IRS releases guidance on parking lot rules

The IRS recently provided guidance in the form of proposed Treasury regulations (Proposed Regulations), which address the disallowance of employer deductions for the cost of providing commuting and parking benefits to employees. As you may recall, following the Tax Cuts and Jobs Act (TCJA) of 2017, the IRS provided complex, yet incomplete, guidance on how to calculate disallowed parking expenses. The Proposed Regulations provide some significant updates to simplify the process of calculating the disallowed deduction. While many of these changes are favorable to taxpayers, some may have unfavorable impacts.

Background

The TCJA disallowed a deduction for the expense of any qualified transportation fringe benefit (QTFB) provided by taxpayers to their employees for expenses paid or incurred after Dec. 31, 2017. These benefits can still be excluded from an employee’s income, but an employer no longer gets a corresponding tax deduction if the amounts are not included in the employee’s income. Note, however, the disallowed deduction relates to the expense of providing a QTFB, not its value, and the determination of an expense is not always straightforward, especially for the cost of employee parking.

In 2018, the IRS provided interim guidance for taxpayers to determine the amount of parking expenses that is nondeductible. The interim guidance created as many questions as it answered, and the Proposed Regulations attempt to address some of these more glaring issues by clarifying the statutory requirements. In particular, they address QTFBs paid or incurred by an employer and transportation and commuting expenses paid or incurred by an employer.

Disallowance of deductions for certain qualified transportation fringe expenditures

The Proposed Regulations define relevant terms and modify previous guidance by 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. Taxpayers may choose to apply the general rule or one of the three simplified methods for each taxable year and for each parking facility.

• General rule. The general rule in the Proposed Regulations allows taxpayers to calculate the disallowance based on a reasonable interpretation of the statute subject to a few requirements (using actual expenses paid or incurred, allocating expenses to reserved parking spots, and properly applying the exception for parking made to the public).