excepted from the section 274(a) disallowance 
by the general public exception under section 274(e)(7).
    For purposes of calculating the disallowance, the term ``primary 
use'' means greater than 50 percent of actual or estimated usage of the 
parking spaces in the parking facility. Primary use of the parking 
spaces is tested during normal business hours on a typical business 
day. Nonreserved parking spaces that are available to the general 
public but empty during normal business hours on a typical business day 
are treated as provided to the general public. In addition, if the 
actual or estimated usage of the parking spaces varies significantly 
between days of the week or times of the year, the taxpayer may use any 
reasonable method to determine the average actual or estimated usage.
    For purposes of Notice 2018-99, the term ``general public'' 
includes, but is not limited to, customers, clients, visitors, 
individuals delivering goods or services to the taxpayer, students of 
an educational institution, patients of a health care facility, and 
congregants of a religious organization. As noted in part 1 of the 
Background, section 512(a)(7) was retroactively repealed, therefore 
``congregants of a religious organization'' is not included in the 
definition of the ``general public'' in these proposed regulations. The 
general public does not include employees, partners, 2-percent 
shareholders of S corporations, or independent contractors of the 
taxpayer.
iii. Step 3
    Third, the taxpayer calculates the allowance for reserved 
nonemployee spaces. If the primary use of a taxpayer's remaining 
parking spaces is not to provide parking to the general public, the 
taxpayer may identify the number of spaces in the parking facility, or 
the taxpayer's portion thereof, exclusively reserved for nonemployees 
(reserved nonemployee spaces). For example, reserved nonemployee spaces 
include spaces reserved for visitors and customers, as well as spaces 
reserved for partners, sole proprietors, and 2-percent shareholders of 
S corporations.
    Notice 2018-99 explains that the number of reserved nonemployee 
spaces in the parking facility, or portion thereof, may be exclusively 
reserved for nonemployees by a variety of methods, including, but not 
limited to, specific signage (for example, ``Customer Parking Only'') 
or a separate facility or portion of a facility segregated by a barrier 
to entry or limited by terms of access. A taxpayer that has no reserved 
nonemployee spaces may proceed to Step 4.
    A taxpayer that has reserved nonemployee spaces may determine the 
percentage of reserved nonemployee spaces in relation to the remaining 
total parking spaces and multiply that percentage by the taxpayer's 
remaining total parking expenses. The product is the amount of the 
deduction for remaining total parking expenses that is not disallowed 
under section 274(a)(4).
iv. Step 4
    Fourth, the taxpayer determines the remaining use and allocable 
expenses of any remaining parking spaces. If the taxpayer completes 
Steps 1 through 3 of the method in Notice 2018-99 and has any remaining 
parking expenses not specifically categorized as deductible or 
nondeductible, the taxpayer must reasonably determine the employee use 
of the remaining parking spaces during normal business hours on a 
typical business day and the related expenses allocable to employee 
parking spaces. Methods to determine employee use of the remaining 
parking spaces may include specifically identifying the number of 
employee spaces based on actual or estimated usage. Actual or estimated 
usage may be based on the number of spaces, the number of employees, 
the hours of use, or other measures.
C. Comments on Notice 2018-99
    Notice 2018-99 requested comments for future guidance to further 
clarify the treatment of QTFs under section 274. In particular, the 
Treasury Department and the IRS requested comments on the definitions 
of ``primary use'' and ``general public'', whether primary use should 
be used to determine the extent to which parking is made available to 
the general public under section 274(e)(7), other methodologies for 
determining the use of the parking spaces and the related expenses 
allocable to employee parking, the applicability of section 274(e)(8) 
to expenses for any goods or services that constitute a QTF sold by the 
taxpayer to an employee in a bona fide transaction for an adequate and 
full consideration in money or money's worth, and the circumstances 
under which such a transaction should be excluded from the term QTF for 
purposes of section 274(a)(4).
    The Treasury Department and the IRS received approximately 500 
comments in response to Notice 2018-99. All comments were considered in 
drafting these proposed regulations and are available at 
www.regulations.gov or upon request. Approximately 200 comments 
addressed issues involving section 512(a)(7), which was retroactively 
repealed, as explained in part 1 of the Background. Approximately 70 
comments expressed support for the disallowance of parking expenses in 
section 274(a)(4) on environmental policy grounds and encouraged the 
Treasury Department and the IRS to further discourage employers from 
subsidizing employees that drive to work. The majority of the remaining 
comments requested additional methodologies and simplified rules for 
taxpayers that own or lease parking facilities to calculate the amount 
of the parking expense disallowance.
    Several of the comments addressing section 274(a)(4) are summarized 
in the Explanation of Provisions. However, comments recommending 
statutory revisions or addressing issues outside the scope of these 
proposed regulations, such as environmental policy issues, are not 
addressed.

Explanation of Provisions

    The proposed regulations describe and clarify the statutory 
requirements of section 274(a)(4) and 274(l), as well as the 
applicability of certain exceptions under section 274(e) to QTF 
expenses. To implement the TCJA's disallowance of deductions for QTF 
expenses under section 274(a)(4), the proposed regulations create a new 
Sec.  1.274-13 (proposed Sec.  1.274-13) to address QTF expenses paid 
or incurred by an employer, and the application of certain exceptions 
in section 274(e) to QTF expenses. Further, the proposed regulations 
create a new Sec.  1.274-14 (proposed Sec.  1.274-14) to address 
transportation and commuting expenses paid or incurred by an employer. 
As discussed in part 2 of the Background, the statutory changes made by 
the TCJA

[[Page 37603]]

apply to QTF expenses paid or incurred by employers after December 31, 
2017.

1. Qualified Transportation Fringes

A. In General
    Proposed Sec.  1.274-13 restates the statutory rules under section 
274(a)(4), defines relevant terms, and modifies certain guidance in 
Notice 2018-99, providing a general rule and three simplified 
methodologies to determine the amount of nondeductible parking expenses 
when a parking facility is owned or leased by the taxpayer. 
Additionally, the proposed regulations build on Notice 2018-99 to 
include rules addressing the deduction disallowance for expenses 
related to providing employees transportation in a commuter highway 
vehicle and transit pass QTFs.
    The proposed regulations include special rules to clarify and 
simplify the calculations underlying the methodologies to determine the 
amount of QTF parking expenses. In addition, the proposed regulations 
generally apply the guidance in Notice 2018-99 and the applicable 
exceptions in section 274(e) to all QTF expenses.
    Specifically, as in Notice 2018-99, the proposed regulations 
provide that if the taxpayer pays a third party for its employee's QTF, 
the section 274(a)(4) disallowance is generally calculated as the 
taxpayer's total annual cost of the QTF paid to the third party. With 
regard to QTF parking expenses, the proposed regulations provide that 
if the taxpayer owns or leases all or a portion of one or more parking 
facilities, the section 274(a)(4) disallowance may be calculated using 
a general rule, as defined below, or any one of three simplified 
methodologies. Taxpayers may choose to apply the general rule or a 
simplified methodology for each taxable year and for each parking 
facility. Special rules and definitions are included in the proposed 
regulations for allocating certain mixed parking expenses, aggregating 
parking spaces by geographic location, removing inventory/unusable 
spaces from available parking spaces, defining general public for 
multi-tenant building parking facilities, and disregarding five or 
fewer reserved parking spaces if the reserved spaces are 5 percent or 
less of total parking spaces. Taxpayers may use statistical sampling 
with the general rule or simplified methodologies if they follow the 
procedures in Rev. Proc. 2011-42, 2011-37 I.R.B. 318, as corrected by 
Ann. 2013-46, 2013-48 I.R.B. 593.
    The general rule in the proposed regulations allows taxpayers to 
calculate the disallowance based on a reasonable interpretation of 
section 274(a)(4). However, taxpayers must use the expense paid or 
incurred in providing a QTF instead of its value to an employee, 
allocate parking expenses to reserved employee spaces, and properly 
apply the exception for parking made available to the general public. A 
special rule for aggregating parking spaces by geographic location may 
be used with the general rule.
    The proposed regulations also include three simplified 
methodologies that taxpayers may use instead of the general rule. Under 
the first simplified methodology, the ``qualified parking limit 
methodology,'' taxpayers calculate the disallowance by multiplying the 
total number of spaces used by employees during the peak demand period, 
or, alternatively, the total number of the taxpayer's employees, by the 
section 132(f)(2) monthly per employee limitation on exclusion for 
qualified parking ($270), for each month in the taxable year.
    The second simplified methodology, the ``primary use methodology,'' 
is largely based on the method deemed reasonable in Notice 2018-99, 
modified in response to comments received. Special rules for allocating 
certain mixed parking expenses and aggregating parking spaces by 
geographic location may be used with the primary use methodology. 
Definitions in Notice 2018-99 for employee, general public, parking 
facility, total parking spaces, reserved employee spaces, reserved 
nonemployee spaces, primary use, and total parking expenses, as 
modified in response to comments, are also included in the proposed 
regulations. New definitions for geographic location, inventory/
unusable spaces, available parking spaces, peak demand period, and 
mixed parking expense are included in the proposed regulations to 
clarify the methodology in response to comments received.
    The final simplified methodology is the ``cost per space 
methodology,'' which allows taxpayers to calculate the disallowance by 
multiplying the cost per parking space by the number of available 
parking spaces to be used by employees during the peak demand period. 
Cost per space is calculated by dividing total parking expenses 
(including expenses for inventory/unusable spaces) by total parking 
spaces (including inventory/unusable spaces). Special rules for 
allocating certain mixed parking expenses and aggregating parking 
spaces by geographic location may be used with the cost per space 
methodology.
B. Definitions
    As described below, the proposed regulations generally include the 
definitions from Notice 2018-99, modified in response to comments 
received, along with new definitions to clarify terms as needed.
i. Qualified Transportation Fringe
    The proposed regulations add a definition for the term ``qualified 
transportation fringe.'' The definition is based on section 132(f)(1), 
except that it does not include qualified bicycle commuting 
reimbursements for the reasons described in part 2 of the Background. 
Thus, the proposed regulations provide that the term ``qualified 
transportation fringe'' means any of the following provided by an 
employer to an employee: Transportation in a commuter highway vehicle 
if such transportation is in connection with travel between the 
employee's residence and place of employment (as described in sections 
132(f)(1)(A) and 132(f)(5)(B)); any transit pass (as described in 
sections 132(f)(1)(B) and 132(f)(5)(A)); or qualified parking (as 
described in sections 132(f)(1)(C) and 132(f)(5)(C)).
ii. Employee
    The proposed regulations include the definition of the term 
``employee,'' which is taken from Sec. Sec.  1.132-1(b)(2)(i) and 
1.132-9(b), Q/A-5 and Q/A-24. Commenters have asked whether volunteers 
are treated as employees under Notice 2018-99, although most of the 
comments concerning the status of volunteers related to section 
512(a)(7), which has been retroactively repealed. The term ``employee'' 
for Federal tax purposes generally is understood to refer to a common-
law employee (although the regulations under section 132 also include 
certain statutory employees such as officers of corporations in the 
definition of employee for purposes of QTFs). Whether a service 
provider is a common-law employee generally turns on whether the 
service recipient has the right to direct and control the service 
provider, not only as to the result to be accomplished by the work but 
also as to the details and means by which that result is accomplished. 
See, e.g., Sec.  31.3121(d)-1(c)(2) of the Employment Taxes and 
Collection of Income Tax at Source Regulations. The determination does 
not depend on whether or how the individual is compensated, or by which 
person. The employment status of a volunteer depends on the facts and 
circumstances in each case. Accordingly, the proposed regulations

