[Federal Register Volume 85, Number 242 (Wednesday, December 16, 2020)]
[Rules and Regulations]
[Pages 81391-81409]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-27505]


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DEPARTMENT OF TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9939]
RIN 1545-BP49


Qualified Transportation Fringe, Transportation and Commuting 
Expenses Under Section 274

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final Regulations.

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SUMMARY: This document contains final regulations to implement 
legislative

[[Page 81392]]

changes to section 274 of the Internal Revenue Code (Code) effective 
for taxable years beginning after December 31, 2017. Specifically, the 
final 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. The final 
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 final regulations 
affect taxpayers who pay or incur such expenses.

DATES: 
    Effective Date: These regulations are effective on December 16, 
2020.
    Applicability Date: These regulations apply to taxable years 
beginning on or after December 16, 2020. Notwithstanding the preceding 
sentence, taxpayers may choose to apply Sec.  1.274-13(b)(14)(ii) to 
taxable years ending after December 31, 2019.

FOR FURTHER INFORMATION CONTACT: Patrick Clinton of the Office of 
Associate Chief Counsel (Income Tax and Accounting), (202) 317-7005 
(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    This document contains final regulations under section 274 of the 
Code that amend the Income Tax Regulations (26 CFR part 1). 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 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.
    On December 24, 2018, the Department of the Treasury (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, in part, provided interim guidance for taxpayers to determine 
the amount of parking expenses for QTFs that is nondeductible under 
section 274(a)(4).
    On June 23, 2020, the Treasury Department and the IRS published a 
notice of proposed rulemaking (REG-119307-19) in the Federal Register 
(85 FR 37599) containing proposed regulations under section 274 
(proposed regulations) to implement the TCJA's amendments to section 
274. The proposed regulations would add a new section at Sec.  1.274-13 
to address parking and other QTF expenses under section 274(a)(4), 
including the application of certain exceptions in section 274(e) to 
QTF expenses. The proposed regulations also would add a new section at 
Sec.  1.274-14 to address transportation and commuting expenses under 
section 274(l).
    Pending the issuance of these final regulations, taxpayers were 
allowed to rely on the proposed regulations or the guidance provided in 
Notice 2018-99 for parking expenses, other QTF expenses, and 
transportation and commuting expenses, as applicable, paid or incurred 
in taxable years beginning after December 31, 2017.
    The Treasury Department and the IRS received one request to speak 
at a public hearing that was later withdrawn. Therefore, no public 
hearing was held. The Treasury Department and the IRS received 12 
written and electronic comments responding to the proposed regulations. 
All comments were considered and are available at https://www.regulations.gov or upon request. The comments addressing the 
proposed regulations are summarized in the Summary of Comments and 
Explanation of Revisions section. However, comments recommending 
statutory revisions or addressing issues outside the scope of these 
final regulations are not discussed in this preamble.
    After full consideration of the comments received on the proposed 
regulations, this Treasury decision adopts the proposed regulations 
with modifications in response to certain comments, as described in the 
Summary of Comments and Explanation of Revisions section.

Summary of Comments and Explanation of Revisions

1. Qualified Transportation Fringes

A. In General
    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. 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.
    The proposed regulations restated the statutory rules under section 
274(a)(4), defined relevant terms, and provided 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 included rules 
addressing the deduction disallowance for expenses related to providing 
employees transportation in a commuter highway vehicle and transit pass 
QTFs. Finally, the proposed regulations applied the applicable 
exceptions in section 274(e) to all QTF expenses.
    Specifically, the proposed regulations provided 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 provided 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

[[Page 81393]]

general rule or any one of three simplified methodologies. The proposed 
regulations provided taxpayers the option to apply the general rule or 
a simplified methodology for each taxable year and for each parking 
facility. The proposed regulations included special rules and 
definitions 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, disregarding five or fewer 
reserved parking spaces if the reserved spaces are 5 percent or less of 
total parking spaces, and determining employee use of parking on a 
typical business day. The preamble to the proposed regulations provided 
that 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 allowed taxpayers to 
calculate the disallowance based on a reasonable interpretation of 
section 274(a)(4). However, the proposed regulations required taxpayers 
to use the expense paid or incurred in providing a QTF and not 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. The proposed regulations allowed a special rule for 
aggregating parking spaces by geographic location to be used with the 
general rule.
    The proposed regulations also included three simplified 
methodologies as alternatives to 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 2020), 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 on the Notice. The proposed 
regulations permitted the use of special rules for allocating certain 
mixed parking expenses and aggregating parking spaces by geographic 
location. The proposed regulations also provided definitions for 
employee, general public, parking facility, total parking spaces, 
reserved employee spaces, reserved nonemployee spaces, primary use, and 
total parking expenses, geographic location, inventory/unusable spaces, 
available parking spaces, peak demand period, and mixed parking 
expense.
    The third simplified methodology provided in the proposed 
regulations 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 used by 
employees during the peak demand period. The proposed regulations 
provided that cost per space is calculated by dividing total parking 
expenses (including expenses for inventory/unusable spaces) by total 
parking spaces (including inventory/unusable spaces). The proposed 
regulations also permitted special rules for allocating certain mixed 
parking expenses and aggregating parking spaces by geographic location 
to be used with the cost per space methodology.
    Finally, the proposed regulations provided that the deduction 
disallowance under section 274(a)(4) does not apply to expenditures for 
QTFs that meet the requirements of section 274(e)(2), (7), or (8), the 
three exceptions in section 274(e) that are relevant for QTFs. Pursuant 
to section 274(e)(2), the proposed regulations provided that the 
disallowance under section 274(a) does not apply to expenditures for 
QTFs to the extent the taxpayer properly 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 of the Code (chapter 24) relating to 
collection of Federal income tax at source on wages. The proposed 
regulations also provided, in accordance with section 274(e)(7), 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) 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. Finally, consistent 
with section 274(e)(8), the proposed regulations provided 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 final regulations substantially adopt the proposed regulations, 
with certain modifications and clarifications, as discussed in this 
Summary of Comments and Explanation of Revisions. In applying the final 
regulations, taxpayers may continue to 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.
B. Definitions
    As described in this part 1.B., the final regulations generally 
include the definitions from the proposed regulations, modified and 
clarified in response to comments.
i. Qualified Transportation Fringe
    The final regulations adopt the proposed regulations' 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. 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. 
Because qualified bicycle commuting reimbursements are not QTFs, 
deductions for qualified bicycle commuting reimbursements are not 
disallowed under section 274(a)(4) for taxable years beginning after 
December 31, 2017 and before January 1, 2026. Thus, the final 
regulations provide that the term ``qualified transportation fringe'' 
means any of the following provided by an employer to an employee: (1) 
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 section 132(f)(1)(A) and (f)(5)(B)), (2) 
any transit pass (as described in section 132(f)(1)(B) and (f)(5)(A)), 
or (3) qualified parking (as described in section 132(f)(1)(C) and 
(f)(5)(C)).
    Under section 132(f)(1)(C) and (f)(5)(C), the term ``qualified 
parking'' includes parking provided by an employer to an employee on or 
near the business premises of the employer. A

