The 2017 U.S. tax law made the rules surrounding the tax treatment of employee transportation fringe benefits more complex and restrictive. This podcast provides an overview of this often overlooked benefit.
Melissa Abel (firstname.lastname@example.org): Hi, I’m Melissa Abel, a manager in KPMG’s Washington National Tax practice in the Income Tax & Accounting group.
Carly Rhodes (email@example.com): And I’m Carly Rhodes, a manager in the Compensation & Benefits group also with our Washington National Tax practice. Today, we are discussing the tax treatment of a commonly provided –
Melissa: but, in many cases overlooked –
Carly: finge benefit: transportation. The rules around how these benefits are treated from a tax perspective—specifically with respect to deductibility by the employer—have become more complex and more restrictive.
Melissa: The 2017 U.S. tax law—commonly referred to as the Tax Cuts and Jobs Act, or “TCJA,” made several sweeping changes to section 274 of the Internal Revenue Code, limiting the available deduction for many common fringe benefits. Changes to section 512 impose a similar tax burden on certain tax-exempt entities in the form of an increase to unrelated business taxable income, or “UBTI.”
Carly: Beginning in 2018, the TCJA explicitly disallows permanent deductions for an employer’s expenses for providing qualified transportation fringes to its employees and expenses in connection with providing commuting benefits to employees, unless for safety reasons.
Melissa: We’ll be referring to these qualified transportation fringes as “QTFs.”
There are four broad categories of QTFs under section 132(f) of the Internal Revenue Code. The first is commuter highway vehicles, such as vanpools, used in commuting. The second is transit passes, such as metro fare cards. The third is parking provided to employees on or near the employer’s business premises or another commuting stop, and, beginning in 2026, bicycle commuting expenses.
A QTF may be provided by the employer without any employee payment or may be “paid for” by the employees through a pre-tax salary reduction.
Carly: The value of most QTF benefits are still excludable from employee compensation (up to a stated monthly limit).
Melissa: Employers must now essentially make up for this tax-free benefit through a disallowed deduction, or an increased UBTI, for any expenses related to providing the QTF benefits to their employees.
Carly: The amount of the expenses related to providing the benefit is determined without regard to the value of that benefit to the employee and can, in fact, be a very different number.
Melissa: Expenses incurred generally include the actual cost of the benefits, program administration fees, and any pre-tax amounts deducted from the employee’s salary.
Here’s an example:
I typically commute to work on the metro. Let’s assume the value of my monthly metro pass is $90 and I “pay for” half of the value or $45 through a tax-free deduction from my paycheck. My employer subsidizes the other half and pays $45 directly to the third-party transit company. In this case, although my employer only incurred a $45 expense, it must disallow a deduction for the full $90 transit pass, including the $45 QTF that I received via a pre-tax salary reduction.
Carly, how do you commute to the office?
Carly: I live outside of the city, so I drive and park onsite for free.
Melissa: So, how does an employer compute the qualified parking disallowance if it provides free parking to its employees?
Carly: Let’s consider another example: Assume Company A provides free parking to its employees at its main office building, which is leased from a third party. There are 50 spaces available and reserved for Company A’s employees. The fair market value of that parking, i.e., the benefit to each employee, is estimated to be approximately $75 per space per month based on the price for other similar parking options in the area.
However, the deduction disallowance to Company A is based on the cost to the employer of providing that benefit. For Company A, that includes a portion of the lease payments allocable to that space, the cost of maintenance and repairs to the parking area such as repaving and restriping, the cost of security, and other day-to-day operational expenses. These expenses amount to approximately $2,500 per month, or $50 per space per month.
The $75 value for each space is irrelevant for purposes of calculating deduction disallowance. In this case, Company A must disallow a deduction of $50 per space per month.
It’s important to note that there are some key exceptions to these limitations, including when expenses are treated as taxable compensation or, in certain circumstances, where the expenses are incurred under a reimbursement or expense allowance arrangement with a third party. Additionally, if the primary use (i.e., greater than 50 percent) of the remaining spaces not reserved for employees is available for the general public, then the remaining expenses are generally deductible.
Note, however, that expenses incurred for reserved employee parking are still subject to the disallowance or UBTI increase.
Melissa: So, when may the QTF deduction disallowance apply to employers? Generally, when employers can answer “Yes” to any of the following questions:
Carly: Employers subject to the QTF disallowance with respect to qualified parking need to identify and analyze expenses associated with providing that benefit to their employees, regardless of whether or not employees pay for parking pre-tax or whether there is any value associated with the parking. To compute the disallowance or increase to UBTI, employers need to consider facts such as: whether they own or lease the parking lot or garage, whether there are any parking spaces specifically reserved for employee use or reserved for non-employee use, and what are their total expenses for maintaining the lot or garage.
Melissa: IRS Notice 2018-99 provides interim guidance with respect to determining the potential deduction disallowance under section 274 or the corresponding increase in the amount of UBTI under section 512(a)(7) attributable to the nondeductible parking expense.
Carly: Under the Notice, a taxpayer who owns or leases all or a portion of a parking facility may calculate the disallowance using any reasonable method. The Notice provides a four-step safe harbor that is deemed to be a reasonable method, and it identifies certain approaches that are not considered reasonable.
Melissa: The Notice also provides examples of several types of direct costs that factor into the employer’s total parking expenses, such as repair and maintenance costs,
Carly: utility costs, insurance, property taxes,
Melissa: snow and ice removal, leaf removal, trash removal,
Carly: cleaning, landscaping,
Melissa: parking lot attendants, security, and rent expense. However, the Notice specifically excludes an allowance for depreciation from this category of nondeductible expenses.
Carly: Depending on the types of QTFs offered to employees and the expenses incurred in connection with providing those benefits, calculating the potential deduction disallowance can feel overwhelming.
Melissa: KPMG uses data analytics and technology-driven solutions to assist employers in performing this tax analysis more efficiently and helps streamline the identification and quantification of disallowed deductions related to fringe benefits.
Carly: Thanks for joining us today to talk about the deductibility of employer-provided qualified transportation fringe benefits. We are expecting additional guidance in this area, possibly by the end of the year, and will revisit these issues once that guidance is available.