[[Page 37604]]

do not address the employment status of volunteers.
iii. General Public
    Commenters raised concerns that, for taxpayers that lease space in 
a multi-tenant building, Notice 2018-99 did not include employees, 
partners, 2-percent shareholders of S corporations, independent 
contractors, clients, or customers of unrelated tenants in the building 
as members of the general public. In response to these comments, the 
proposed regulations modify the definition of the term ``general 
public'' from Notice 2018-99 to include employees, partners, 2-percent 
shareholders of S corporations, sole proprietors, independent 
contractors, clients, or customers of unrelated tenants in multi-tenant 
buildings, as well as customers, clients, or visitors of the taxpayer, 
individuals delivering goods or services to the taxpayer, students of 
an educational institution, and patients of a health care facility.
iv. Parking Facility
    The proposed regulations include a definition of the term ``parking 
facility'' that follows the definition of qualified parking in section 
132(f)(5)(C) and includes one or more indoor or outdoor garages and 
other structures, as well as parking lots and other areas where 
employees may park. Commenters suggested that because qualified parking 
as defined in section 132(f)(5)(C) and Sec.  1.132-9(b), Q/A-4(c) does 
not include any parking on or near property used by the employee for 
residential purposes, including parking for resident employees of 
residential rental buildings, the definition of ``total parking 
spaces'' should exclude such spaces. In response to these comments, the 
proposed regulations specifically exclude parking spaces on or near 
property used by the employee for residential purposes from the 
definition of parking facility.
v. Geographic Location
    Commenters have asked how a geographic location is defined for 
purposes of aggregating the number of parking spaces to determine the 
section 274(a)(4) disallowance using the primary use methodology. 
Specifically, Notice 2018-99 provides that if a taxpayer owns or leases 
more than one parking facility in a single geographic location, the 
taxpayer may aggregate the number of spaces in those parking 
facilities. However, if a taxpayer owns or leases parking facilities in 
more than one geographic location, the taxpayer may not aggregate the 
spaces in parking facilities that are in different geographic 
locations.
    In response to these comments, the proposed regulations add a 
definition of the term ``geographic location'' as contiguous tracts or 
parcels of land owned or leased by the taxpayer. Two or more tracts or 
parcels of land are contiguous if they share common boundaries or would 
share common boundaries but for the interposition of a road, street, 
railroad, stream, or similar property. Tracts or parcels of land which 
touch only at a common corner are not contiguous. The proposed 
regulations follow Notice 2018-99 and allow taxpayers to aggregate the 
number of parking spaces in a single geographic location to determine 
the section 274(a)(4) disallowance using the general rule, primary use 
methodology, or cost per space methodology.
vi. Total Parking Spaces
    The proposed regulations define the term ``total parking spaces'' 
as the total number of parking spaces in the parking facility. New 
terms ``available parking spaces'' and ``inventory/unusable spaces'' 
are added to the proposed regulations and the definition of the term 
``parking facility'' is clarified in response to comments received.
vii. Reserved Employee Spaces
    A commenter recommended that the definition of the term ``reserved 
employee spaces'' be limited to parking spaces actually used by 
employees on a typical business day. Because section 274(a)(4) 
disallows the deduction for the expense of providing a QTF to an 
individual employee, the commenter reasoned that the taxpayer should 
identify the expense for each QTF provided to each individual employee 
when determining the amount that is disallowed.
    After considering the comment, the Treasury Department and the IRS 
have determined that costs allocated to reserved employee spaces should 
be disallowed regardless of actual use of the reserved spaces. However, 
a special rule is included in step 1 of the primary use methodology 
providing that there is no disallowance for reserved employee spaces if 
the primary use of the available parking spaces is to provide parking 
to the general public, there are five or fewer reserved employee 
spaces, and the number of reserved employee spaces is 5 percent or less 
of the total parking spaces in the parking facility.
viii. Reserved Nonemployee Spaces
    A commenter suggested that parking spaces reserved for drivers with 
disabilities be treated as ``reserved nonemployee spaces'' and as such, 
any related expenses not be disallowed under section 274(a)(4). After 
considering the comment, the Treasury Department and the IRS have 
determined that the proposed regulations should not include parking 
spaces reserved for drivers with disabilities in the definition of 
reserved nonemployee spaces. Unlike parking spaces reserved for 
customers or visitors, parking spaces reserved for drivers with 
disabilities may be used by employees (with disabilities), and section 
274(a)(4) would then apply to disallow the expense. Parking spaces 
reserved for drivers with disabilities are also not included in 
``reserved employee spaces'' because they may or may not be exclusively 
reserved for employees.
ix. Inventory/Unusable Spaces
    The Treasury Department and the IRS received questions and comments 
on how parking spaces reserved for, or used by, inventoried vehicles 
are to be treated for purposes of determining the disallowance. For 
example, taxpayers asked whether parking spaces reserved exclusively 
for, or used by, vehicles to be sold or leased to customers at a car 
dealership or car rental agency are treated as spaces available to the 
general public.
    In response to the comments and questions received, the proposed 
regulations add a new definition for the term ``inventory/unusable 
spaces'' that includes parking spaces used for inventoried vehicles, 
qualified nonpersonal use vehicles (as described in Sec.  1.274-5(k)), 
other fleet vehicles used in a taxpayer's trade or business, or 
otherwise not usable for parking by employees.
    Inventory/unusable spaces are specifically excluded from the 
definitions of ``available parking spaces,'' discussed later, and 
``reserved nonemployee spaces,'' discussed earlier, under the primary 
use methodology and primary use test in the proposed regulations. The 
proposed regulations exclude inventory/unusable spaces because those 
spaces are generally not available to employees or the general public 
but are instead used for other purposes. Inventory/unusable spaces are 
included in total parking spaces under the cost per space methodology 
because taxpayers do incur costs in maintaining the spaces.
x. Available Parking Spaces
    The proposed regulations add a new definition for the term 
``available parking spaces'' to clarify that reserved employee spaces 
and inventory/unusable spaces are not included in

[[Page 37605]]

determining primary use under the primary use methodology.
xi. Primary Use
    The Treasury Department and the IRS received numerous comments on 
the primary use test used in step 2 of the four-step method in Notice 
2018-99 to determine the extent to which parking is made available to 
the general public under section 274(e)(7). Notice 2018-99 provides 
that ``primary use'' means greater than 50 percent of actual or 
estimated usage by the general public of the parking spaces in the 
parking facility.
    Several commenters suggested that primary use should mean greater 
than 85, 90, or 95 percent of actual or estimated usage by the general 
public, thereby applying the exception in section 274(e)(7) only to 
taxpayers with less than 15 percent actual or estimated usage by 
employees. Other commenters suggested that 50 percent is fair and 
reasonable.
    After considering the comments received, the Treasury Department 
and the IRS have decided to retain the primary use test as described in 
Notice 2018-99 as a reasonable interpretation of the exception in 
section 274(e)(7) for parking made available to the general public. 
This interpretation is consistent with recent proposed regulations 
addressing the application of the section 274(e)(7) exception to the 
limitation on deduction for meals and entertainment expenses. See 85 FR 
11020 (February 26, 2020). Specifically, the proposed regulations for 
meals and entertainment expenses (proposed Sec.  1.274-11 and Sec.  
1.274-12) include a definition of the term ``primarily consumed'' that 
means greater than 50 percent of actual or reasonably estimated 
consumption.
xii. Total Parking Expenses
    Commenters suggested that safety-related expenses, such as 
lighting, snow and ice removal, leaf removal, trash removal, cleaning, 
and security, should be excluded from the definition of ``total parking 
expenses.'' Commentators reasoned that including the expenses may 
encourage unsafe parking conditions and neglect of care in maintaining 
the parking facilities.
    Commenters also requested the removal of indirect costs, such as 
utility costs, insurance, property taxes, snow and ice removal, leaf 
removal, trash removal, cleaning, parking lot attendant expenses, and 
security. Multiple commenters also suggested adding depreciation to 
total parking expenses, reasoning that these are costs of parking 
facilities.
    After considering the comments received, the Treasury Department 
and the IRS have determined that the proposed regulations should adopt 
the definition of the term ``total parking expenses'' from Notice 2018-
99. Section 274(a)(4) disallows a deduction for the expense of 
providing a QTF, without regard to whether the expense is required for 
safety reasons. Further, QTF parking expenses include indirect costs 
such as allocable salaries for security and maintenance personnel, 
property taxes, repairs and maintenance, etc. See Joint Committee on 
Taxation, General Explanation of Public Law 115-97 (JCS-1-18), at 190, 
December 2018. However, as explained in Notice 2018-99 and in part 2.B. 
of the Background, a deduction for an allowance for depreciation is not 
included in total parking expenses because it is an allowance for the 
exhaustion, wear and tear, and obsolescence of property, and not a 
parking expense.
xiii. Mixed Parking Expense
    Numerous commenters expressed concerns and asked questions about 
how to determine the amount of expenses allocable to a parking facility 
if the invoice does not separate parking facility expenses from 
nonparking facility expenses. Commenters explained that determining and 
allocating expenses may impose excessive and unduly burdensome 
recordkeeping requirements on taxpayers and may be difficult for 
taxpayers and the IRS to administer. Commenters noted that such 
expenses for parking and nonparking property may include rent or lease 
payments, repairs, maintenance, utility costs, insurance, property 
taxes, interest, snow or ice removal, and security. In response to the 
comments, the Treasury Department and the IRS have included in the 
proposed regulations a definition for the term ``mixed parking 
expense'' and a special rule for allocating certain mixed parking 
expenses. ``Mixed parking expense'' is defined as an amount paid or 
incurred by a taxpayer for both a parking facility and nonparking 
facility property that a taxpayer owns or leases. The special rule for 
allocating certain mixed parking expenses to a parking facility is 
explained in part 1.C of this Explanation of Provisions.
xiv. Peak Demand Period
    In these proposed regulations, several of the methodologies for 
determining the section 274(a)(4) disallowance for parking facilities 
require the taxpayer to determine the total number of parking spaces 
used by employees during the peak demand period for employee parking on 
a typical business day. Thus, the proposed regulations provide that for 
purposes of proposed Sec.  1.274-13, the term ``peak demand period'' 
means the period of time on a typical business day when the greatest 
number of the taxpayer's employees are utilizing parking spaces in the 
taxpayer's parking facility. If a taxpayer's employees work in shifts, 
the peak demand period would take into account the shift during which 
the largest number of employees park in the taxpayer's parking 
facility. However, a brief transition period during which two shifts 
overlap in their use of parking spaces, as one shift of employees is 
getting ready to leave and the next shift is reporting to work, may be 
disregarded. Taxpayers may use any reasonable methodology to determine 
the total number of spaces used by employees during the peak demand 
period on a typical business day, for example based on periodic 
inspections or employee surveys.
    The recent Coronavirus Disease (COVID-19) pandemic highlights that 
taxpayers may experience significant variations in employee parking 
during the taxable year due to a national emergency or other type of 
disaster. The Treasury Department and the IRS request comments on what 
additional rules, if any, are needed to address significant variations 
in employee parking during the taxable year and whether any additional 
rules should apply to all taxpayers generally or should be triggered 
only upon certain events.
C. Special Rules for QTF Parking Expenses
    Multiple commenters expressed concerns and asked questions 
regarding how to allocate mixed parking expenses. Commenters suggested 
the use of a special rule that would allow the taxpayer to allocate a 
certain percentage of the taxpayer's mixed parking expenses, such as 5 
percent, to a parking facility. Commenters also recommended that 
taxpayers be permitted to allocate mixed parking expenses by comparing 
rent or lease payments for leases with and without parking facilities 
or comparing the value of similar nonparking facilities with and 
without parking facilities.
    In response to concerns raised by commenters, the proposed 
regulations include a special rule for certain mixed parking expenses 
to reduce administrative burdens for taxpayers and simplify 
calculations in complying with section 274(a)(4). Specifically, the 
proposed regulations provide that a