[[Page 81394]]

commenter requested that the final regulations define ``parking 
provided to an employee'' to include only parking spaces that are 
reserved or otherwise set aside exclusively for employee use. The 
Treasury Department and the IRS decline to adopt this suggestion. 
Section 1.132-9, Q/A-4(d) provides that parking is provided by an 
employer to an employee if the parking is on property that the employer 
owns or leases, the employer pays for the parking, or the employer 
reimburses the employee for parking expense. Thus, the definition of 
qualified parking as a QTF under section 132(f) is not limited to 
parking that is reserved or otherwise set aside exclusively for 
employee use.
    Another commenter suggested that parking with no objective value to 
an employee, such as parking in industrial, remote, or rural areas 
(that is, areas where the general public would not pay to park) is not 
a QTF and therefore, that section 274(a)(4) should not disallow the 
deduction of the expenses. The Treasury Department and the IRS note 
that there is nothing in section 132 or Sec.  1.132-9 that supports the 
proposition that the value of parking to an employee is relevant in 
determining whether the parking itself constitutes qualified parking 
and a QTF. Thus, the Treasury Department and the IRS do not agree with 
the commenter that qualified parking with no objective value to an 
employee is not a QTF. However, see part 1.E.iii. of this Summary of 
Comments and Explanation of Revisions section for a discussion of the 
applicability of the section 274(e)(8) exception to parking with no 
objective value to an employee.
ii. Employee
    The proposed regulations defined the term ``employee'' based on 
definitions in Sec. Sec.  1.132-1(b)(2)(i) and 1.132-9(b), Q/A-5 and Q/
A-24. The term ``employee'' for Federal tax purposes generally is 
understood to refer to a common-law employee. 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 regulations under section 132 also include certain 
statutory employees such as officers of corporations in the definition 
of employee for purposes of QTFs. No comments were received on the 
proposed definition of ``employee''. Thus, the final regulations adopt 
this definition without modification.
iii. General Public
    Commenters on Notice 2018-99 raised concerns that, for taxpayers 
that lease space in a multi-tenant building, the Notice did not include 
employees, partners, 2-percent shareholders of S corporations (as 
defined in section 1372(b)), 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 
provided that ``general public'' includes employees, partners, 2-
percent shareholders of S corporations (as defined in section 1372(b)), 
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.
    A commenter on the proposed regulations raised concerns that the 
definition of the term ``general public'' in the proposed regulations 
gives tenants of multi-tenant buildings an unfair advantage in 
comparison to tenants in buildings with only one tenant and suggested 
all tenants be treated the same. The Treasury Department and the IRS 
decline to adopt this suggestion because any alternative would likely 
impose an undue administrative burden on taxpayers in a multi-tenant 
building to determine the use of the parking facility by numerous other 
tenants.
    A commenter also asked why taxpayers that own or lease space in a 
multi-tenant building may include independent contractors in the 
definition of general public. The Treasury Department and the IRS note 
that the proposed regulations defined general public to include 
independent contractors of unrelated taxpayers in a multi-tenant 
building because unlike independent contractors of the taxpayer, 
independent contractors of unrelated tenants do not have a relationship 
with the taxpayer. The final regulations continue to provide that 
independent contractors of unrelated tenants in multi-tenant buildings 
are included in the general public. However, independent contractors of 
the taxpayer continue to be excluded from the general public regardless 
of whether the taxpayer owns or leases space in a multi-tenant 
building.
    A commenter requested that a car dealership's parking spaces 
occupied by customers' vehicles being repaired or serviced be excluded 
from the definition of inventory/unusable spaces and instead be 
included in the definition of spaces available to the general public 
because the parking spaces are used by customers and are not available 
for employee parking. The Treasury Department and the IRS agree with 
the commenter and have revised the definition of general public in the 
final regulations accordingly. Thus, the final regulations follow the 
definition of the term general public as provided in the proposed 
regulations with the clarification that parking spaces that are used to 
park vehicles owned by members of the general public while the vehicles 
await repair or service by the taxpayer also are treated as provided to 
the general public.
iv. Parking Facility
    The final 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 on Notice 2018-99 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'' in the proposed regulations should exclude such 
spaces. In response to these comments, the proposed regulations 
specifically excluded parking spaces on or near property used by the 
employee for residential purposes from the definition of parking 
facility. The final regulations adopt this definition, without 
modification.
v. Geographic Location
    Consistent with the proposed regulations, the final regulations 
allow the taxpayer 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.
    The proposed regulations defined 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

[[Page 81395]]

road, street, railroad, stream, or similar property. Tracts or parcels 
of land which touch only at a common corner are not contiguous.
    A commenter suggested that the definition of geographic location be 
expanded to allow parking lots located within reasonable distance (\1/
4\ mile) of a principal parking lot to be aggregated as part of a 
single geographic location. The commenter explained that automotive 
dealers often have overflow parking lots not designated for any purpose 
available relatively close to the business location in the event the 
inventory levels exceed the spaces available at the principal location.
    The Treasury Department and the IRS considered this comment and 
decline to adopt it because the term ``reasonable distance'' is 
difficult to define and, as the commenter explained, overflow parking 
facilities are typically utilized for excess inventory vehicles, 
instead of parking for the general public. The Treasury Department and 
the IRS believe that expanding the definition of geographic location to 
include noncontiguous tracts or parcels of land would introduce 
unnecessary complexity without providing a meaningful benefit to 
taxpayers. Thus, the final regulations adopt the proposed regulations' 
definition of geographic location, without modification.
vi. Total Parking Spaces
    The proposed regulations defined the term ``total parking spaces'' 
as the total number of parking spaces, or the taxpayer's portion 
thereof, in the parking facility. No comments were received on this 
definition, and the final regulations adopt it without modification.
vii. Reserved Employee Spaces
    A commenter on Notice 2018-99 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, 
in the proposed regulations, provided that costs allocated to reserved 
employee spaces would be disallowed regardless of actual use of the 
reserved spaces. However, the proposed regulations also included a 
special rule 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. The final regulations 
adopt the disallowance of costs allocated to reserved employee spaces 
and the special rule in step 1 of the primary use methodology provided 
in the proposed regulations, without modification.
viii. Reserved Nonemployee Spaces
    A commenter on Notice 2018-99 suggested that parking spaces 
reserved for drivers with disabilities be treated as ``reserved 
nonemployee spaces'' and thus, any related expenses not be disallowed 
under section 274(a)(4). After considering the comment, the Treasury 
Department and the IRS declined to include parking spaces reserved for 
drivers with disabilities from the definition of reserved nonemployee 
spaces in the proposed regulations. The Treasury Department and the IRS 
reasoned that 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. The proposed regulations also did not include 
parking spaces reserved for drivers with disabilities in ``reserved 
employee spaces'' because they may or may not be exclusively reserved 
for employees. The final regulations adopt the proposed regulations' 
definitions of reserved nonemployee spaces and reserved employee 
spaces, without modification.
ix. Inventory/Unusable Spaces
    The Treasury Department and the IRS received questions and comments 
in response to Notice 2018-99 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 added a new definition for the term ``inventory/unusable 
spaces'' that includes parking spaces used exclusively 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.
    A commenter on the proposed regulations suggested that inventory 
spaces should be included in the definition of spaces available to the 
general public in cases where inventory spaces may at times be used by 
customers and are not available for employee parking. The Treasury 
Department and the IRS note that spaces used by customers should not be 
included in inventory/unusable spaces. Therefore, the final regulations 
adopt the definition of ``inventory/unusable spaces'' included in the 
proposed regulations, with the clarification that inventory/unusable 
spaces are otherwise not usable for parking by the general public.
    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 final regulations. The 
final regulations exclude inventory/unusable spaces because those 
spaces are not available to employees or the general public but are 
instead used exclusively 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.
    A commenter on the proposed regulations requested that a safe 
harbor be added to the final regulations to determine the number of 
inventory spaces at a car dealership because of extreme fluctuations of 
inventory over a car dealer's tax year. The commenter suggested that 
the safe harbor should be based on an annualization of the number of 
spaces occupied by inventory vehicles at the end of the month during 
the tax year with lowest inventory, or alternatively, based on the 
average number of spaces occupied by inventory vehicles at the end of 
each month. The commenter further suggested that inventory per month 
should be determined based on inventory levels a car dealer reports to 
the vehicle manufacturer on monthly financial reporting.
    The Treasury Department and the IRS note that the proposed 
regulations did not specifically describe how taxpayers should 
determine the number of inventory/unusable spaces in the parking 
facility. Thus, the Treasury Department and the IRS have added a rule 
in these final regulations providing that taxpayers may use any 
reasonable methodology to determine the number

