AICPA suggests changes in IRS rules for transportation fringe benefits
The American Institute of CPAs has sent the Internal Revenue Service a set of recommendations on changing some of the parking rules for tax breaks for transportation fringe benefits, which the Tax Cuts and Jobs Act mostly eliminated.
The 2017 tax overhaul amended section 274(a)(4) of the tax code so no deduction would be allowed for employers for the expenses associated with any qualified transportation fringe benefit provided to an employee. That includes traditional perks like allowing businesses to claim tax breaks when employees get to make pre-tax payments for mass transit fares, tolls and parking fees. Employees can still get these benefits on a pre-tax basis, but employers can't claim tax breaks for providing perks like free employee parking at the workplace, leaving many businesses in a quandary.
Under section 512(a)(7), as added by the TCJA, the unrelated business taxable income of tax-exempt organizations is increased by any amount paid or incurred by the organization for any qualified transportation fringe benefit, or QTF, that’s nondeductible under section 274(a)(4). However, the AICPA pointed out that the TCJA didn’t address how taxpayers should determine the amount of any QTF expense. The AICPA sent its comment letter in response to a notice that the IRS issued last year, Notice 2018-99, related to the changes made to the transportation fringe benefits under the new tax law.
AICPA Tax Executive Committee chair Annette Nellen made several recommendations to the IRS, providing some examples for illustration:
- She suggested that for purposes of Step 1 of the four-step safe harbor calculation provided for in the Notice, and determining whether any method is reasonable, the expense treated as nondeductible under section 274(a)(4) or UBTI under section 512(a)(7) should be limited to the amount of the expense associated with employee reserved spots that are used by employees on a typical business day.
- The AICPA recommended that in future guidance the IRS should clarify there’s a distinction between an employer paying a third party for individual parking spots assigned to specified employees and an employer paying a third party for a group of spots (including part of a lot or garage), that aren’t assigned to specific employees;
- The AICPA said that where no parking expense allocation is specifically provided that the IRS and Treasury methods or examples that are described in the letter in the proposed regulations for organizations to use in determining their parking expense related to lease agreement arrangements.
- The AICPA suggested that the proposed regulations provide that parking meets the general public criteria of section 274(e)(7) in the following situations:
- The taxpayer leases space in a multi-tenant building that includes access to a parking facility for all tenants;
- The number of parking spots available to the taxpayer is not specifically identified in the lease; and
- The taxpayer’s employees use less than 50 percent of the parking spots available to all tenants in the facility.
- The AICPA said that with a multi-tenant scenario, the term “general public” should specifically include anyone who is not the taxpayer’s employee, partner or independent contractor, such as an employee, partner or independent contractor of other unrelated tenants in the building;
- The AICPA recommended that the proposed regulations clarify that expenses associated with parking used by an employee for residential purposes not be subject to sections 274(a)(4) and 512(a)(7);
- The AICPA said the proposed regulations should allow organizations to use a “snapshot” method to determine the average actual or estimated usage of their parking spots based on a specified typical timeframe in a multi-use parking facility scenario; and
- The Institute suggested that the proposed regulations offer examples that take into account employee payments for parking on a pre-tax and after-tax basis.