Proposed Regs Address Transportation Fringe, Commuting Expenses

Proposed Regs Address Transportation Fringe, Commuting Expenses

Internal Revenue Service

The IRS has published proposed regulations (REG-119307-19) that address the elimination of the deduction for expenses regarding some employer-provided transportation and commuting benefits, providing guidance to determine the amount of those expenses that is nondeductible and to apply specified exceptions that may allow them to be deductible. Comments and public hearing requests are due by August 24. Section 274(a)(4), as added by the Tax Cuts and Jobs Act, provides that no deduction is allowed for the expense of any qualified transportation fringe (QTF) provided by taxpayers to their employees for expenses paid or incurred after December 31, 2017. The TCJA also added section 274(l), which does not allow deductions for some transportation and commuting expenses. In December 2018 the IRS issued interim guidance (<a href="/lr/resolve//28nz7">Notice 2018-99</a>) for taxpayers to determine the amount of parking expenses for QTFs that is nondeductible under section 274(a)(4). Notice 2018-99 also requested comments to further clarify the treatment of QTFs under section 274. The proposed regs describe and clarify the statutory requirements of section 274(a)(4) and 274(l) as well as the applicability of specified exceptions under section 274(e) to QTF expenses. The proposed regs restate the statutory rules under section 274(a)(4), define relevant terms, and modify some guidance in <a href="/lr/resolve//28nz7">Notice 2018-99</a>, providing a general rule and three simplified methods to determine the amount of nondeductible parking expenses when a parking facility is owned or leased by the taxpayer. The regs also build on Notice 2018-99 to include rules addressing the deduction disallowance for expenses for providing employees transportation in a commuter highway vehicle and transit pass QTFs. The regs include special rules to clarify and simplify the calculations underlying the methods to determine the amount of QTF parking expenses. The regs generally apply the guidance in Notice 2018-99 and the applicable exceptions in section 274(e) to all QTF expenses. As in Notice 2018-99, the proposed regs 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. For QTF parking expenses, the regs 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 or one of three simplified methods. Taxpayers may choose to apply the general rule or a simplified method for each tax year and for each parking facility. The regs provide special rules and definitions for allocating specified 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 specified procedures. The general rule in the proposed regs 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 three simplified methods under the regs are a qualified parking limit method and primary use and cost-per-space methods. The primary use method is largely based on the method deemed reasonable in <a href="/lr/resolve//28nz7">Notice 2018-99</a> but modified in response to comments. The proposed regs address the disallowance of deductions under section 274(l) for some expenses of transportation and commuting between an employee’s residence and place of employment, except if needed to ensure the safety of the employee. The regs define the terms “residence” and “safety of the employee.” According to the preamble, 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). Thus, the regs do not apply the section 274(e)(2) exception for expenses treated as compensation to section 274(l) expenses. The regs are proposed to apply for tax years beginning on or after the date the regs are finalized. Until then, a taxpayer may rely on the proposed regs for QTF expenses and transportation and commuting expenses, as applicable, that are paid or incurred in tax years beginning after December 31, 2017. Alternatively, a taxpayer may choose to rely on the guidance in <a href="/lr/resolve//28nz7">Notice 2018-99</a> until the proposed regs are finalized.

The IRS has published proposed regulations (REG-119307-19) that address the elimination of the deduction for expenses regarding some employer-provided transportation and commuting benefits, providing guidance to determine the amount of those expenses that is nondeductible and to apply specified exceptions that may allow them to be deductible.

The IRS has published proposed regulations (REG-119307-19) that address the elimination of the deduction for expenses regarding some employer-provided transportation and commuting benefits, providing guidance to determine the amount of those expenses that is nondeductible and to apply specified exceptions that may allow them to be deductible. Comments and public hearing requests are due by August 24. Section 274(a)(4), as added by the Tax Cuts and Jobs Act, provides that no deduction is allowed for the expense of any qualified transportation fringe (QTF) provided by taxpayers to their employees for expenses paid or incurred after December 31, 2017. The TCJA also added section 274(l), which does not allow deductions for some transportation and commuting expenses. In December 2018 the IRS issued interim guidance (Notice 2018-99) for taxpayers to determine the amount of parking expenses for QTFs that is nondeductible under section 274(a)(4). Notice 2018-99 also requested comments to further clarify the treatment of QTFs under section 274. The proposed regs describe and clarify the statutory requirements of section 274(a)(4) and 274(l) as well as the applicability of specified exceptions under section 274(e) to QTF expenses. The proposed regs restate the statutory rules under section 274(a)(4), define relevant terms, and modify some guidance in Notice 2018-99, providing a general rule and three simplified methods to determine the amount of nondeductible parking expenses when a parking facility is owned or leased by the taxpayer. The regs also build on Notice 2018-99 to include rules addressing the deduction disallowance for expenses for providing employees transportation in a commuter highway vehicle and transit pass QTFs. The regs include special rules to clarify and simplify the calculations underlying the methods to determine the amount of QTF parking expenses. The regs generally apply the guidance in Notice 2018-99 and the applicable exceptions in section 274(e) to all QTF expenses. As in Notice 2018-99, the proposed regs 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. For QTF parking expenses, the regs 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 or one of three simplified methods. Taxpayers may choose to apply the general rule or a simplified method for each tax year and for each parking facility. The regs provide special rules and definitions for allocating specified 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 specified procedures. The general rule in the proposed regs 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 three simplified methods under the regs are a qualified parking limit method and primary use and cost-per-space methods. The primary use method is largely based on the method deemed reasonable in Notice 2018-99 but modified in response to comments. The proposed regs address the disallowance of deductions under section 274(l) for some expenses of transportation and commuting between an employee’s residence and place of employment, except if needed to ensure the safety of the employee. The regs define the terms “residence” and “safety of the employee.” According to the preamble, 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). Thus, the regs do not apply the section 274(e)(2) exception for expenses treated as compensation to section 274(l) expenses. The regs are proposed to apply for tax years beginning on or after the date the regs are finalized. Until then, a taxpayer may rely on the proposed regs for QTF expenses and transportation and commuting expenses, as applicable, that are paid or incurred in tax years beginning after December 31, 2017. Alternatively, a taxpayer may choose to rely on the guidance in Notice 2018-99 until the proposed regs are finalized.

Sec. 274 Disallowance of certain entertainment, etc., expenses

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Proposed Regs Address Transportation Fringe, Commuting Expenses