[[Page 81396]]

of inventory/unusable spaces in the parking facility. In addition, in 
response to the commenter's alternative suggestion, the final 
regulations provide that a reasonable methodology may include using the 
average of monthly inventory counts.
x. Available Parking Spaces
    The proposed regulations included a definition of ``available 
parking spaces'' to clarify that reserved employee spaces and 
inventory/unusable spaces are not included in determining primary use 
under the primary use methodology. No comments were received on this 
definition, and the final regulations adopt it without modification.
xi. Primary Use
    The proposed regulations provided that for purposes of the primary 
use test of the primary use methodology, ``primary use'' means greater 
than 50 percent of actual or estimated usage of the parking spaces in 
the parking facility by the general public. A commenter on the proposed 
regulations suggested that the final regulations provide that primary 
use should mean 30 percent or greater for healthcare facilities, 
including skilled nursing and assisted living healthcare facilities, 
because the employees at these types of healthcare businesses provide 
essential and life-saving care services to the public, especially 
during the ongoing Coronavirus Disease (COVID-19) pandemic.
    After considering this comment, the Treasury Department and the IRS 
have decided to retain the primary use test as described in the 
proposed regulations. The Treasury Department and the IRS continue to 
believe that this primary use test is a reasonable interpretation of 
the exception in section 274(e)(7) for parking made available to the 
general public. Further, this interpretation is consistent with recent 
final regulations addressing the application of the section 274(e)(7) 
exception to the limitation on the deduction for meals and 
entertainment expenses, which apply the section 274(e)(7) exception to 
food and beverages ``primarily consumed'' by the general public, 
meaning greater than 50 percent of actual or reasonably estimated 
consumption. See TD 9925, 85 FR 64026 (October 9, 2020).
    The Treasury Department and the IRS understand that the primary use 
of a parking facility could be affected by a federally declared 
disaster such as the COVID-19 pandemic. Thus, as discussed in part 
1.B.xiv. of this Summary of Comments and Explanation of Revisions 
section, the final regulations modify the definition of ``peak demand 
period'' to provide flexibility for taxpayers affected by a federally 
declared disaster to determine the primary use of parking spaces used 
by employees during the peak demand period.
xii. Total Parking Expenses
    Commenters on Notice 2018-99 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.'' Commenters reasoned that including the 
expenses may encourage unsafe parking conditions and neglect of care in 
maintaining the parking facilities. Commenters on the Notice 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 on the Notice 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 determined that the proposed regulations should include the 
definition of the term ``total parking expenses'' from Notice 2018-99, 
and the final regulations adopt this definition without modification. 
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, 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 on Notice 2018-99 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 included in the proposed 
regulations a definition for the term ``mixed parking expense'' and a 
special rule for allocating certain mixed parking expenses. The 
proposed regulations defined ``mixed parking expense'' 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 
proposed regulations provided that mixed parking expenses may be 
allocated using any reasonable methodology but provided a special rule 
for allocating certain mixed costs that taxpayers could chose to apply 
in conjunction with certain of the methodologies for determining 
disallowed parking expenses.
    The final regulations adopt the definition of ``mixed parking 
expenses'' included in the proposed regulations, as well as the rule 
allowing the use of any reasonable methodology to allocate mixed 
parking expenses. However, the final regulations make certain 
modifications to the allowance of the special rule in the proposed 
regulations for allocating certain mixed parking expenses. The special 
rule for allocating certain mixed parking expenses to a parking 
facility and the modifications made in the final regulations is 
explained in part 1.C of this Summary of Comments and Explanation of 
Revisions section.
    A commenter on the proposed regulations suggested using property 
tax assessments and/or acreage to determine the amount of mixed parking 
expenses allocable to a parking facility. The Treasury Department and 
the IRS note that taxpayers may use any reasonable methodology to 
allocate mixed parking expenses. However, the Treasury Department and 
the IRS decline to adopt a specific methodology as reasonable for this 
purpose. The Treasury Department and the IRS further note that the 
methodology must be reasonable for the expense being allocated. Thus, 
one methodology for multiple expenses may be used only if the 
methodology is reasonable for all such expenses.
xiv. Peak Demand Period
    In the 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

[[Page 81397]]

