Part IV

Notice of Proposed Rulemaking

Qualified Transportation Fringe, Transportation and Commuting Expenses under Section 274

REG-119307-19

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains proposed regulations to implement legislative changes to section 274 of the Internal Revenue Code (Code) effective for taxable years beginning after December 31, 2017. Specifically, the proposed 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 in taxable years beginning after December 31, 2017. The proposed 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 proposed regulations affect taxpayers who pay or incur such expenses.

DATES: Written or electronic comments and requests for a public hearing must be received by August 24, 2020. Requests for a public hearing must be submitted as prescribed in the “ Comments and Requests for a Public Hearing ” section.

ADDRESSES: Commenters are strongly encouraged to submit public comments electronically. Submit electronic submissions via the Federal Rulemaking Portal at www.regulations.gov (indicate IRS and REG-119307-19) by following the online instructions for submitting comments. Once submitted to the Federal Rulemaking Portal, comments cannot be edited or withdrawn. The IRS expects to have

limited personnel available to process public comments that are submitted on paper through mail. Until further notice, any comments submitted on paper will be considered to the extent practicable. The Department of the Treasury (Treasury Department) and the IRS will publish for public availability any comment submitted electronically, and to the extent practicable any comment submitted on paper, to its public docket. Send paper submissions to: CC:PA:LPD:PR (REG-119307-19), room 5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, DC 20044.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, call Patrick Clinton of the Office of Associate Chief Counsel (Income Tax and Accounting), (202) 317-7005; concerning the submission of comments and/or requests for a public hearing, Regina L. Johnson, (202) 317-5177 (not tollfree numbers).

SUPPLEMENTARY INFORMATION:

Background

This notice of proposed rulemaking contains proposed amendments to the Income Tax Regulations (26 CFR part 1) under section 274 of the Code.

1. Statutory Framework

Section 274 was added to the Code by section 4 of the Revenue Act of 1962, Public Law 87-834 (76 Stat. 960) and has been amended numerous times over the years. 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 512(a) (7) providing that a tax-exempt organization’s unrelated business taxable income (UBTI) is increased by the amount of the QTF expense for which a deduction is not allowable under section 274, effective for amounts paid or incurred after December 31, 2017. However, on December 20, 2019, section 512(a)(7) was repealed retroactive to the original date of enactment of the TCJA by section 302 of the Taxpayer Certainty and Disaster Tax Relief Act of 2019, enacted as part of the Further Consolidated Appropriations Act, 2020, Pub. L. No. 116-94, 133 Stat. 2534, Div. Q, Title III (2019). Although section 512(a)(7) was retroactively repealed, the rules of section 274 and these proposed regulations apply to tax exempt organizations to the extent the amount of the QTF expenses paid or incurred by an exempt organization is directly connected with an unrelated trade or business conducted by the exempt organization. In such case, the amount of the QTF expenses directly connected with the unrelated trade or business is subject to the disallowance under section 274(a)(4) and, thus, is disallowed as a deduction in calculating the UBTI attributable to such unrelated trade or business under the general rule of section 512(a) (1). While the examples set forth in proposed §1.274-13 involve taxable entities, tax exempt organizations with unrelated trades or businesses may use the examples to assist in determining the amount of the section 274(a)(4) disallowance for purposes of calculating their UBTI under section 512(a)(1).

Finally, the TCJA 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.

July 6, 2020 44 Bulletin No. 2020–28

2. Qualified Transportation Fringes

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.

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.

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. Although the value of a QTF is relevant in determining the exclusion under section 132(f) and whether the section 274(e)(2) exception for expenses treated as compensation applies, the deduction disallowed under section 274(a) (4) relates to the expense of providing a QTF, not its value. In addition, the disallowance of a deduction for commuting and transportation expenses under section 274(l) is suspended for any qualified bicy

cle 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 are not disallowed under sections 274(a)(4) and 274(l).

A. Section 274(e) Exceptions to Section 274(a)(4)

Section 274(e) enumerates nine specific exceptions to section 274(a), three of which, sections 274(e)(2), (e)(7), and (e) (8), are relevant for QTFs. Deductions for expenses that are within any of the three exceptions in section 274(e) are not disallowed under section 274(a)(4).

Section 274(e)(2) applies to 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 of the Code (chapter 24). Although the language in section 274(e)(2) refers to a recipient of entertainment, amusement, or recreation, it applies as a specific exception to the application of section 274(a), which, as amended by the TCJA, includes the QTF expense disallowance in section 274(a) (4). Thus, the Treasury Department and the IRS have determined that QTF expenses are included in this exception to the extent that the fair market value of the QTF exceeds the section 132(f)(2) limitation on exclusion and such excess amount is treated by the taxpayer as compensation to the employee on the taxpayer’s return of tax under chapter 1 and wages to such employee for purposes of chapter 24. See §1.132-9(b), Q/A-8. This interpretation is consistent with Congressional intent. See H.R. Rep. No.115-409, at 266 (2017) (“As part of its broader tax reform effort, the Committee believes that certain nontaxable fringe benefits should not be deductible by employers if not includible in income of employees.”).

Section 274(e)(7) applies to expenses for goods, services, and facilities made available by the taxpayer to the general public. Section 274(e)(8) applies to expenses for goods or services (including the use of facilities) which are sold by the

taxpayer in a bona fide transaction for an adequate full consideration in money or money’s worth.

B. Qualified parking

As explained earlier in part 2 of this Background, QTFs are defined in section 132(f)(1) to include qualified parking. The term “qualified parking” is defined in section 132(f)(5)(C) as parking provided to an employee on or near the business premises of the employer or on or near a location from which the employee commutes to work. The term does not include any parking on or near property used by the employee for residential purposes.

On December 24, 2018, the Treasury Department and the IRS published Notice 2018-99, 2018-52 I.R.B. 1067, “Parking Expenses for Qualified Transportation Fringes under § 274(a)(4) and § 512(a) (7) of the Internal Revenue Code”. Notice 2018-99 explains that the Treasury Department and the IRS have received questions about how to determine the amount of parking expenses that is nondeductible or treated as UBTI. Notice 2018-99 provides interim guidance for taxpayers to determine the amount of parking expenses for QTFs that is nondeductible under section 274(a)(4) (nondeductible amount) and for tax exempt organizations to determine the corresponding increase in the amount of UBTI under section 512(a)(7) attributable to the nondeductible parking expenses. Because section 512(a)(7) was retroactively repealed, as noted in part 1 of this Background, the following discussion of Notice 2018-99 focuses only on section 274(a)(4). Under Notice 2018-99, the method for determining the nondeductible amount depends on whether the taxpayer pays a third party to provide parking for its employees or the taxpayer owns or leases a parking facility where its employees park. If a taxpayer pays a third party an amount so that its employees may park at the third party’s parking facility, the section 274(a)(4) disallowance generally is calculated as the taxpayer’s total annual cost of employee parking paid to the third party. However, if the amount the taxpayer pays to a third party for an employee’s parking exceeds the section 132(f)(2) monthly limitation on exclusion, which for 2020 is $270 per employ

Bulletin No. 2020–28 45 July 6, 2020

ee, that excess amount generally must be treated by the taxpayer as compensation and wages to the employee. As a result, the total of the monthly amount in excess of $270 per employee that is treated as compensation and wages is excepted from the taxpayer’s section 274(a) disallowance amount by section 274(e)(2).