[[Page 37606]]

taxpayer may choose to allocate 5 percent of certain mixed parking 
expenses to the parking facility. This special rule applies to mixed 
parking expenses related to payments under a lease or rental agreement, 
and payments for utilities, insurance, interest and property taxes. The 
special rule to allocate certain mixed parking expenses may only be 
used in the primary use methodology and cost per space methodology and 
may not be used with the general rule or the qualified parking limit 
methodology. Taxpayers are not required to use the special rule for 
certain mixed parking expenses and may instead use any reasonable 
methodology for mixed parking expenses.
    The proposed regulations also include a special rule allowing 
taxpayers to aggregate the number of parking spaces in a single 
geographic location. The rule generally follows the rule in Notice 
2018-99, but in response to comments adds a definition of the term 
``geographic location,'' which is based on tracts or parcels of land 
that are contiguous. The special rule for aggregation of parking spaces 
in a single geographic location may be used with the general rule, 
primary use methodology, and cost per space methodology, but may not be 
used with the qualified parking limit methodology.
D. Calculation of Disallowance of QTF Parking Expenses
    The proposed regulations follow Notice 2018-99 and provide that if 
a taxpayer pays one or more third parties an amount for its employees' 
QTFs, the section 274(a)(4) disallowance is equal to the taxpayer's 
total annual cost for the QTFs paid or incurred to third parties. A 
commenter suggested that if a taxpayer pays a third party for parking 
spaces that are not assigned to specific employees, some of which are 
not used (for example, taxpayer leases 10 spaces and only has 8 
employees), the disallowance should be limited to parking spaces 
actually used by employees on a typical business day. After considering 
the comment, the Treasury Department and the IRS determined that 
amounts paid to a third party for qualified parking in such situations 
should be disallowed regardless of actual employee use of the spaces 
because the taxpayer paid or incurred the expense for its employees' 
QTFs regardless of employee use.
    If instead, the taxpayer owns or leases a parking facility, the 
taxpayer may use the general rule or choose any of the following three 
simplified methodologies for each parking facility to determine the 
section 274(a)(4) disallowance for each taxable year.
i. General Rule
    Multiple commenters requested guidance on additional methodologies 
that may be used to calculate the disallowance under section 274(a)(4). 
In response to these comments, the Treasury Department and the IRS 
determined that taxpayers may calculate the disallowance using a 
general rule if the calculation is based on a reasonable interpretation 
of section 274(a)(4), as long as the taxpayer's methodology does not 
use the value of a QTF instead of its expense, fail to allocate parking 
expense to reserved employee spaces, or improperly apply the exception 
for qualified parking made available to the public (for example, by 
treating a parking facility regularly used by employees as available to 
the public merely because the public has access to the parking 
facility).
ii. Qualified Parking Limit Methodology
    Multiple commenters suggested that a standard cost per parking 
space similar to the standard mileage rate or per diem rate be used to 
determine the disallowance under section 274(a)(4). Other commenters 
suggested that a national average fair market value per parking space 
be used.
    In response to the comments received, the Treasury Department and 
the IRS have determined that the maximum monthly dollar amount under 
section 132(f)(2), adjusted for inflation, may be used as a simple 
estimate of the taxpayer's monthly total cost per parking space. The 
adjusted maximum monthly excludable amount for 2020 is $270 per 
employee. Using the qualified parking limit methodology, taxpayers may 
determine the disallowance simply by multiplying the section 132(f)(2) 
monthly per employee limitation on the exclusion by the total number of 
spaces used by employees during the peak demand period. Alternatively, 
the proposed regulations provide that taxpayers using this methodology 
may instead multiply the section 132(f)(2) monthly per employee 
limitation on the exclusion by the total number of the taxpayer's 
employees.
    Section 274(e)(2) and proposed Sec.  1.274-13(e)(2)(i) provide that 
the section 274(a)(4) disallowance for QTFs does not apply to the 
extent that a QTF is treated as compensation to an employee on the 
taxpayer's return and as wages to the employee. A taxpayer using this 
qualified parking limit methodology who has monthly expenses per 
parking space exceeding the section 132(f)(2) monthly per employee 
limitation on the exclusion can deduct those excess expenses without 
regard to how much (if any) of the value of the parking space to the 
employee exceeds the section 132(f)(2) monthly per employee limitation 
on exclusion. However, these proposed regulations provide that the 
qualified parking limit methodology may be used only if the value of 
the QTF, to the extent it exceeds the sum of the amount paid (if any) 
by the employee for the QTF and the applicable statutory monthly limit 
in section 132(f)(2), is included on the taxpayer's Federal income tax 
return as originally filed as compensation paid to the employee and as 
wages to the employee for purposes of withholding under chapter 24 
(relating to collection of Federal income tax at source on wages).
    Section 132(a)(5) excludes from gross income the value of a QTF up 
to the section 132(f)(2) monthly per employee limitation on exclusion, 
and therefore no amount for the value of QTFs up to the section 
132(f)(2) monthly limitation can be included in an employee's wages. 
Thus, the exception in section 274(e)(2) and proposed Sec.  1.274-
13(e)(2)(i)(A) cannot be applied to the value of a QTF that is less 
than or equal to the monthly per employee limitation on exclusion in 
section 132(f)(2). Because this qualified parking limit methodology 
already limits the taxpayer's expenses per parking space to the section 
132(f)(2) monthly per employee limitation on exclusion, section 
274(e)(2) cannot be used to reduce the disallowed expenses even 
further. For this reason, the proposed regulations provide that the 
exception to the disallowance for amounts treated as employee 
compensation provided for in section 274(e)(2) and in proposed Sec.  
1.274-13(e)(2)(i) cannot be applied to reduce a section 274(a)(4) 
disallowance calculated using this method.
iii. Primary Use Methodology
    The Treasury Department and the IRS received numerous comments on 
the four-step method in Notice 2018-99. The proposed regulations adopt 
the four-step method in Notice 2018-99, with revisions in response to 
comments, and rename it as the ``primary use methodology.'' Comments 
received on the definition of primary use in Notice 2018-99 are 
discussed in part 1.B.xi. of this Explanation of Provisions.
    The four-step method in Notice 2018-99 provides that employee use 
of parking spaces is determined by identifying the actual or estimated 
usage of the parking spaces during normal business hours on a typical 
business day. Multiple commenters suggested

[[Page 37607]]