peak demand period for employee parking on a typical business day. The 
proposed regulations provided that for purposes of 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.
    A commenter on the proposed regulations explained that it is overly 
burdensome for taxpayers at healthcare facilities to determine how many 
employees are at each location 24 hours a day, 7 days a week and 
instead suggested using an average based on the primary location of 
each employee and the amount of time each employee typically works each 
week. The Treasury Department and the IRS considered the comment and 
have determined that the proposed rules regarding ``peak demand 
period'' should be adopted in the final regulations, subject to an 
optional rule for parking facilities located in a federally declared 
disaster area as discussed later in this part 1.B.xiv. of this Summary 
of Comments and Explanation of Revisions section. However, the Treasury 
Department and the IRS note that the definition of peak demand period 
allows for flexibility based on taxpayer facts and circumstances by 
allowing taxpayers to choose a typical business day during the taxable 
year and to use any reasonable methodology to determine the total 
number of spaces used by employees. For example, a taxpayer may 
determine the total number of spaces used by employees based on 
periodic inspections or employee surveys.
    The ongoing 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. In 
the preamble to the proposed regulations, the Treasury Department and 
the IRS requested comments on what additional rules, if any, are needed 
to address significant variations in employee parking during the 
taxable year due to the COVID-19 pandemic. One commenter suggested that 
the final regulations allow for a COVID-19 exception for employees not 
working at the workplace location and thus not using employee parking 
during the period of the COVID-19 pandemic. Specifically, the commenter 
requested that taxpayers be permitted to calculate their disallowance 
under one of the simplified methodologies in Sec.  1.274-13(d)(2), and 
then reduce their disallowance by a certain amount based on the 
taxpayer's ``COVID relief period'' and the reduction in their workforce 
during that period.
    Although the commenter's example would not be permitted under any 
of the simplified methodologies in the proposed or final regulations 
because taxpayers must use one methodology for the entire year, 
taxpayers may achieve a similar result using any reasonable method 
under the general rule. Taxpayers also may achieve a similar result by 
using a monthly computation method such as the qualified parking limit 
methodology or the cost per space methodology. A taxpayer using the 
cost per space methodology generally computes the cost per space and 
multiplies it by the number of spaces used by employees during the peak 
demand period. Although the proposed regulations did not specify 
whether the cost per space must be based on one peak demand period in 
the taxable year, these final regulations clarify that the cost per 
space calculation may be performed on a monthly basis.
    A taxpayer using the primary use methodology would be allowed a 
full deduction for parking expenses (except for expenses related to 
reserved employee spaces) if the primary use of the parking facility 
during the peak demand period is for the general public. The proposed 
regulations defined ``peak demand period'' as 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. As discussed previously in this part 1.B.xiv. of this Summary 
of Comments and Explanation of Revisions section, the final regulations 
retain this general definition. However, to provide relief to taxpayers 
affected by the COVID-19 pandemic or other federally declared 
disasters, the final regulations add an optional rule in the definition 
of ``peak demand period'' for taxpayers who own or lease a parking 
facility that is located in a federally declared disaster area, as 
defined in section 165(i)(5). A taxpayer that uses this rule may 
identify a typical business day for the taxable year in which the 
disaster occurred by reference to a typical business day in that 
taxable year prior to the date that the taxpayer's operations were 
impacted by the federally declared disaster. For example, a restaurant 
that transitioned from a dine-in restaurant to take-out service due to 
the COVID-19 pandemic could determine its parking disallowance under 
the primary use test based on the usage of parking on a typical 
business day prior to its transition to take-out service. 
Alternatively, under this rule, a taxpayer may choose to identify a 
typical business day for the month(s) of the taxable year in which the 
disaster occurred by reference to a typical business day in the same 
month(s) of the taxable year immediately preceding the taxable year in 
which the disaster first occurred. For purposes of this rule, the 
taxable year in which the disaster occurred is determined without 
regard to whether the taxpayer makes an election under section 165(i). 
In order to allow taxpayers affected by the COVID-19 pandemic to 
benefit from this rule, the final regulations allow a taxpayer to apply 
this rule to taxable years ending after December 31, 2019. This rule is 
intended to provide relief to both calendar and fiscal year taxpayers, 
as well as taxpayers with a seasonal business, that are affected by a 
federally declared disaster.
C. Optional Rules for QTF Parking Expenses
    The proposed regulations included a special rule for allocating 
certain mixed parking expenses to reduce administrative burdens for 
taxpayers and simplify calculations in complying with section 
274(a)(4). Specifically, the proposed regulations provided that a 
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. 
However, the proposed regulations provided that the special rule for 
allocating certain mixed parking expenses may only be used in applying 
the primary use methodology and cost per space methodology and may not 
be used in applying the general rule or the qualified parking limit 
methodology. The proposed regulations did not require taxpayers to use 
the special rule for allocating certain mixed parking expenses and 
provided that taxpayers may instead use any reasonable methodology for 
mixed parking expenses.
    A commenter on the proposed regulations requested that the final 
regulations allow taxpayers to use this special rule for applicable 
mixed parking expenses when using the general rule to calculate the

[[Page 81398]]

disallowance of deductions for QTFs based on a reasonable 
interpretation of section 274(a)(4). In response to the commenter's 
request, these final regulations have extended the 5 percent optional 
rule for allocating certain mixed parking expenses to the general rule 
as a further attempt to reduce administrative burdens for taxpayers and 
to simplify calculations in complying with section 274(a)(4). The 
optional rule for allocating certain mixed parking expenses in these 
final regulations may therefore be used in applying the general rule, 
the primary use methodology, and the cost per space methodology. In 
addition, this optional rule may be used by taxpayers using the 
qualified parking methodology, but solely for the purpose of 
determining total parking expenses. As revised, this optional rule may 
be used to determine total parking expenses under any of the parking 
methodologies permitted in the proposed and final regulations. Thus, 
the final regulations relocate this rule from Sec.  1.274-13(c) to the 
definition of total parking expenses in Sec.  1.274-13(b)(12).
    A commenter suggested that the 5 percent special rule for 
allocating mixed parking expenses be expanded to include any parking 
expense that is not allocated by a service provider to a parking 
facility or is not accounted for separately on the taxpayer's books, 
including expenses for maintenance, snow and ice removal, landscape 
costs, security, cleaning. The Treasury Department and the IRS continue 
to believe that this optional rule should apply only to mixed parking 
expenses related to payments under a lease or rental agreement, and 
payments for utilities, insurance, interest and property taxes, and 
therefore, decline to adopt this comment. However, the final 
regulations clarify that a taxpayer who chooses to apply the 5 percent 
optional rule is not required to apply the rule to allocate all 
eligible mixed parking expenses. Thus, a taxpayer may choose to apply 
the 5 percent optional rule to allocate one or more of the eligible 
mixed parking expenses, while using a reasonable methodology to 
allocate remaining eligible mixed parking expenses. Certain types of 
expenses, such as parking facility maintenance, snow and ice removal, 
landscape costs, security, and parking facility cleaning are more 
likely to be separately billed and/or primarily allocable to the 
parking facility. Taxpayers may, however, continue to use any 
reasonable methodology to allocate these mixed parking expenses.
    Consistent with the proposed regulations, the final regulations 
permit taxpayers using certain methodologies to aggregate the number of 
parking spaces in a single geographic location if they so choose. The 
final regulations adopt the proposed definition of the term 
``geographic location,'' which is based on tracts or parcels of land 
that are contiguous. The optional rule for aggregation of parking 
spaces in a single geographic location may be used in applying the 
general rule, primary use methodology, and cost per space methodology, 
but may not be used with the qualified parking limit methodology. The 
final regulations clarify that a taxpayer that chooses to apply this 
optional aggregation rule must treat the aggregated parking spaces as 
one parking facility for purposes of determining total parking 
expenses.
D. Calculation of Disallowance of QTF Parking Expenses
    Like the proposed regulations, the final regulations 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. The Treasury Department and the IRS determined that amounts 
paid to a third party for qualified parking 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 
final regulations continue to provide that a 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. The general rule and 
three simplified methodologies are substantially the same as those 
provided in the proposed regulations, with the following modifications 
based on comments received.
i. General Rule
    Consistent with the proposed regulations, under the general rule 
provided in the final regulations taxpayers may calculate the 
disallowance 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).
    In response to the proposed regulations, a commenter recommended 
that taxpayers be permitted to elect to use historic information to 
calculate the current year disallowance to reduce the compliance burden 
of annually calculating the disallowance under section 274(a)(4). For 
example, the commenter suggested that the average disallowed amount for 
the prior two years may be used as the disallowance for the next five 
years or, alternatively, if the primary use of the available parking 
spaces is to provide parking to the general public for two out of three 
years, then the taxpayer may treat the primary use of the available 
parking spaces as providing parking to the general public for the next 
five years. The Treasury Department and the IRS considered this comment 
and do not believe that section 274(a)(4) permits taxpayers to compute 
the amount of a permanently disallowed deduction for a taxable year 
based on the amount of the disallowance in one or more different 
taxable years.
ii. Qualified Parking Limit Methodology
    Consistent with the proposed regulations, the final regulations 
provide 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. Taxpayers 
using the qualified parking limit methodology 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, 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.
    A commenter recommended the adoption of an alternative monthly rate 
of $25 per parking space, instead of the maximum monthly dollar amount 
under section 132(f)(2), to estimate a taxpayer's monthly total cost 
per parking space for parking facilities located outside the city 
limits of the 20 most populous cities in the United States. The 
commenter explained that this will encourage the use of the qualified 
parking limit methodology by manufacturers and employers with parking 
spaces in less populous areas. The Treasury Department and the IRS 
decline to adopt this comment because

