The IRS recently provided guidance in the form of proposed Treasury regulations (Proposed Regulations), which address the disallowance of employer deductions for the cost of providing commuting and parking benefits to employees. As you may recall, following the Tax Cuts and Jobs Act (TCJA) of 2017, the IRS provided complex, yet incomplete, guidance on how to calculate disallowed parking expenses. The Proposed Regulations provide some significant updates to simplify the process of calculating the disallowed deduction. While many of these changes are favorable to taxpayers, some may have unfavorable impacts.
The TCJA disallowed a deduction for the expense of any qualified transportation fringe benefit (QTFB) provided by taxpayers to their employees for expenses paid or incurred after Dec. 31, 2017. These benefits can still be excluded from an employee’s income, but an employer no longer gets a corresponding tax deduction if the amounts are not included in the employee’s income. Note, however, the disallowed deduction relates to the expense of providing a QTFB, not its value, and the determination of an expense is not always straightforward, especially for the cost of employee parking.
In 2018, the IRS provided interim guidance for taxpayers to determine the amount of parking expenses that is nondeductible. The interim guidance created as many questions as it answered, and the Proposed Regulations attempt to address some of these more glaring issues by clarifying the statutory requirements. In particular, they address QTFBs paid or incurred by an employer and transportation and commuting expenses paid or incurred by an employer.
The Proposed Regulations define relevant terms and modify previous guidance by providing a general rule and three simplified methodologies to determine the amount of nondeductible parking expenses when a parking facility is owned or leased by the taxpayer. Taxpayers may choose to apply the general rule or one of the three simplified methods for each taxable year and for each parking facility.
Payments to third parties. The Proposed Regulations provide that if the taxpayer pays a third party for its employee’s QTFB, the amount of the deduction disallowed is generally the taxpayer’s total annual cost of the QTFB paid to the third party.
New definitions. This Alert will not provide all definitions listed in the Proposed Regulations, but instead, draws attention to newly defined terms and resulting impact.
Multitenant parking. If a taxpayer owns or leases space in a multitenant building, employees, partners, 2-percent shareholders of S corporations, sole proprietors, independent contractors or customers of unrelated tenants in the building are included in the definition of general public. Consequently, the Proposed Regulations appear favorable to taxpayers.
The Proposed Regulations also address the disallowance of deductions for amounts paid or incurred after Dec. 31, 2017, for any expense incurred to provide any transportation, or any payment or reimbursement, to an employee of the taxpayer in connection with travel between the employee’s residence and place of employment, except as necessary for ensuring the safety of the employee. Travel between the employee’s residence and place of employment includes travel that originates at a transportation hub near the employee’s residence or place of employment. For example, an employee who commutes to work by airplane from an airport near the employee’s residence to an airport near the employee’s place of employment is traveling between the residence and place of employment.
Please reach out to your Baker Tilly tax advisor to discuss how these changes may affect your tax situation.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.