that taxpayers should instead be required to count the number of 
parking spaces in the parking facility actually used by employees. The 
Treasury Department and the IRS considered these comments and 
determined that, to ease the burden of counting actual spaces used by 
employees and provide a clearer standard, taxpayers must identify the 
number of available parking spaces used by employees during the peak 
demand period.
iv. Cost Per Space Methodology
    Multiple commenters stated that the four-step method in Notice 
2018-99 is cumbersome and complex. As an alternative, the Treasury 
Department and the IRS include in the proposed regulations the cost per 
space methodology, which allows taxpayers to calculate the disallowance 
by multiplying the cost per space by the number of spaces used by 
employees. Taxpayers must identify the number of available parking 
spaces used by employees during the peak demand period. Cost per space 
is calculated by dividing total parking expenses (including expenses 
related to inventory/unusable spaces) by the total number of spaces 
(including inventory/unusable spaces).
v. Expenses for Transportation in a Commuter Highway Vehicle and 
Transit Pass QTFs
    Notice 2018-99 addresses only expenses related to parking QTFs. The 
proposed regulations include rules addressing the disallowance of 
deductions for expenses for transportation in a commuter highway 
vehicle and transit pass QTFs, as well as the applicability of certain 
exceptions under section 274(e).
E. Specific Exceptions to Section 274(a) for QTF Expenses
    The Treasury Department and the IRS received multiple questions and 
comments about whether the exceptions in section 274(e) apply to QTF 
expenses that are otherwise nondeductible under section 274(a)(4). 
Section 274(e) provides that the deduction disallowance under section 
274(a) does not apply to any expense described in section 274(e). The 
Treasury Department and the IRS considered the comments and note that 
while section 274(e) was not amended by the TCJA, it provides that 
section 274(a) ``shall not apply to'' deductions for expenses described 
in section 274(e). Therefore, except as described in part 1.E.i. of 
this Explanation of Provisions, the proposed regulations provide that 
the deduction disallowance does not apply to expenditures for QTFs that 
meet the requirements of sections 274(e)(2), (7) and (8).
    Numerous commenters also recommended providing exceptions from the 
section 274(a)(4) disallowance for QTFs with a zero or a de minimis 
fair market value, QTFs required to be provided to employees under 
certain laws, or QTFs provided by small business taxpayers. Exceptions 
for QTFs with a zero or a de minimis fair market value, QTFs required 
under certain laws, and small business taxpayers are not provided for 
in any of the exceptions under section 274(e) and therefore are not 
exceptions to the section 274(a)(4) disallowance.
i. Certain QTF Expenses Treated as Compensation Under Section 274(e)(2)
    Pursuant to section 274(e)(2), the proposed regulations provide 
that the disallowance under section 274(a) does not apply to 
expenditures for QTFs to the extent the taxpayer treats the expenses as 
compensation to the employee on the taxpayer's Federal income tax 
return as originally filed, and as wages to the employee for purposes 
of withholding under chapter 24 relating to collection of Federal 
income tax at source on wages. However, section 132(a)(5) excludes the 
value of QTFs from an employee's gross income subject to the 
limitations on exclusion provided by section 132(f)(2). Therefore, in 
determining whether the section 274(e)(2) exception for expenses 
treated as compensation applies, the proposed regulations provide that 
the exception in section 274(e)(2) does not apply to expenses paid or 
incurred for QTFs the value of which (including a purported value of 
zero) is excluded from an employee's gross income under section 
132(a)(5).
    The Treasury Department and the IRS are aware that some taxpayers 
may attempt to claim a deduction under section 274(e)(2) by including a 
value that is less than the amount required to be included under Sec.  
1.61-21, which provides the rules for valuation of fringe benefits, or 
by including a purported value of zero, as compensation and as wages to 
the employee. The proposed regulations therefore provide that the 
exception in section 274(e)(2) does not apply to expenses paid or 
incurred for QTFs for which the value that is included in gross income 
is less than the amount required to be included in gross income under 
Sec.  1.61-21. Similarly, if the amount required to be included in 
gross income under Sec.  1.61-21 is purportedly zero, the exception in 
section 274(e)(2) and proposed Sec.  1.274-13(e)(2)(i) does not apply.
    As noted above, section 132(a)(5) excludes the value of QTFs from 
an employee's gross income subject to the monthly per employee 
limitations on exclusion provided by section 132(f)(2). Section 
132(f)(2) provides that the amount of QTFs that can be excluded from 
gross income cannot exceed a maximum monthly dollar amount, adjusted 
for inflation. For taxable years beginning in 2020, the monthly per 
employee limitation under section 132(f)(2)(A) regarding the aggregate 
fringe benefit exclusion amount for transportation in a commuter 
highway vehicle and any transit pass is $270 per employee. The monthly 
limitation under section 132(f)(2)(B) regarding the fringe benefit 
exclusion amount for qualified parking is $270 per employee. Rev. Proc. 
2019-44, 2019-47 I.R.B. 1093. Therefore, if an employer provides an 
employee with QTFs, the value of which exceeds the sum of the amount, 
if any, paid by the employee for the fringe benefits and the applicable 
statutory monthly per employee limit, then the employer must include 
the value of the benefits provided in excess of the amount paid by the 
employee and the applicable statutory per employee monthly limit in the 
employee's wages for income and employment tax purposes. See Sec.  
1.61-21(b)(1) and Sec.  1.132-9(b), Q/A-8. The proposed regulations 
provide that the employer must follow this treatment in order to rely 
on the exception in section 274(e)(2).
ii. Expenses for Transportation in a Commuter Highway Vehicle, Transit 
Pass, or Parking Made Available to the Public
    As noted in part 2.A. of the Background, section 274(e)(7) applies 
to expenses for goods, services, and facilities made available by the 
taxpayer to the general public. When enacting section 274(n) in 1986 
(limiting the deduction for meal and entertainment expenses), Congress 
indicated that a taxpayer's customers and potential customers are 
members of the general public for purposes of section 274(e)(7):

    The reduction rule [in section 274(n)] does not apply in the 
case of items, such as samples and promotional activities, that are 
made available to the general public. For example, if the owner of a 
hardware store advertises that tickets to a baseball game will be 
provided to the first 50 people who visit the store on a particular 
date, or who purchase an item from the store during a sale, then the 
full amount of the face value of the tickets is deductible by the 
owner.

H.R. Rep. No. 99-426 (1986), reprinted in 1986-3 (Vol. 2) C.B. 1, 124, 
and S. Rep. No. 99-313 (1986), reprinted in

[[Page 37608]]

1986-3 (Vol. 3) C.B. 1, 72. Thus, the Treasury Department and the IRS 
have determined that expenses for transportation in a commuter highway 
vehicle, any transit pass, and parking that otherwise qualify as QTFs 
and are made available to the general public, which includes a 
taxpayer's customers and potential customers, are within this 
exception. However, goods, services, and facilities are not made 
available to the general public if they are made available only to an 
exclusive list of guests. See Churchill Downs, Inc. v. Commissioner, 
307 F.3d 423 (6th Cir. 2002).
    Pursuant to section 274(e)(7), the proposed regulations provide 
that any taxpayer expense for transportation in a commuter highway 
vehicle, a transit pass, or parking that otherwise qualifies as a QTF 
under section 132(f)(1) and that is also made available to the general 
public is not subject to the deduction disallowance under section 
274(a) to the extent such transportation, transit pass, or parking is 
made available to the general public. As described further in part 
1.B.iii. of this Explanation of Provisions, ``general public'' 
includes, but is not limited to, customers, clients, visitors, 
individuals delivering goods or services to the taxpayer, and patients 
of a health care facility. The general public does not include 
employees, partners, 2-percent shareholders of S corporations, sole 
proprietors, or independent contractors of the taxpayer. If a taxpayer 
owns or leases space in a multi-tenant building, employees, partners, 
2-percent shareholders of S corporations, sole proprietors, independent 
contractors or customers of unrelated tenants in the building are 
included in the definition of general public.
iii. Expenses for Transportation in a Commuter Highway Vehicle, Transit 
Pass, or Parking Sold to Customers
    As noted in part 2.A. of the Background, section 274(e)(8) applies 
to expenses for goods or services (including the use of facilities) 
that are sold by the taxpayer in a bona fide transaction for an 
adequate and full consideration in money or money's worth. The Treasury 
Department and the IRS have determined that expenses for transportation 
in a commuter highway vehicle, any transit pass, and parking that 
otherwise qualify as QTFs and that are sold by a taxpayer fall within 
this exception.
    Pursuant to section 274(e)(8), the proposed regulations provide 
that any taxpayer expense for transportation in a commuter highway 
vehicle, a transit pass, or parking that otherwise qualifies as a QTF 
under section 132(f)(1) that is sold to customers in a bona fide 
transaction for an adequate and full consideration in money or money's 
worth is not subject to the deduction disallowance under section 
274(a). The proposed regulations also provide that for purposes of this 
section, the term ``customer'' includes an employee of the taxpayer who 
purchases the transportation in a commuter highway vehicle, transit 
pass, or parking in a bona fide transaction for an adequate and full 
consideration in money or money's worth.
    Some commenters have stated that QTFs offered through a 
compensation reduction agreement should not be subject to the 
disallowance under section 274(a)(4) because an employer should not be 
disallowed a deduction for expenses for otherwise deductible 
compensation when an employee chooses to use that compensation towards 
the purchase of a QTF through a compensation reduction agreement. 
Pursuant to section 132(f)(4), no amount for a QTF is included in the 
gross income of an employee solely because the employee can choose 
between any QTF (other than a qualified bicycle commuting 
reimbursement) and compensation that would otherwise be includible in 
the employee's gross income. Thus, an employee who is offered this 
choice and who elects QTFs is not required to include the foregone cash 
compensation in income if the election is made pursuant to a 
compensation reduction agreement and the relevant requirements are met. 
See Sec.  1.132-9(b), Q/A-11 through 15. In other words, an employer 
who provides an employee a QTF through a compensation reduction 
agreement is incurring an expense for an excludible QTF (assuming the 
relevant requirements are met), rather than an expense for the 
compensation that was reduced. Therefore, the Treasury Department and 
the IRS do not adopt this approach because a QTF is subject to the 
section 274(a)(4) disallowance regardless of whether the benefit is 
provided by the employer in-kind, through a bona fide cash 
reimbursement arrangement, or through a compensation reduction 
agreement.

2. Transportation and Commuting Expenses

    Proposed Sec.  1.274-14 addresses the disallowance of deductions 
under section 274(l) for amounts paid or incurred after December 31, 
2017, for any expense incurred to provide any transportation, or any 
payment or reimbursement, to an employee of the taxpayer in connection 
with travel between the employee's residence and place of employment, 
except as necessary for ensuring the safety of the employee. Travel 
between the employee's residence and place of employment includes 
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.
    Responding to comments received, the proposed regulations provide a 
definition for an employee's ``residence,'' referencing the definition 
of the term ``residence'' in Sec.  1.121-1(b)(1). Under Sec.  1.121-
1(b)(1), whether property is used by the taxpayer as the taxpayer's 
residence depends upon all the facts and circumstances. A property used 
by the taxpayer as the taxpayer's residence may 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. 
The proposed regulations also define the term ``safety of the 
employee,'' referencing the description of a bona fide business-
oriented security concern in Sec.  1.132-5(m).
    Commentators have asked whether section 274(l) applies to expenses 
for QTFs provided to an employee of the taxpayer for which a deduction 
would be disallowed under section 274(a)(4) except that one of the 
exceptions under section 274(e) applies. The Treasury Department and 
the IRS have determined that section 274(l) does not apply to 
deductions for such expenses.
    The Treasury Department and the IRS also received comments 
suggesting that the exception in section 274(e)(2) for expenses treated 
as compensation should apply to section 274(l) transportation and 
commuting expenses. However, 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). The Joint Committee on 
Taxation's Bluebook on the TCJA confirms that the exception in section 
274(e)(2) does not apply to section 274(l) expenses:

    The provision is intended to include qualified transportation 
fringe expenses in the exception to the deduction disallowance for 
expenses that are treated as compensation. Any expenses incurred for 
providing any form of transportation which are not qualified 
transportation fringes (or any payment or reimbursement) for 
commuting between the employee's residence and place or employment, 
even if included in compensation, are not eligible for this 
exception.


[[Page 37609]]


Joint Committee on Taxation, General Explanation of Public Law 115-97 
(JCS-1-18), at 190, December 2018. Thus, the proposed regulations do 
not apply the section 274(e)(2) exception to section 274(l) expenses.

Request for Comments

    The Treasury Department and the IRS request comments on all aspects 
of these proposed regulations. Regarding QTF parking expenses under 
proposed Sec.  1.274-13, comments are specifically requested on other 
methodologies for determining the use of parking spaces and the related 
expenses allocable to employee parking. Comments are also requested on 
additional guidance needed to determine the amount of commuter highway 
vehicle and transit pass expenses for QTFs that is nondeductible under 
section 274(a)(4), including whether any specific examples should be 
addressed. Regarding transportation and commuting expenses under 
proposed Sec.  1.274-14, comments are specifically requested on 
additional guidance needed to determine whether transportation is 
necessary for ensuring the safety of the employee, and how to define an 
employee's residence and place of employment. Comments are also 
requested on whether any specific examples of transportation and 
commuting expenses should be addressed.

Proposed Applicability Date

    These regulations are proposed to apply for taxable years beginning 
on or after the date these regulations are published as final 
regulations in the Federal Register. Pending the issuance of the final 
regulations, a taxpayer may rely on these proposed regulations for QTF 
expenses and transportation and commuting expenses, as applicable, that 
are paid or incurred in taxable years beginning after December 31, 
2017. Alternatively, a taxpayer may choose to rely on the guidance in 
Notice 2018-99 until these proposed regulations are finalized.