[[Page 81399]]

the commenter provided no evidence that the monthly rate of $25 per 
parking space is the appropriate cost for all parking spaces located 
outside the city limits of the 20 most populous cities in the United 
States.
    Section 274(e)(2) provides 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. Under Sec.  1.274-13(e)(2)(i) of the proposed 
regulations, 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 could 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, the proposed 
regulations provided that the qualified parking limit methodology could 
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). The final regulations adopt 
this rule from the proposed regulations without change.
iii. Primary Use Methodology
    The Treasury Department and the IRS received numerous comments on 
Notice 2018-99 related to the four-step method provided in the Notice. 
The proposed regulations adopted the four-step method provided in the 
Notice, with revisions in response to comments, and renamed it the 
``primary use methodology.'' No comments were received on the primary 
use methodology included in the proposed regulations, and the final 
regulations adopt the primary use methodology without modification.
iv. Cost Per Space Methodology
    The proposed regulations also provided a cost per space 
methodology, which allows taxpayers to calculate the disallowance by 
multiplying the cost per space by the number of available parking 
spaces used by employees. Taxpayers must identify the number of total 
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 total parking spaces 
(including inventory/unusable spaces).
    In response to the proposed regulations, a commenter pointed out 
that a taxpayer using the cost per space methodology calculates the 
disallowance of deductions for QTF parking expenses by multiplying the 
cost per space by the total number of ``available parking spaces'' used 
by employees during the peak demand period rather than the ``total 
parking spaces'' used by employees. The commenter suggested that 
``total parking spaces'' should be used instead of ``available parking 
spaces'' because reserved spaces are excluded from the definition of 
``available parking spaces.'' The Treasury Department and the IRS agree 
with this suggestion and modify the cost per space methodology provided 
in the proposed regulations by specifying that ``total parking spaces'' 
is used to calculate the disallowance under the final regulations. In 
addition, as discussed in part 1.B.xiv. of this Summary of Comments and 
Explanation of Revisions section, the final regulations clarify that 
the cost per space calculation may be performed on a monthly basis.
v. Expenses for Transportation in a Commuter Highway Vehicle and 
Transit Pass QTFs
    Consistent with the proposed regulations, the final 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). The general rules are unchanged from those in the proposed 
regulations.
E. Specific Exceptions to Section 274(a) for QTF Expenses
    Section 274(e) provides that the deduction disallowance under 
section 274(a) does not apply to any expense described in section 
274(e). Consistent with the proposed regulations, the final regulations 
provide that the deduction disallowance does not apply to expenditures 
for QTFs that meet the requirements of section 274(e)(2), (7), or (8), 
which are the three exceptions in section 274(e) that are relevant for 
QTFs.
    A commenter suggested that the IRS implement a moratorium on 
enforcement of the deduction disallowance for the expense of QTFs 
during the ongoing COVID-19 pandemic. In addition, a commenter 
requested that healthcare facilities, including skilled nursing and 
assisted living healthcare facilities, be excepted from the section 
274(a)(4) disallowance because the employees at these types of 
healthcare businesses provide essential and life-saving care services 
to the public.
    The Treasury Department and the IRS note that exceptions for QTFs 
during the COVID-19 pandemic or for healthcare facility 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 that 
the Treasury Department and the IRS may allow. However, as discussed in 
part 1.B.xiv. of this Summary of Comments and Explanation of Revisions 
section, the Treasury Department and the IRS are modifying the 
definition of ``peak demand period'' to provide additional flexibility 
for taxpayers affected by the COVID-19 pandemic or other federally 
declared disaster in applying the methodologies for determining the 
section 274(a)(4) disallowance for parking facilities.
i. Certain QTF Expenses Treated as Compensation Under Section 274(e)(2)
    Section 274(e)(2) provides an exception to section 274(a) for 
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. Pursuant to section 274(e)(2), the proposed regulations provided 
that the disallowance under section 274(a) does not apply to 
expenditures for QTFs to the extent the taxpayer properly 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. Because section 132(a)(5) 
excludes the value of QTFs from an employee's gross income up to the 
limitations on exclusion provided by section 132(f)(2), the proposed 
regulations provided 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 proposed regulations further 
provided that section 274(e)(2) applies to expenses paid or incurred 
for QTFs, 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

[[Page 81400]]

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.
    Section 1.61-21(b)(1) provides rules for the valuation of fringe 
benefits and requires that an employee must include in gross income the 
amount by which the fair market value of the fringe benefit exceeds the 
sum of the amount paid for the benefit by or on behalf of the recipient 
and the amount, if any, specifically excluded from gross income under 
the Code. Thus, in the case of reimbursements by a recipient, the 
amount of the reimbursement is taken into account in determining the 
amount properly includible in the recipient's income and does not 
affect the taxpayer's ability to use the exception in section 
274(e)(2).
    To prevent taxpayers from inappropriately claiming a full 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, the proposed 
regulations provided that the exception in section 274(e)(2) does not 
apply to expenses for QTFs for which the taxpayer calculates a value 
that is less than the amount required to be included in gross income 
under Sec.  1.61-21.
    Commenters on the proposed regulations under section 274 limiting 
deductions for meals and entertainment expenses (proposed Sec. Sec.  
1.274-11 and 1.274-12 (REG-100814-19)) asserted that a rule disallowing 
the application of section 274(e)(2) to expenses for which an improper 
amount is included in compensation and wages or in gross income, as 
applicable, is unduly harsh given the difficulty in determining the 
value of a fringe benefit under Sec.  1.61-21 and the possibility of 
good faith errors. See TD 9925, 85 FR 64026, 64031 (October 9, 2020). 
In addition, a commenter noted that the ``to the extent that'' language 
in section 274(e)(2)(A) does not support applying an ``all or nothing'' 
rule against the taxpayer.
    The Treasury Department and the IRS agree that the ``all or 
nothing'' rule in proposed Sec. Sec.  1.274-13 and 1.274-14 may lead to 
unduly harsh results. Therefore, in response to these comments, the 
Treasury Department and the IRS have revised the rules in proposed 
Sec.  1.274-13(e)(2)(i) to allow a taxpayer to apply section 274(e)(2) 
even if the taxpayer includes less than the proper amount in 
compensation and wages as required under Sec.  1.61-21. In such a case, 
however, the amount of a taxpayer's deduction is limited to the amount 
included in compensation and wages, taking into account the amount, if 
any, reimbursed to the taxpayer by the employee (referred to as the 
``dollar-for-dollar'' methodology in this preamble). This is consistent 
with the rule provided in section 274(e)(2)(B) for QTFs provided to 
specified individuals.
    The final regulations also provide that if the value of a QTF 
exceeds the monthly per employee limitations on exclusion provided by 
section 132(f)(2) ($270 per employee for 2020), so that only a portion 
of the value is included in the employees' wages, the taxpayer may 
apply section 274(e)(2). However, in this case, the taxpayer must use 
the dollar-for-dollar methodology.
ii. Expenses for Transportation in a Commuter Highway Vehicle, Transit 
Pass, or Parking Made Available to the Public
    Section 274(e)(7) provides an exception to section 274(a) for 
expenses for goods, services, and facilities made available by the 
taxpayer to the general public. Pursuant to section 274(e)(7), the 
proposed regulations provided 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) 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. No comments were received on this provision, and 
the final regulations adopt it without modification. As described 
further in part 1.B.iii. of this Summary of Comments and Explanation of 
Revisions section, ``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 (as defined in section 1372(b)), 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 (as defined in section 1372(b)), 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
    Section 274(e)(8) provides an exception to section 274(a) for 
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. Pursuant to section 
274(e)(8), the proposed regulations provided 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 provided 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. The final regulations adopt these provisions.
    A commenter requested guidance in the final regulations for a 
situation in which employees are charged for parking at a parking 
facility. If a taxpayer charges its employees for parking at its 
parking facilities in a bona fide transaction for adequate and full 
consideration in money or money's worth, the employees are the 
taxpayer's customers for this purpose and the exception in section 
274(e)(8) and Sec.  1.274-13(e)(2)(iii) would apply. On the other hand, 
if an employee pays less than adequate and full consideration, this 
exception would not apply because the parking was not sold to the 
employee for full consideration. In this case, however, the taxpayer 
may apply the exception in section 274(e)(2) and Sec.  1.274-
13(e)(2)(i) to the extent of the reimbursement.
    Another commenter suggested that the deduction disallowance for the 
expense of any QTF should not apply to expenses for parking that has no 
objective value to the taxpayer's employees, such as parking in 
industrial, remote, or rural areas (that is, areas where the general 
public would not pay to park). In response to this comment, the 
Treasury Department and the IRS have determined that the exception in 
section 274(e)(8) and the final regulations at Sec.  1.274-
13(e)(2)(iii) should apply if in a bona fide transaction, the adequate 
and full consideration for qualified parking is zero. The final 
regulations provide that to apply the exception in such a case, the 
taxpayer bears the burden of proving that the fair market value of the 
qualified parking is zero. However, a taxpayer will be treated as 
satisfying this burden if the qualified parking is provided in a rural, 
industrial, or remote area in which no commercial parking is available 
and an individual other than

