Qualified transportation fringe disallowance

By Jackie Fountain, CPA, MST, Irvine, Calif.

Editor: Mark G. Cook, CPA, CGMA

The law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, delivered tax cuts to families and made American businesses more competitive worldwide. To help offset the major reduction in tax revenue that these changes brought about, the TCJA modified other provisions of the Code, including the tax treatment of qualified transportation fringe (QTF) benefits, such as parking and commuting expenses.

Before 2018, employers generally were permitted to take a deduction for QTF expenses, subject to certain restrictions. The TCJA eliminated the QTF deduction, effective Jan. 1, 2018, with certain exceptions (Sec. 274(a)(4)).

The IRS has issued guidance on the elimination of the QTF deduction. The following discussion highlights the June 2020 proposed regulations (REG-119307-19) and how they compare to the prior guidance in Notice 2018-99.


In Notice 2018-99, the IRS provided temporary guidance on methods to determine the amount of parking expenses that are nondeductible QTF expenses. The notice distinguished between two situations in which companies provide parking to employees:

  • The company pays a third party for employee parking spots;
  • The company owns or leases a parking facility for its employees.

(The notice said that, until proposed regulations were published, companies could either follow the guidance provided in the notice or use "any reasonable method" for determining the amount of nondeductible QTF expenses.)

If a company pays a third party for employee parking spots, the notice's calculation of the nondeductible QTF expenses was fairly straightforward: The nondeductible QTF expense amount was the total annual cost of the employee parking. If, however, any amount of parking expense paid to a third party exceeded the monthly limitation on the exclusion (which was $260 per employee for 2018, under Sec. 132(f)(2)), it would be treated by the employer as compensation and wages to the employee. In other words, any amount of parking expense treated as taxable to the employee would be deductible to the business.

These rules for employers paying third parties for employee parking spots were not changed by the June proposed regulations. However, the maximum excludable amount has been inflation-adjusted to $270 for 2020.

If the company owned or leased a parking facility, the calculation set out in Notice 2018-99 was more complicated. In that situation, the notice provided a four-step method for determining the nondeductible QTF expenses:

  1. Calculate the disallowance for reserved employee spots;
  2. Determine the primary use of the remaining spots;
  3. Calculate the allowance for reserved nonemployee spots; and
  4. Determine the remaining use and allocable expenses.

The IRS received numerous comments about the notice's method for owned or leased parking facilities. In response, the proposed regulations provide that a taxpayer may use the general rule (which allows the taxpayer to use any reasonable interpretation of Sec. 274(a)(4)) or one of three simplified methodologies to calculate the nondeductible portion of parking expenses. The simplified methods are:

  1. Qualified parking limit methodology;
  2. Primary use methodology; and
  3. Cost per space methodology.

These methods, set forth in Prop. Regs. Secs. 1.274-13 and 1.274-14, are intended to reduce the administrative burdens of these calculations on taxpayers and simplify the calculations.

Transportation and commuting expenses

Under Sec. 274(l), added by the TCJA, a company cannot deduct any expense incurred for providing any transportation, or any payment or reimbursement, to an employee in connection with travel between the employee's residence and place of employment, except where the costs were necessary for ensuring the safety of the employee. The proposed regulations add definitions for "residence" and "safety of the employee" for these purposes.


Despite the general elimination of the QTF deduction, a company can still deduct the following expenses:

  • QTF expenses that are treated by the company as compensation and wages to the employee (Sec. 274(e)(2)).
  • Expenses for goods, services, and facilities made available by the company to the general public (Sec. 274(e)(7)).
  • Expenses for goods or services (including the use of facilities) that are sold by the company to a customer in a bona fide transaction for an adequate and full consideration (Sec. 274(e)(8)).

The proposed regulations define the terms "general public" and "customer."

Exempt organizations

Notice 2018-99, as well as providing for-profit taxpayers rules to determine the amount of nondeductible parking expenses under Sec. 274(a)(4), provided rules for exempt organizations to determine the increase in the amount of unrelated business taxable income (UBTI) required under Sec. 512(a)(7) before its repeal attributable to the nondeductible parking expenses.

For exempt organizations, the QTF expenses determined to be nondeductible were reported as UBTI, effectively increasing the amount of UBTI on which the exempt organization was responsible for paying tax, or in some cases creating UBTI where none previously existed. On Dec. 20, 2019, however, Sec. 512(a)(7) was repealed (Further Consolidated Appropriations Act, 2020, P.L. 116-94, §302) retroactive to the original date of enactment of the TCJA.

Even though Sec. 512(a)(7) was repealed, the proposed regulations will still apply if the QTF expenses are directly related to an unrelated trade or business conducted by an exempt organization. The amount of QTF expenses directly connected with the unrelated trade or business would be subject to disallowance under Sec. 274(a)(4) and, therefore, disallowed as a deduction in calculating UBTI.


Mark G. Cook, CPA, CGMA, MBA, is the lead tax partner with SingerLewak LLP in Irvine, Calif.

For additional information about these items, contact Mr. Cook at 949-261-8600 or mcook@singerlewak.com.

All contributors are members of SingerLewak LLP.

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