Special Analyses

    These proposed regulations are not subject to review under section 
6(b) of Executive Order 12866 pursuant to the Memorandum of Agreement 
(April 11, 2018) between the Treasury Department and the Office of 
Management and Budget regarding review of tax regulations.
    In accordance with the Regulatory Flexibility Act (5 U.S.C. chapter 
6), it is hereby certified that this proposed rule will not have a 
significant economic impact on a substantial number of small entities. 
Although the rule may affect a substantial number of small entities, 
the economic impact of the regulations is not likely to be significant. 
Data are not readily available about the number of taxpayers affected, 
but the number is likely to be substantial for both large and small 
entities because the rule affects any entity that provides QTFs or 
certain commuting benefits to employees. The economic impact of these 
regulations is not likely to be significant, however, because these 
proposed regulations substantially incorporate prior guidance and 
otherwise clarify the application of the TCJA changes to section 274 
related to QTFs and certain commuting benefits. The proposed 
regulations will assist taxpayers in understanding the changes to 
section 274 and make it easier for taxpayers to comply with those 
changes. Notwithstanding this certification, the Treasury Department 
and the IRS welcome comments on the impact of these regulations on 
small entities.
    Pursuant to section 7805(f), these proposed regulations have been 
submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on their impact on small business.

Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) 
requires that agencies assess anticipated costs and benefits and take 
certain other actions before issuing a final rule that includes any 
Federal mandate that may result in expenditures in any one year by a 
state, local, or tribal government, in the aggregate, or by the private 
sector, of $100 million (updated annually for inflation). This rule 
does not include any Federal mandate that may result in expenditures by 
state, local, or tribal governments, or by the private sector in excess 
of that threshold.

Executive Order 13132: Federalism

    Executive Order 13132 (entitled ``Federalism'') prohibits an agency 
from publishing any rule that has federalism implications if the rule 
either imposes substantial, direct compliance costs on state and local 
governments, and is not required by statute, or preempts state law, 
unless the agency meets the consultation and funding requirements of 
section 6 of the Executive order. This proposed rule does not have 
federalism implications and does not impose substantial direct 
compliance costs on state and local governments or preempt state law 
within the meaning of the Executive order.

Comments and Requests for a Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any comments that are submitted timely 
to the IRS as prescribed in this preamble under the ADDRESSES heading. 
Any electronic comments submitted, and to the extent practicable any 
paper comments submitted, will be made available at https://www.regulations.gov or upon request.
    A public hearing will be scheduled if requested in writing by any 
person who timely submits electronic or written comments. Requests for 
a public hearing are also encouraged to be made electronically and can 
also be made as prescribed in this preamble under the ADDRESSES 
heading. If a public hearing is scheduled, notice of the date and time 
for the public hearing will be published in the Federal Register. 
Announcement 2020-4, 2020-17 IRB 1, provides that until further notice, 
public hearings conducted by the IRS will be held telephonically. Any 
telephonic hearing will be made accessible to people with disabilities.

Statement of Availability of IRS Documents

    IRS Revenue Procedures, Revenue Rulings, and Notices cited in this 
preamble are published in the Internal Revenue Bulletin (or Cumulative 
Bulletin) and are available from the Superintendent of Documents, U.S. 
Government Publishing Office, Washington, DC 20402, or by visiting the 
IRS website at https://www.irs.gov.

Drafting Information

    The principal author of this proposed regulation is Patrick 
Clinton, Office of the Associate Chief Counsel (Income Tax & 
Accounting). Other personnel from the Treasury Department and the IRS 
participated in their development.

List of Subjects in 26 CFR Part 1

    Income Taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAX

0
Paragraph 1. The authority citation for part 1 is amended by adding 
sectional authorities for Sec. Sec.  1.274-13 and 1.274-14 in numerical 
order to read in part as follows:

    Authority:  26 U.S.C. 7805.
* * * * *

[[Page 37610]]

    Section 1.274-13 also issued under 26 U.S.C. 274.
    Section 1.274-14 also issued under 26 U.S.C. 274.
* * * * *
0
Par. 2. Sections 1.274-13 and 1.274-14 are added to read as follows:


Sec.  1.274-13  Disallowance of deductions for certain qualified 
transportation fringe expenditures.

    (a) In general. Except as provided in this section, no deduction 
otherwise allowable under chapter 1 of the Internal Revenue Code (Code) 
is allowed for any expense of any qualified transportation fringe as 
defined in paragraph (b)(1) of this section.
    (b) Definitions. The following definitions apply for purposes of 
this section:
    (1) Qualified transportation fringe. The term qualified 
transportation fringe means any of the following provided by an 
employer to an employee: Transportation in a commuter highway vehicle 
if such transportation is in connection with travel between the 
employee's residence and place of employment (as described in sections 
132(f)(1)(A) and 132(f)(5)(B)); any transit pass (as described in 
sections 132(f)(1)(B) and 132(f)(5)(A)); or qualified parking (as 
described in sections 132(f)(1)(C) and 132(f)(5)(C)).
    (2) Employee. The term employee means a common law employee or 
other statutory employee, such as an officer of a corporation, who is 
currently employed by the taxpayer. See Sec.  1.132-9 Q/A-5. Partners, 
2-percent shareholders of S corporations, sole proprietors, and 
independent contractors are not employees of the taxpayer for purposes 
of this section.
    (3) General public. The term general public includes, but is not 
limited to, customers, clients, visitors, individuals delivering goods 
or services to the taxpayer, students of an educational institution, 
and patients of a health care facility. If a taxpayer owns or leases 
space in a multi-tenant building, the term general public includes 
employees, partners, 2-percent shareholders of S corporations, sole 
proprietors, independent contractors, clients, or customers of 
unrelated tenants in the building. The term general public does not 
include individuals that are employees, partners, 2-percent 
shareholders of S corporations, sole proprietors, or independent 
contractors of the taxpayer. Also, an exclusive list of guests is not 
the general public.
    (4) Parking facility. The term parking facility includes indoor and 
outdoor garages and other structures, as well as parking lots and other 
areas, where a taxpayer provides qualified parking (as defined in 
section 132(f)(5)(C)) to one or more of its employees. The term parking 
facility may include one or more parking facilities but does not 
include parking spaces on or near property used by an employee for 
residential purposes.
    (5) Geographic location. The term geographic location means 
contiguous tracts or parcels of land owned or leased by the taxpayer. 
Two or more tracts or parcels of land are contiguous if they share 
common boundaries or would share common boundaries but for the 
interposition of a road, street, railroad, stream, or similar property. 
Tracts or parcels of land which touch only at a common corner are not 
contiguous.
    (6) Total parking spaces. The term total parking spaces means the 
total number of parking spaces, or the taxpayer's portion thereof, in 
the parking facility.
    (7) Reserved employee spaces. The term reserved employee spaces 
means the spaces in the parking facility, or the taxpayer's portion 
thereof, exclusively reserved for the taxpayer's employees. Employee 
spaces in the parking facility, or portion thereof, may be exclusively 
reserved for employees by a variety of methods, including, but not 
limited to, specific signage (for example, ``Employee Parking Only'') 
or a separate facility or portion of a facility segregated by a barrier 
to entry or limited by terms of access. Inventory/unusable spaces are 
not included in reserved employee spaces.
    (8) Reserved nonemployee spaces. The term reserved nonemployee 
spaces means the spaces in the parking facility, or the taxpayer's 
portion thereof, exclusively reserved for nonemployees. For example, 
such parking spaces may include, but are not limited to, spaces 
reserved exclusively for visitors, customers, partners, sole 
proprietors, 2-percent shareholders of S corporations, vendor 
deliveries, and passenger loading/unloading. Nonemployee spaces in the 
parking facility, or portion thereof, may be exclusively reserved for 
nonemployees by a variety of methods, including, but not limited to, 
specific signage (for example, ``Customer Parking Only'') or a separate 
facility, or portion of a facility, segregated by a barrier to entry or 
limited by terms of access. Inventory/unusable spaces are not included 
in reserved nonemployee spaces.
    (9) Inventory/unusable spaces. The term inventory/unusable spaces 
means the spaces in the parking facility, or the taxpayer's portion 
thereof, exclusively used or reserved for inventoried vehicles, 
qualified nonpersonal use vehicles described in Sec.  1.274-5(k), or 
other fleet vehicles used in the taxpayer's business, or that are 
otherwise not usable for parking by employees. Examples of such parking 
spaces include, but are not limited to, parking spaces for vehicles 
that are intended to be sold or leased at a car dealership or car 
rental agency, parking spaces for vehicles owned by an electric utility 
used exclusively to maintain electric power lines, or parking spaces 
occupied by trash dumpsters (or similar property).
    (10) Available parking spaces. The term available parking spaces 
means the total parking spaces, less reserved employee spaces and less 
inventory/unusable spaces, that are available to employees and the 
general public.
    (11) Primary use. The term primary use means greater than 50 
percent of actual or estimated usage of the available parking spaces in 
the parking facility.
    (12) Total parking expenses. The term total parking expenses means 
all expenses of the taxpayer related to total parking spaces in a 
parking facility including, but not limited to, repairs, maintenance, 
utility costs, insurance, property taxes, interest, snow and ice 
removal, leaf removal, trash removal, cleaning, landscape costs, 
parking lot attendant expenses, security, and rent or lease payments or 
a portion of a rent or lease payment (if not broken out separately). A 
deduction for an allowance for depreciation on a parking facility owned 
by a taxpayer and used for parking by the taxpayer's employees is an 
allowance for the exhaustion, wear and tear, and obsolescence of 
property, and not included in total parking expenses for purposes of 
this section. Expenses paid or incurred for nonparking facility 
property, including items related to property next to the parking 
facility, such as landscaping or lighting, also are not included in 
total parking expenses.
    (13) Mixed parking expense. The term mixed parking expense means a 
single expense amount paid or incurred by a taxpayer that includes both 
parking facility and nonparking facility expenses for a property that a 
taxpayer owns or leases.
    (14) Peak demand period. The term peak demand period refers to the 
period of time on a typical business day when the greatest number of 
the taxpayer's employees are utilizing parking spaces in the taxpayer's 
parking facility. If a taxpayer's employees work in shifts, the peak 
demand period would take into account the shift during which the 
largest number of employees park in the taxpayer's parking facility. 
However, a brief transition period during which two