[[Page 81401]]

an employee ordinarily would not pay to park. The final regulations 
also provide an example illustrating the application of this rule.

2. Transportation and Commuting Expenses

    Section 274(l)(1), as added by the TCJA, 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. The provision applies to expenses paid or incurred after 
December 31, 2017. Section 274(l)(2) provides that 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, which, also for such 
period, are not excluded from an employee's income under section 
132(f)(8), are not disallowed under section 274(l).
    Section 1.274-14 addresses the disallowance of deductions under 
section 274(l). Section 1.274-14 of the proposed regulations provided 
that 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.
    A commenter suggested that the final regulations clarify that 
section 274(l) applies to commuting expenses only and does not apply to 
business travel. The commenter further requested that the concept of 
transportation originating at a hub near the employee's residence or 
place of employment be removed from the proposed regulations because it 
may disallow business travel between two places of employment. In 
addition, the commenter noted that it is incorrect to describe a 
commute as originating at a transportation hub because an individual's 
commute will always begin at the residence, even if the individual 
first travels from the residence to the transportation hub. Thus, the 
commenter suggested that instead of the hub reference, the final 
regulations provide that the application of section 274(l) to travel 
between a residence and place of employment is not affected by the use 
of different modes of transportation on the trip.
    The Treasury Department and the IRS agree with these suggestions. 
The final regulations do not include a reference to a transportation 
hub and instead explain that travel between the employee's residence 
and place of employment is not affected by the use of different modes 
of transportation, or by whether the employer pays for all modes of 
transportation during the commute. The final regulations also state 
that the disallowance under section 274(l) does not apply to business 
expenses under section 162(a)(2) paid or incurred while traveling away 
from home.
    A commenter suggested that only the marginal cost of commuting 
should be disallowed, similar to spouse and dependent travel in section 
274(m)(3). The Treasury Department and the IRS decline to adopt this 
suggestion because the language of section 274(l) broadly refers to 
``any expense'' incurred for the provision of commuting to an employee. 
Further, the Treasury Department and the IRS are not aware of any 
evidence that Congress intended to disallow only the marginal cost of 
commuting.
    A commenter requested that the final regulations include a 
definition of ``employee'' for purposes of section 274(l). In response 
to this comment, the Treasury Department and the IRS include a 
definition of employee in the final regulations. Under the final 
regulations, the term ``employee'' means an employee of the taxpayer as 
defined in section 3121(d)(1) and (2) (that is, officers of a corporate 
taxpayer and employees of the taxpayer under the common law rules).
    The proposed regulations provided 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.
    A commenter requested that the final regulations limit the 
definition of ``residence'' to the residence to or from which the 
employee regularly commutes, which generally is the employee's 
principal residence. The Treasury Department and the IRS decline to 
adopt this comment because nothing in the language of section 274(l) 
indicates that commuting is limited to transportation from a principal 
residence. An employee could, for example, regularly commute from a 
vacation home to the workplace. Thus, the final regulations continue to 
define ``residence'' by referencing the definition of the term 
``residence'' in Sec.  1.121-1(b)(1), and specifically provide that 
this definition may include a residence that is not a principal 
residence.
    The proposed regulations also defined the term ``safety of the 
employee,'' referencing the description of a bona fide business-
oriented security concern in Sec.  1.132-5(m). Several commenters 
suggested that the proposed rules for determining when transportation 
provided by an employer is necessary for the safety of the employee 
were too narrow and should be expanded to apply beyond a bona fide 
business-oriented security concern in Sec.  1.132-5(m). These 
commenters generally suggested that the final regulations should 
instead define ``safety of the employee'' by reference to Sec.  1.61-
21(k)(5). Section 1.61-21(k)(5) provides that unsafe conditions exist 
if a reasonable person would, under the facts and circumstances, 
consider it unsafe for the employee to walk to or from home, or to walk 
to or use public transportation at the time of day the employee must 
commute. One of the factors indicating whether it is unsafe is the 
history of crime in the geographic area surrounding the employee's 
workplace or residence at the time of day the employee must commute.
    The Treasury Department and the IRS agree with this suggestion. 
Accordingly, the final regulations clarify that a transportation or 
commuting expense is necessary for ensuring the safety of the employee 
if unsafe conditions, as described in Sec.  1.61-21(k)(5), exist for 
the employee.
    To further clarify the exception, a commenter also suggested that 
examples be included illustrating situations in which transportation 
provided by an employer is necessary for the safety of the employee. 
The Treasury Department and the IRS believe that further clarification 
is unnecessary in light of the final regulations' reference to unsafe 
conditions as described in Sec.  1.61-21(k)(5).
    A commenter suggested that temporary or occasional places of 
employment should not be considered an employee's place of employment 
for purpose of section 274(l). The commenter pointed to prior guidance 
issued by the IRS as well as to case law that provides that travel to a 
temporary place of employment is not treated as

[[Page 81402]]

commuting. The Treasury Department and the IRS agree with this comment 
and have modified the final regulations to explain that temporary or 
occasional places of employment are not an employee's place of 
employment under section 274(l). However, the final regulations provide 
that an employee must have at least one regular or principal place of 
business.
    The Treasury Department and the IRS have determined that the 
exceptions in section 274(e) do not apply to deductions disallowed by 
section 274(l), because the statutory language in section 274 applies 
the exceptions in 274(e) only to expenses that are otherwise disallowed 
or limited by section 274(a), (k), and (n). A commenter pointed out 
that although the exceptions in section 274(e) are applicable only to 
expenses disallowed or limited by section 274(a), (k), and (n), the 
Treasury Department and the IRS have previously extended the exceptions 
in 274(e)(2) to expenses otherwise disallowed by other subsections of 
section 274. Specifically, the commenter noted that the exception in 
section 274(e)(2) was extended to the spouse travel disallowance in 
Sec.  274(m)(3), pursuant to Sec.  1.274-2(f)(2)(iii).
    The Treasury Department and the IRS considered this comment but do 
not believe that the exception in section 274(e)(2) should be extended 
to commuting expenses disallowed by section 274(l). The Joint Committee 
on Taxation's ``Bluebook'' describing 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.