[[Page 37611]]

shifts overlap in their use of parking spaces, as one shift of 
employees is getting ready to leave and the next shift is reporting to 
work, may be disregarded. Taxpayers may use any reasonable methodology 
to determine the total number of spaces used by employees during the 
peak demand period on a typical business day. A reasonable methodology 
may include periodic inspections or employee surveys.
    (c) Special rules for calculating disallowance of deductions for 
qualified transportation fringe parking expenses; taxpayer owned or 
leased parking facilities. Either or both of the following special 
rules may be used for determining total parking expenses and total 
parking spaces in calculating the disallowance of deductions for 
qualified transportation fringe parking expenses under the 
methodologies in paragraph (d)(2)(ii)(B) and (C) of this section. The 
special rule in paragraph (c)(2) of this section may be used for 
determining total parking spaces in calculating the disallowance of 
deductions for qualified transportation fringe parking expenses under 
the methodology in paragraph (d)(2)(i) of this section.
    (1) Calculation of mixed parking expenses. For purposes of 
determining total parking expenses, a taxpayer may use any reasonable 
methodology to allocate the applicable portion of mixed parking 
expenses to a parking facility. A taxpayer may choose to allocate 5 
percent of the following mixed parking expenses to a parking facility: 
Lease or rental agreement expenses, property taxes, interest expense, 
and expenses for utilities and insurance.
    (2) Aggregation of spaces by geographic location. If a taxpayer 
owns or leases more than one parking facility in a single geographic 
location, the taxpayer may aggregate the number of spaces in those 
parking facilities for purposes of calculating the disallowance of 
deductions for certain qualified transportation fringe expenses. For 
example, parking spaces at an office park or an industrial complex in 
the geographic location may be aggregated. However, a taxpayer may not 
aggregate parking spaces in parking facilities that are in different 
geographic locations.
    (d) Calculation of disallowance of deductions for qualified 
transportation fringe expenses--(1) Taxpayer pays a third party for 
parking qualified transportation fringe. If a taxpayer pays a third 
party an amount for its employees' parking qualified transportation 
fringe, the section 274(a)(4) disallowance generally is calculated as 
the taxpayer's total annual cost of employee parking qualified 
transportation fringes paid to the third party.
    (2) Taxpayer provides parking qualified transportation fringe at a 
parking facility it owns or leases. If a taxpayer owns or leases all or 
a portion of one or more parking facilities where its employees park, 
the section 274(a)(4) disallowance may be calculated using the general 
rule in paragraph (d)(2)(i) of this section or any of the simplified 
methodologies in paragraph (d)(2)(ii) of this section. A taxpayer may 
choose to use the general rule or any of the following methodologies 
for each taxable year and for each parking facility.
    (i) General rule. A taxpayer that uses the general rule in this 
paragraph (d)(2)(i) must calculate the disallowance of deductions for 
qualified transportation fringe parking expenses for each employee 
receiving the qualified transportation fringe based on a reasonable 
interpretation of section 274(a)(4). A taxpayer that uses the general 
rule in this paragraph (d)(2)(i) may not use the special rule in 
paragraph (c)(1) of this section but may use the special rule in 
paragraph (c)(2) of this section. An interpretation of section 
274(a)(4) is not reasonable unless the taxpayer applies the following 
rules when calculating the disallowance under this paragraph (d)(2)(i).
    (A) A taxpayer must not use value to determine expense. A taxpayer 
may not use the value of employee parking to determine expenses 
allocable to employee parking that is either owned or leased by the 
taxpayer because section 274(a)(4) disallows a deduction for the 
expense of providing a qualified transportation fringe, regardless of 
its value.
    (B) A taxpayer must not deduct expenses related to reserved 
employee spaces. A taxpayer must determine the allocable portion of 
total parking expenses that relate to any reserved employee spaces. No 
deduction is allowed for the parking expenses that relate to reserved 
employee spaces.
    (C) A taxpayer must not improperly apply the exception for 
qualified parking made available to the public. A taxpayer must not 
improperly apply the exception in section 274(e)(7) or paragraph 
(e)(2)(ii) of this section to parking facilities, for example, by 
treating a parking facility regularly used by employees as available to 
the general public merely because the general public has access to the 
parking facility.
    (ii) Additional simplified methodologies. Instead of using the 
general rule in paragraph (d)(2)(i) of this section for a taxpayer 
owned or leased parking facility, a taxpayer may use a simplified 
methodology under paragraph (d)(2)(ii)(A), (B), or (C) of this section.
    (A) Qualified parking limit methodology. A taxpayer that uses the 
qualified parking limit methodology in this paragraph (d)(2)(ii)(A) 
must calculate the disallowance of deductions for qualified 
transportation fringe parking expenses by multiplying the total number 
of spaces used by employees during the peak demand period, or the total 
number of taxpayer's employees, by the section 132(f)(2) monthly per 
employee limitation on exclusion (adjusted for inflation), for each 
month in the taxable year. The result is the amount of the taxpayer's 
expenses that are disallowed under section 274(a)(4). This methodology 
may be used only if the taxpayer includes the value of the qualified 
transportation fringe in excess of the sum of the amount, if any, paid 
by the employee for the qualified transportation fringe and the 
applicable statutory monthly limit in section 132(f)(2) on the 
taxpayer's Federal income tax return as originally filed as 
compensation paid to the employee and as wages to the employee for 
purposes of withholding under chapter 24 of the Code (relating to 
collection of Federal income tax at source on wages). In addition, the 
exception to the disallowance for amounts treated as employee 
compensation provided for in section 274(e)(2) and in paragraph 
(e)(2)(i) of this section cannot be applied to reduce a section 
274(a)(4) disallowance calculated using this method. A taxpayer using 
this methodology may not use either of the special rules in paragraph 
(c) of this section.
    (B) Primary use methodology. A taxpayer that uses the primary use 
methodology in this paragraph (d)(2)(ii)(B) must use the following 
four-step methodology to calculate the disallowance of deductions for 
qualified transportation fringe parking expenses for each parking 
facility. A taxpayer may use either or both of the special rules in 
paragraph (c) of this section for determining total parking expenses 
and total parking spaces.
    (1) Step 1--Calculate the disallowance for reserved employee 
spaces. A taxpayer must identify the total parking spaces in the 
parking facility, or the taxpayer's portion thereof, exclusively 
reserved for the taxpayer's employees. The taxpayer must then determine 
the percentage of reserved employee spaces in relation to total parking 
spaces and multiply that percentage by the taxpayer's total

[[Page 37612]]

parking expenses for the parking facility. The product is the amount of 
the deduction for total parking expenses that is disallowed under 
section 274(a)(4) for reserved employee spaces. There is no 
disallowance for reserved employee spaces if the primary use (as 
defined in paragraphs (b)(11) and (d)(2)(ii)(B)(2) of this section) of 
the available parking spaces is to provide parking to the general 
public, and there are five or fewer reserved employee spaces in the 
parking facility and the reserved employee spaces are 5 percent or less 
of the total parking spaces.
    (2) Step 2--Determine the primary use of available parking spaces. 
A taxpayer must identify the available parking spaces in the parking 
facility and determine whether their primary use is to provide parking 
to the general public. If the primary use of the available parking 
spaces in the parking facility is to provide parking to the general 
public, then total parking expenses allocable to available parking 
spaces at the parking facility are excepted from the section 274(a)(4) 
disallowance by the general public exception under section 274(e)(7) 
and paragraph (e)(2)(ii) of this section. Primary use of available 
parking spaces is based on the number of available parking spaces used 
by employees during the peak demand period. Nonreserved parking spaces 
that are available to the general public but empty during normal 
business hours on a typical business day are treated as provided to the 
general public.
    (3) Step 3--Calculate the allowance for reserved nonemployee 
spaces. If the primary use of a taxpayer's available parking spaces is 
not to provide parking to the general public, the taxpayer must 
identify the number of available parking spaces in the parking 
facility, or the taxpayer's portion thereof, exclusively reserved for 
nonemployees. A taxpayer that has no reserved nonemployee spaces may 
proceed to Step 4 in paragraph (d)(2)(ii)(B)(4) of this section. If the 
taxpayer has reserved nonemployee spaces, it may determine the 
percentage of reserved nonemployee spaces in relation to remaining 
total parking spaces and multiply that percentage by the taxpayer's 
remaining total parking expenses. The product is the amount of the 
deduction for remaining total parking expenses that is not disallowed 
because the spaces are not available for employee parking.
    (4) Step 4--Determine remaining use of available parking spaces and 
allocable expenses. If a taxpayer completes Steps 1-3 in paragraph 
(d)(2)(ii)(B) of this section and has any remaining total parking 
expenses not specifically categorized as deductible or nondeductible, 
the taxpayer must reasonably allocate such expenses by determining the 
total number of available parking spaces used by employees during the 
peak demand period.
    (C) Cost per space methodology. A taxpayer using the cost per space 
methodology in this paragraph (d)(2)(ii)(C) must calculate the 
disallowance of deductions for qualified transportation fringe parking 
expenses by multiplying the cost per space by the total number of 
available parking spaces used by employees during the peak demand 
period. The product is the amount of the deduction for total parking 
expenses that is disallowed under section 274(a)(4). A taxpayer may 
calculate cost per space by dividing total parking expenses by total 
parking spaces. A taxpayer using this methodology may use either or 
both of the special rules in paragraph (c) of this section for 
determining total parking expenses and total parking spaces.
    (3) Expenses for transportation in a commuter highway vehicle or 
transit pass. If a taxpayer pays a third party an amount for its 
employees' commuter highway vehicle or a transit pass qualified 
transportation fringe, the section 274(a)(4) disallowance generally is 
equal to the taxpayer's total annual cost of employee commuter highway 
vehicle or a transit pass qualified transportation fringes paid to the 
third party. If a taxpayer provides transportation in a commuter 
highway vehicle or transit pass qualified transportation fringes in 
kind directly to its employees, the taxpayer must calculate the 
disallowance of deductions for expenses for such fringes based on a 
reasonable interpretation of section 274(a)(4). However, a taxpayer may 
not use the value of the qualified commuter highway vehicle or transit 
pass fringe to the employee to determine expenses allocable to such 
fringe because section 274(a)(4) disallows a deduction for the expense 
of providing a qualified transportation fringe, regardless of its value 
to the employee.
    (e) Specific exceptions to disallowance of deduction for qualified 
transportation fringe expenses--(1) In general. The provisions of 
section 274(a)(4) and paragraph (a) of this section (imposing 
limitations on deductions for qualified transportation fringe expenses) 
are not applicable in the case of expenditures set forth in paragraph 
(e)(2) of this section. Such expenditures are deductible to the extent 
allowable under chapter 1 of the Code. This paragraph (e) cannot be 
construed to affect whether a deduction under section 162 or 212 is 
allowed or allowable. The fact that an expenditure is not covered by a 
specific exception provided for in this paragraph (e) is not 
determinative of whether a deduction for the expenditure is disallowed 
under section 274(a)(4) and paragraph (a) of this section.
    (2) Exceptions to disallowance. The expenditures referred to in 
paragraph (e)(1) of this section are set forth in paragraphs (e)(2)(i) 
through (iii) of this section.
    (i) Certain qualified transportation fringe expenses treated as 
compensation--(A) In general. Under section 274(e)(2) and this 
paragraph (e)(2)(i), any expense paid or incurred by a taxpayer for a 
qualified transportation fringe is not subject to the disallowance of 
deductions provided for in paragraph (a) of this section to the extent 
that the expense is treated by the taxpayer--
    (1) On the taxpayer's Federal income tax return as originally 
filed, as compensation paid to the employee; and
    (2) As wages to the employee for purposes of withholding under 
chapter 24 (relating to collection of Federal income tax at source on 
wages).
    (B) Limitation on exception. The exception in section 274(e)(2) and 
paragraph (e)(2)(i) of this section does not apply to expenses paid or 
incurred for qualified transportation fringes the value of which 
(including a purported value of zero) is less than the sum of the 
amount, if any, paid by the employee for the fringe benefits and any 
amount excluded from gross income under section 132(a)(5). Thus, if an 
employer provides an employee with qualified transportation fringes the 
value of which is less than the applicable statutory monthly per 
employee limit under section 132(a)(5), the exception in section 
274(e)(2) and paragraph (e)(2)(i) of this section does not apply to 
expenses paid or incurred for the fringe benefits.
    (C) Expenses for which value is improperly included. The exception 
in section 274(e)(2) and paragraph (e)(2)(i) of this section does not 
apply to expenses paid or incurred for qualified transportation fringes 
for which the value that is included in gross income of the employee is 
less than the amount required to be included in gross income under 
Sec.  1.61-21. Similarly, if the amount required to be included in 
gross income under Sec.  1.61-21 is purportedly zero, the exception in 
section 274(e)(2) and paragraph (e)(2)(i) of this section does not 
apply.
    (D) Required inclusion in wages. The exception in section 274(e)(2) 
and paragraph (e)(2)(i) of this section applies to expenses paid or 
incurred for

[[Page 37613]]

qualified transportation fringes the value of which exceeds the sum of 
the amount, if any, paid by the employee for the fringe benefits and 
any amount excluded from gross income under section 132(a)(5), if 
treated as compensation on the taxpayer's Federal income tax return as 
originally filed and as wages to the employee for purposes of 
withholding under chapter 24. Thus, assuming no other statutory 
exclusion applies, if an employer provides an employee with qualified 
transportation fringes the value of which exceeds the applicable 
statutory monthly limit and the employee does not make any payment, the 
value of the benefits provided in excess of the applicable statutory 
monthly limit must be included in the employee's wages for income and 
employment tax purposes in accordance with section 274(e)(2) and 
paragraph (e)(2)(i) of this section. See Sec.  1.61-21(b)(1) and Sec.  
1.132-9(b), Q/A-8.
    (ii) Expenses for transportation in a commuter highway vehicle, 
transit pass, or parking made available to the public. Under section 
274(e)(7) and this paragraph (e)(2)(ii), any expense paid or incurred 
by a taxpayer for transportation in a commuter highway vehicle, a 
transit pass, or parking that otherwise qualifies as a qualified 
transportation fringe and that is also made available to the general 
public, is not subject to the disallowance of deductions provided for 
in paragraph (a) of this section to the extent that such 
transportation, transit pass, or parking is made available to the 
general public. With respect to parking, this exception applies to the 
entire amount of the taxpayer's parking expense, less any expenses 
specifically attributable to employees (for example, expenses allocable 
to reserved employee spaces), if the primary use of the parking is by 
the general public. If the primary use of the parking is not by the 
general public, this exception applies only to the costs attributable 
to the parking used by the general public.
    (iii) Expenses for transportation in a commuter highway vehicle, 
transit pass, or parking sold to customers. Under section 274(e)(8) and 
this paragraph (e)(2)(iii), any expense paid or incurred by a taxpayer 
for transportation in a commuter highway vehicle, a transit pass, or 
parking that otherwise qualifies as a qualified transportation fringe 
to the extent such transportation, transit pass, or parking is sold to 
customers in a bona fide transaction for an adequate and full 
consideration in money or money's worth, is not subject to the 
disallowance of deductions provided for in paragraph (a) of this 
section. For purposes of this paragraph (e)(2)(iii), the term customer 
includes an employee of the taxpayer who purchases the transportation 
in a bona fide transaction for an adequate and full consideration in 
money or money's worth.
    (f) Examples. The following examples illustrate the provisions of 
this section related to parking expenses for qualified transportation 
fringes. For each example, assume the parking expenses are otherwise 
deductible expenses paid or incurred during the 2020 taxable year; all 
or some portion of the expenses relate to a qualified transportation 
fringe under section 132(f); the section 132(f)(2) monthly per employee 
limitation on an employee's exclusion is $270; all taxpayers are 
calendar-year taxpayers; and the length of the 2020 taxable year is 12 
months.

    (1) Example 1. Taxpayer A pays B, a third party who owns a 
parking garage adjacent to A's place of business, $100 per month per 
parking space for each of A's 10 employees to park in B's garage, or 
$12,000 for parking in 2020 (($100 x 10) x 12 = $12,000). The $100 
per month paid for each of A's 10 employees for parking is 
excludible under section 132(a)(5), and none of the exceptions in 
section 274(e) or paragraph (e) of this section are applicable. 
Thus, the entire $12,000 is subject to the section 274(a)(4) 
disallowance under paragraphs (a) and (d)(1) of this section.
    (2) Example 2. (i) Assume the same facts as in paragraph (f)(1) 
of this section (Example 1), except A pays B $300 per month for each 
parking space, or $36,000 for parking for 2020 (($300 x 10) x 12 = 
$36,000). Of the $300 per month paid for parking for each of 10 
employees, $270 is excludible under section 132(a)(5) for 2020 and 
none of the exceptions in section 274(e) or paragraph (e) of this 
section are applicable to this amount. A properly treats the excess 
amount of $30 ($300 - $270) per employee per month as compensation 
and wages. Thus, $32,400 (($270 x 10) x 12 = $32,400) is subject to 
the section 274(a)(4) disallowance under paragraphs (a) and (d)(1) 
of this section.
    (ii) The excess amount of $30 per employee per month is not 
excludible under section 132(a)(5). As a result, the exceptions in 
section 274(e)(2) and paragraph (e)(2)(i) of this section are 
applicable to this amount. Thus, $3,600 ($36,000 - $32,400 = $3,600) 
is not subject to the section 274(a)(4) disallowance and remains 
deductible.
    (3) Example 3. (i) Taxpayer C leases 200 parking spaces from a 
third party at a rate of $500 per space, per month in 2020. C's 
annual lease payment for the parking spaces is $1,200,000 ((200 x 
$500) x 12 = $1,200,000). The number of available parking spaces 
used by C's employees during the peak demand period is 200.
    (ii) C uses the qualified parking limit methodology described in 
paragraph (d)(2)(ii)(A) of this section to determine the 
disallowance under section 274(a)(4). Under this methodology, the 
section 274(a)(4) disallowance is calculated by multiplying the 
number of available parking spaces used by employees during the peak 
demand period, 200, the section 132(f)(2) monthly per employee 
limitation on exclusion, $270, and 12, the number of months in the 
applicable taxable year. The amount subject to the section 274(a)(4) 
disallowance is $648,000 (200 x $270 x 12 = $648,000). This amount 
is excludible from C's employees' gross incomes under section 
132(a)(5) and none of the exceptions in section 274(e) or paragraph 
(e) of this section are applicable to this amount. The excess 
$552,000 ($1,200,000 - $648,000) for which C is not disallowed a 
deduction under 274(a)(4) is included in C's employees' gross 
incomes because it exceeds the section 132(f)(2) monthly per 
employee limitation on exclusion.
    (4) Example 4--(i) Facts. Taxpayer D, a big box retailer, owns a 
surface parking facility adjacent to its store. D incurs $10,000 of 
total parking expenses for its store in the 2020 taxable year. D's 
parking facility has 510 spaces that are used by its customers, 
employees, and its fleet vehicles. None of D's parking spaces are 
reserved. The number of available parking spaces used by D's 
employees during the peak demand period is 50. Approximately 30 
nonreserved parking spaces are empty during normal business hours on 
a typical business day. D's fleet vehicles occupy 10 parking spaces.
    (ii) Methodology. D uses the primary use methodology in 
paragraph (d)(2)(ii)(B) of this section to determine the amount of 
parking expenses that are disallowed under section 274(a)(4).
    (iii) Step 1. Because none of D's parking spaces are exclusively 
reserved for employees, there is no amount to be specifically 
allocated to reserved employee spaces under paragraph 
(d)(2)(ii)(B)(1) of this section.
    (iv) Step 2. D's number of available parking spaces is the total 
parking spaces reduced by the number of reserved employee spaces and 
inventory/unusable spaces or 500 (510 - 0 - 10 = 500). The number of 
available parking spaces used by D's employees during the peak 
demand period is 50. Of the 500 available parking spaces, 450 are 
used to provide parking to the general public, including the 30 
empty nonreserved parking spaces that are treated as provided to the 
general public. The primary use of D's available parking spaces is 
to provide parking to the general public because 90% (450/500 = 90%) 
of the available parking spaces are used by the general public under 
paragraph (d)(2)(ii)(B)(2) of this section. Because the primary use 
of the available parking spaces is to provide parking to the general 
public, the exception in section 274(e)(7) and paragraph (e)(2)(ii) 
of this section applies and none of the $10,000 of total parking 
expenses is subject to the section 274(a)(4) disallowance.
    (5) Example 5--(i) Facts. Taxpayer E, a manufacturer, owns a 
surface parking facility adjacent to its plant. E incurs $10,000 of 
total parking expenses in 2020. E's parking facility has 500 spaces 
that are used by its visitors and employees. E reserves 25 of these 
spaces for nonemployee visitors. The number of available parking 
spaces used by E's employees during the peak demand period is 400.
    (ii) Methodology. E uses the primary use methodology in 
paragraph (d)(2)(ii)(B) of this