Joint Committee on Taxation, General Explanation of Public Law 115-97 
(JCS-1-18), at 190 (December 20, 2018). Thus, the final regulations do 
not apply the section 274(e) exceptions, including section 274(e)(2), 
to commuting expenses disallowed by section 274(l).

Applicability Date

    These regulations apply to taxable years beginning on or after 
December 16, 2020. Notwithstanding the preceding sentence, taxpayers 
may choose to apply Sec.  1.274-13(b)(14)(ii) of these final 
regulations to taxable years ending after December 31, 2019.
    Taxpayers may continue to rely on proposed Sec. Sec.  1.274-13 
through 1.274-14, which were issued in a notice of proposed rulemaking 
(REG-119307-19) and published on June 23, 2020, in the Federal Register 
(85 FR 37599) or the guidance provided in Notice 2018-99 for parking 
expenses, other QTF expenses, and transportation and commuting 
expenses, as applicable, paid or incurred in taxable years beginning 
after December 31, 2017 and before December 16, 2020.

Special Analyses

    These final 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.
    Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it 
is hereby certified that this final 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 may affect entities that incur QTF or commuting 
expenses. The economic impact of these regulations is not likely to be 
significant, however, because these final regulations substantially 
incorporate prior guidance and otherwise clarify the application of the 
TCJA changes to section 274 related to QTF and commuting expenses. 
These final regulations will assist taxpayers in understanding the 
changes to section 274 and make it easier for taxpayers to comply with 
those changes. Accordingly, the Secretary of the Treasury's delegate 
certifies that the rule will not have a significant economic impact on 
a substantial number of small entities. 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 final regulations have been 
submitted to the Chief Counsel for the Office of Advocacy of the Small 
Business Administration for comment on their impact on small business. 
No comments on the proposed regulations were received from the Chief 
Counsel for the Office of Advocacy of the Small Business 
Administration.

Effect on Other Documents

    The following publications are obsolete as of December 16, 2020.
    Notice 2018-99 (2018-52 I.R.B. 1067).

Statement of Availability of IRS Documents

    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 http://www.irs.gov.

Drafting Information

    The principal author of this final 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.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAX

0
Paragraph 1. The authority citation for part 1 is amended by adding 
entries in 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.
* * * * *
    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. Section 1.274-13 is 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:

[[Page 81403]]

    (i) 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));
    (ii) Any transit pass (as described in sections 132(f)(1)(B) and 
132(f)(5)(A)); or
    (iii) 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 (as defined in section 
1372(b)), sole proprietors, and independent contractors are not 
employees of the taxpayer for purposes of this section. See Sec.  
1.132-9 Q/A-24.
    (3) General public. (i) In general. 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. The 
term general public does not include individuals that are employees, 
partners, 2-percent shareholders of S corporations (as defined in 
section 1372(b)), sole proprietors, or independent contractors of the 
taxpayer. Also, an exclusive list of guests of a taxpayer is not the 
general public. Parking spaces that are available to the general public 
but empty are treated as provided to the general public. Parking spaces 
that are used to park vehicles owned by the general public while the 
vehicles await repair or service by the taxpayer are also treated as 
provided to the general public.
    (ii) Multi-tenant building. 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 (as defined in 
section 1372(b)), sole proprietors, independent contractors, clients, 
or customers of unrelated tenants in the building.
    (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. 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 (as defined in section 1372(b)), 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 or the general public. 
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). Taxpayers may use any reasonable methodology to determine 
the number of inventory/unusable spaces in the parking facility. A 
reasonable methodology may include using the average of monthly 
inventory counts.
    (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--(i) In general. 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 taxpayer may use any reasonable methodology to allocate 
mixed parking expenses to a parking facility. 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.
    (ii) Optional rule for allocating certain mixed parking expenses. A 
taxpayer may choose to allocate 5 percent of any the following mixed 
parking expenses to a parking facility: Lease or rental agreement 
expenses, property taxes, interest expense, and expenses for utilities 
and insurance.
    (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--(i) In general. The term peak demand 
period refers to the period of time on a typical business day during 
the taxable year when the greatest number of the taxpayer's employees 
are utilizing

[[Page 81404]]

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. A reasonable 
methodology may include periodic inspections or employee surveys.
    (ii) Optional rule for federally declared disasters. If a taxpayer 
owns or leases a parking facility that is located in a federally 
declared disaster area, as defined in section 165(i)(5), the taxpayer 
may choose to identify a typical business day for the taxable year in 
which the disaster occurred by reference to a typical business day in 
that taxable year prior to the date that the taxpayer's operations were 
impacted by the federally declared disaster. Alternatively, a taxpayer 
may choose to identify a typical business day during the month(s) of 
the taxable year in which the disaster occurred by reference to a 
typical business day during the same month(s) of the taxable year 
immediately preceding the taxable year in which the disaster first 
occurred. For purposes of applying the optional rule for federally 
declared disasters, the taxable year in which the disaster occurs is 
determined without regard to whether an election under section 165(i) 
is made with respect to the disaster.
    (c) Optional aggregation rule for calculating total parking spaces; 
taxpayer owned or leased parking facilities. For purposes of 
determining total parking spaces in calculating the disallowance of 
deductions for qualified transportation fringe parking expenses under 
the general rule in paragraph (d)(2)(i) of this section, the primary 
use methodology in paragraph (d)(2)(ii)(B) of this section, or the cost 
per space methodology in paragraph (d)(2)(ii)(C) of this section, a 
taxpayer that owns or leases more than one parking facility in a single 
geographic location may aggregate the number of spaces in those parking 
facilities. 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. A taxpayer that 
chooses to aggregate its parking spaces under this paragraph (c) must 
determine its total parking expenses, including the allocation of mixed 
parking expenses, as if the aggregated parking spaces constitute one 
parking facility.
    (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 use the aggregation rule in 
paragraph (c) of this section for determining total parking spaces. 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). In applying this 
methodology, a taxpayer calculates the disallowed amount as required 
under this paragraph (d)(2)(ii)(A), regardless of the actual amount of 
the taxpayer's total parking expenses. 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) as compensation paid to the employee 
under chapter 1 of the Code (chapter 1) and as wages to the employee 
for purposes of withholding under chapter 24 of the Code (chapter 24), 
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 the aggregation rule in paragraph 
(c) of this section.
    (B) Primary use methodology. A taxpayer that uses the primary use 
methodology in this paragraph

[[Page 81405]]