[[Page 37614]]

section to determine the amount of parking expenses that are 
disallowed under section 274(a)(4).
    (iii) Step 1. Because none of E's parking spaces are exclusively 
reserved for employees, there is no amount to be specifically 
allocated to reserved employee spaces under paragraph 
(d)(2)(ii)(B)(1) of this section.
    (iv) Step 2. The primary use of E's parking facility is not to 
provide parking to the general public because 80% (400/500 = 80%) of 
the available parking spaces are used by its employees. Thus, 
expenses allocable to those spaces are not excepted from the section 
274(a) disallowance by section 274(e)(7) and paragraph (e)(2)(ii) of 
this section under the primary use test in paragraph 
(d)(2)(ii)(B)(2) of this section.
    (v) Step 3. Because 5% (25/500 = 5%) of E's available parking 
spaces are reserved nonemployee spaces, up to $9,500 ($10,000 x 95% 
= $9,500) of E's total parking expenses are subject to the section 
274(a)(4) disallowance under this step as provided in paragraph 
(d)(2)(ii)(B)(3) of this section. The remaining $500 ($10,000 x 5% = 
$500) of expenses allocable to reserved nonemployee spaces is 
excepted from the section 274(a) disallowance and continues to be 
deductible.
    (vi) Step 4. E must reasonably determine the employee use of the 
remaining parking spaces by using the number of available parking 
spaces used by E's employees during the peak demand period and 
determine the expenses allocable to employee parking spaces under 
paragraph (d)(2)(ii)(B)(4) of this section.
    (6) Example 6--(i) Facts. Taxpayer F, a manufacturer, owns a 
surface parking facility adjacent to its plant. F incurs $10,000 of 
total parking expenses in 2020. F's parking facility has 500 spaces 
that are used by its visitors and employees. F reserves 50 spaces 
for management. All other employees park in nonreserved spaces in 
F's parking facility; the number of available parking spaces used by 
F's employees during the peak demand period is 400. Additionally, F 
reserves 10 spaces for nonemployee visitors.
    (ii) Methodology. F uses the primary use methodology in 
paragraph (d)(2)(ii)(B) of this section to determine the amount of 
parking expenses that are disallowed under section 274(a)(4).
    (iii) Step 1. Because F reserved 50 spaces for management, 
$1,000 ((50/500) x $10,000 = $1,000) is the amount of total parking 
expenses that is nondeductible for reserved employee spaces under 
section 274(a)(4) and paragraphs (a) and (d)(2)(ii)(B)(1) of this 
section. None of the exceptions in section 274(e) or paragraph (e) 
of this section are applicable to this amount.
    (iv) Step 2. The primary use of the remainder of F's parking 
facility is not to provide parking to the general public because 89% 
(400/450 = 89%) of the available parking spaces in the facility are 
used by its employees. Thus, expenses allocable to these spaces are 
not excepted from the section 274(a)(4) disallowance by section 
274(e)(7) and paragraph (e)(2)(ii) of this section under the primary 
use test in paragraph (d)(2)(ii)(B)(2) of this section.
    (v) Step 3. Because 2% (10/450 = 2.22%) of F's available parking 
spaces are reserved nonemployee spaces, the $180 allocable to those 
spaces (($10,000 - $1,000) x 2%) is not subject to the section 
274(a)(4) disallowance and continues to be deductible under 
paragraph (d)(2)(ii)(B)(3) of this section.
    (vi) Step 4. F must reasonably determine the employee use of the 
remaining parking spaces by using the number of available parking 
spaces used by F's employees during the peak demand period and 
determine the expenses allocable to employee parking spaces under 
paragraph (d)(2)(ii)(B)(4) of this section.
    (7) Example 7--(i) Facts. Taxpayer G, a financial services 
institution, owns a multi-level parking garage adjacent to its 
office building. G incurs $10,000 of total parking expenses in 2020. 
G's parking garage has 1,000 spaces that are used by its visitors 
and employees. However, one floor of the parking garage is 
segregated by an electronic barrier that can only be accessed with a 
card provided by G to its employees. The segregated parking floor 
contains 100 spaces. The other floors of the parking garage are not 
used by employees for parking during the peak demand period.
    (ii) Methodology. G uses the primary use methodology in 
paragraph (d)(2)(ii)(B) of this section to determine the amount of 
parking expenses that are disallowed under section 274(a)(4).
    (iii) Step 1. Because G has 100 reserved spaces for employees, 
$1,000 ((100/1,000) x $10,000 = $1,000) is the amount of total 
parking expenses that is nondeductible for reserved employee spaces 
under section 274(a)(4) and paragraph (d)(2)(ii)(B)(1) of this 
section. None of the exceptions in section 274(e) or paragraph (e) 
of this section are applicable to this amount.
    (iv) Step 2. The primary use of the available parking spaces in 
G's parking facility is to provide parking to the general public 
because 100% (900/900 = 100%) of the available parking spaces are 
used by the public. Thus, expenses allocable to those spaces, 
$9,000, are excepted from the section 274(a)(4) disallowance by 
section 274(e)(7) and paragraph (e)(2)(ii) of this section under the 
primary use test in paragraph (d)(2)(ii)(B)(2).
    (8) Example 8--(i) Facts. Taxpayer H, an accounting firm, leases 
a parking facility adjacent to its office building. H incurs $10,000 
of total parking expenses related to the lease payments in 2020. H's 
leased parking facility has 100 spaces that are used by its clients 
and employees. None of the parking spaces are reserved. The number 
of available parking spaces used by H's employees during the peak 
demand period is 60.
    (ii) Methodology. H uses the primary use methodology in 
paragraph (d)(2)(ii)(B) of this section to determine the amount of 
parking expenses that are disallowed under section 274(a)(4).
    (iii) Step 1. Because none of H's leased parking spaces are 
exclusively reserved for employees, there is no amount to be 
specifically allocated to reserved employee spaces under paragraph 
(d)(2)(ii)(B)(1) of this section.
    (iv) Step 2. The primary use of H's leased parking facility 
under paragraph (d)(2)(ii)(B)(2) of this section is not to provide 
parking to the general public because 60% (60/100 = 60%) of the lot 
is used by its employees. Thus, H may not utilize the general public 
exception from the section 274(a)(4) disallowance provided by 
section 274(e)(7) and paragraph (e)(2)(ii) of this section.
    (v) Step 3. Because none of H's parking spaces are exclusively 
reserved for nonemployees, there is no amount to be specifically 
allocated to reserved nonemployee spaces under paragraph 
(d)(2)(ii)(B)(3) of this section.
    (vi) Step 4. H must reasonably determine the use of the parking 
spaces and the related expenses allocable to employee parking. 
Because the number of available parking spaces used by H's employees 
during the peak demand period is 60, H reasonably determines that 
60% (60/100 = 60%) of H's total parking expenses or $6,000 ($10,000 
x 60% = $6,000) is subject to the section 274(a)(4) disallowance 
under paragraph (d)(2)(ii)(B)(4) of this section.
    (9) Example 9--(i) Facts. Taxpayer I, a large manufacturer, owns 
multiple parking facilities adjacent to its manufacturing plant, 
warehouse, and office building at its complex in the city of X. All 
of I's tracts or parcels of land at its complex in city X are 
located in a single geographic location. I owns parking facilities 
in other cities. I incurs $50,000 of total parking expenses related 
to the parking facilities at its complex in city X in 2020. I's 
parking facilities at its complex in city X have 10,000 total 
parking spaces that are used by its visitors and employees of which 
500 are reserved for management. All other spaces at parking 
facilities in I's complex in city X are nonreserved. The number of 
nonreserved spaces used by I's employees other than management 
during the peak demand period at I's parking facilities in city X is 
8,000.
    (ii) Methodology. I uses the primary use methodology in 
paragraph (d)(2)(ii)(B) of this section to determine the amount of 
parking expenses that are disallowed under section 274(a)(4). I 
chooses to apply the special rule in paragraph (c)(2) of this 
section to aggregate all parking facilities in the geographic 
location that comprises its complex in city X. However, I may not 
aggregate parking facilities in other cities with its parking 
facilities in city X because they are in different geographic 
locations.
    (iii) Step 1. Because 500 spaces are reserved for management, 
$2,500 ((500/10,000) x $50,000 = $2,500) is the amount of total 
parking expenses that is nondeductible for reserved employee spaces 
for I's parking facilities in city X under section 274(a)(4) and 
paragraphs (a) and (d)(2)(ii)(B)(1) of this section.
    (iv) Step 2. The primary use of the remainder of I's parking 
facility is not to provide parking to the general public because 84% 
(8,000/9,500 = 84%) of the available parking spaces in the facility 
are used by its employees. Thus, expenses allocable to these spaces 
are not excepted from the section 274(a)(4) disallowance by section 
274(e)(7) or paragraph (e)(2)(ii) of this section under the primary 
use test in paragraph (d)(2)(ii)(B)(2) of this section.

[[Page 37615]]

    (v) Step 3. Because none of I's parking spaces in its parking 
facilities in city X are exclusively reserved for nonemployees, 
there is no amount to be specifically allocated to reserved 
nonemployee spaces under paragraph (d)(2)(ii)(B)(3) of this section.
    (vi) Step 4. I must reasonably determine the use of the 
remaining parking spaces and the related expenses allocable to 
employee parking for its parking facilities in city X. Because the 
number of available parking spaces used by I's employees during the 
peak demand period in city X during an average workday is 8,000, I 
reasonably determines that 84.2% (8,000/9,500 = 84.2%) of I's 
remaining parking expense or $39,900 (($50,000-$2,500) x 84% = 
$39,900) is subject to the section 274(a)(4) disallowance under 
paragraph (d)(2)(ii)(B)(4) of this section.
    (10) Example 10. (i) Taxpayer J, a manufacturer, owns a parking 
facility and incurs mixed parking expenses along with other parking 
expenses. J uses the special rule in paragraph (c)(1) of this 
section to allocate 5% of certain mixed parking expenses to its 
parking facility. Applying the special rule, J determines that it 
incurred $100,000 of total parking expenses in 2020. J's parking 
facility has 500 spaces that are used by its visitors and employees. 
The number of available parking spaces used by J's employees during 
the peak demand period is 475.
    (ii) J uses the cost per space methodology described in 
paragraph (d)(2)(ii)(C) of this section to determine the amount of 
parking expenses that are disallowed under section 274(a)(4). Under 
this methodology, J multiples the cost per space by the number of 
available parking spaces used by J's employees during the peak 
demand period. J calculates the cost per space by dividing total 
parking expenses by the number of parking spaces ($100,000/500 = 
$200). J determines that $95,000 ($200 x 475 = $95,000) of J's total 
parking expenses is subject to the section 274(a)(4) disallowance 
and none of the exceptions in section 274(e) or paragraph (e) of 
this section are applicable.

    (g) Applicability date. This section applies for taxable years that 
begin on or after [date final rule is published in the Federal 
Register].


Sec.  1.274-14  Disallowance of deductions for certain transportation 
and commuting benefit expenditures.

    (a) General rule. Except as provided in this section, no deduction 
is allowed for any expense incurred for providing any transportation, 
or any payment or reimbursement, to an employee of the taxpayer in 
connection with travel between the employee's residence, as defined in 
Sec.  1.121-1(b)(1), and place of employment. Travel between the 
employee's residence and place of employment includes 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. These transportation and commuting 
expenses do not include any expenditure of any qualified transportation 
fringe (as defined in section 132(f)) provided to an employee of the 
taxpayer. All qualified transportation fringe expenses are required to 
be analyzed under section 274(a)(4) and Sec.  1.274-13.
    (b) Exception. The disallowance for the deduction for expenses 
incurred for providing any transportation or commuting in paragraph (a) 
of this section does not apply if the transportation or commuting 
expense is necessary for ensuring the safety of the employee. The 
transportation or commuting expense is necessary for ensuring the 
safety of the employee if a bona fide business-oriented security 
concern, as described in Sec.  1.132-5(m), exists for the employee.
    (c) Applicability date. This section applies for taxable years that 
begin on or after [date final rule is published in the Federal 
Register].

Sunita Lough,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2020-13506 Filed 6-19-20; 4:15 pm]
BILLING CODE 4830-01-P