(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 for which the taxpayer uses 
the primary use methodology. A taxpayer using this methodology may use 
the aggregation rule in paragraph (c) of this section for determining 
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 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 following conditions are met:
    (i) 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;
    (ii) There are five or fewer reserved employee spaces in the 
parking facility; and
    (iii) 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.
    (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 number of total 
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. 
This calculation may be performed on a monthly basis. A taxpayer using 
this methodology may use the aggregation rule in paragraph (c) of this 
section for determining 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) Expenses includible in income of persons who are 
employees and are not specified individuals. In accordance with section 
274(e)(2)(A), and except as provided in paragraph (e)(2)(i)(C) of this 
section, an expense paid or incurred by a taxpayer for a qualified 
transportation fringe, if an employee who is not a specified individual 
is the recipient of the qualified transportation fringe, is not subject 
to the disallowance of deductions provided for in paragraph (a) of this 
section to the extent that the taxpayer--
    (1) Properly treats the expense relating to the recipient of the 
qualified transportation fringe as compensation to an employee under 
chapter 1 and as wages to the employee for purposes of chapter 24; and
    (2) Treats the proper amount as compensation to the employee under 
Sec.  1.61-21.
    (B) Specified Individuals. In accordance with section 274(e)(2)(B), 
in the case of a specified individual (as defined in section 
274(e)(2)(B)(ii)), the disallowance of deductions provided for in 
paragraph (a) of this section does not apply to an expense for a 
qualified transportation fringe of the specified individual to the 
extent that the amount of the expense does not exceed the sum of--

[[Page 81406]]

    (1) The amount treated as compensation to the specified individual 
under chapter 1 and as wages to the specified individual for purposes 
of chapter 24; and
    (2) Any amount the specified individual reimburses the taxpayer.
    (C) Expenses for which an amount is excluded from income or is less 
than the proper amount. Notwithstanding paragraph (e)(2)(i)(A) of this 
section, in the case of an expense paid or incurred by a taxpayer for a 
qualified transportation fringe for which an amount is wholly or 
partially excluded from a recipient's income under subtitle A of the 
Code (other than because the amount is reimbursed by the recipient), or 
for which an amount included in compensation and wages to an employee 
is less than the amount required to be included under Sec.  1.61-21, 
the disallowance of deductions provided for in paragraph (a) of this 
section does not apply to the extent that the amount of the expense 
does not exceed the sum of--
    (1) The amount treated as compensation to the recipient under 
chapter 1 and as wages to the recipient for purposes of chapter 24; and
    (2) Any amount the recipient reimburses the taxpayer.
    (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 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 transportation in a 
commuter highway vehicle, a transit pass, or parking in a bona fide 
transaction for an adequate and full consideration in money or money's 
worth. If in a bona fide transaction, the adequate and full 
consideration for qualified parking is zero, the exception in this 
paragraph (e)(2)(iii) applies even though the taxpayer does not 
actually sell the parking to its employees. To apply the exception in 
this case, the taxpayer bears the burden of proving that the fair 
market value of the qualified parking is zero. However, solely for 
purposes of this paragraph (e)(2)(iii), a taxpayer will be treated as 
satisfying this burden if the qualified parking is provided in a rural, 
industrial, or remote area in which no commercial parking is available 
and an individual other than an employee ordinarily would not pay to 
park in the parking facility.
    (f) Examples. The following examples illustrate the provisions of 
this section related to parking expenses for qualified transportation 
fringes. For each example, unless otherwise stated, 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; the fair market value of the qualified parking is not $0; 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 from the 
employees' gross income 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 from a third party a parking 
facility that includes 200 parking spaces 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

[[Page 81407]]

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 D's peak demand period. 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 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

[[Page 81408]]

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 aggregation rule in paragraph (c) 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.
    (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 the following mixed parking expenses (along with 
other parking expenses): Property taxes, utilities, insurance, security 
expenses, and snow removal expenses. In accordance with paragraph 
(b)(12)(i) and (ii) of this section, J determines its total parking 
expenses by allocating 5% of its property tax, utilities, and insurance 
expenses to its parking facility. J uses a reasonable methodology to 
allocate to its parking facility an applicable portion of its security 
and snow removal expenses. 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 total 
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 multiplies the cost per space by the number of total 
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 total 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.
    (11) Example 11. Taxpayer K operates an industrial plant with a 
parking facility in a rural area in which no commercial parking is 
available. K provides qualified parking at the plant to its employees 
free of charge. Further, an individual other than an employee 
ordinarily would not consider paying any amount to park in the plant's 
parking facility. Although K does not charge its employees for the 
qualified parking, the exception in section 274(e)(8) and this 
paragraph (e)(3)(iii) will apply to K's total parking expenses if in a 
bona fide transaction, the adequate and full consideration for the 
qualified parking is zero. In order to treat the adequate and full 
consideration as zero, K bears the burden of proving that the parking 
has no objective value. K is treated as satisfying this burden because 
the parking is provided in a rural area in which no commercial parking 
is available and in which an individual other than an employee 
ordinarily would not consider paying any amount to park in the parking 
facility. Therefore, the exception in paragraph (e)(2)(iii) of this 
section applies to K's total parking expenses and a deduction for the 
expenses is not disallowed by reason of section 274(a)(4).
    (g) Applicability date. This section applies to taxable years 
beginning on or after December 16, 2020. However, taxpayers may choose 
to apply Sec.  1.274-13(b)(14)(ii) to taxable years ending after 
December 31, 2019.

0
Par. 3. Section 1.274-14 is added to read as follows:

[[Page 81409]]

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 and place of 
employment. The disallowance is not subject to the exceptions provided 
in section 274(e). The disallowance applies regardless of whether the 
travel between the employee's residence and place of employment 
includes more than one mode of transportation, and regardless of 
whether the taxpayer provides, or pays or reimburses the employee for, 
all modes of transportation used during the trip. For example, the 
disallowance applies if an employee drives a personal vehicle to a 
location where a different mode of transportation is used to complete 
the trip to the place of employment, even though the taxpayer may not 
incur any expense for the portion of travel in the employee's personal 
vehicle. The rules in section 274(l) and this section do not apply to 
business expenses under section 162(a)(2) paid or incurred while 
traveling away from home. The rules in section 274(l) and this section 
also do not apply to any expenditure for 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 unsafe conditions, as described in Sec.  
1.61-21(k)(5), exist for the employee.
    (c) Definitions. The following definitions apply for purposes of 
this section:
    (1) Employee. The term employee means an employee of the taxpayer 
as defined in section 3121(d)(1) and (2) (that is, officers of a 
corporate taxpayer and employees of the taxpayer under the common law 
rules).
    (2) Residence. The term residence means a residence as defined in 
Sec.  1.121-1(b)(1). An employee's residence is not limited to the 
employee's principal residence.
    (3) Place of employment. The term place of employment means the 
employee's regular or principal (if more than one regular) place of 
business. An employee's place of employment does not include temporary 
or occasional places of employment. An employee must have at least one 
regular or principal place of business.
    (d) Applicability date. This section applies to taxable years 
beginning on or after December 16, 2020.

Sunita Lough,
Deputy Commissioner for Services and Enforcement.
    Approved: December 4, 2020.
David J. Kautter,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2020-27505 Filed 12-15-20; 8:45 am]
BILLING CODE 4830-01-P