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IRS Issues Final Rule on Deductions for Qualified Transportation Fringe and Commuting Expenses

The Internal Revenue Service (IRS) has published a final rule on the deduction for qualified transportation fringe and commuting expenses following changes made by the 2017 Tax Cuts and Jobs Act (TCJA).  The 2017 TCJA generally disallows deductions for “qualified transportation fringe” (QTF) expenses and does not allow deductions for certain expenses of transportation and commuting between an employee’s residence and place of employment. Overall, the final rule addresses the disallowance of the deduction for expenses related to QTFs provided to an employee of the taxpayer, including providing guidance and methodologies to determine the amount of QTF parking expenses that is nondeductible. The final regulations also address the disallowance of the deduction for expenses of transportation and commuting between an employee’s residence and place of employment. 

Specifically, the final rule provides 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; (2) any transit pass; or (3) qualified parking.  In this regard, the rule disallows deductions for any expense incurred to provide transportation, or any payment or reimbursement for transportation, 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. With regard to QTF parking expenses, the regulations provide that if the taxpayer owns or leases all or a portion of one or more parking facilities, the disallowance may be calculated using the general rule or a simplified methodology for each taxable year and for each parking facility. The rule also includes special requirements and definitions for allocating certain mixed parking expenses, aggregating parking spaces by geographic location, removing inventory/unusable spaces from available parking spaces, multi-tenant building parking facilities, disregarding five or fewer reserved parking spaces if the reserved spaces are five percent or less of total parking spaces, and determining employee use of parking on a typical business day.

This final rule is effective today, December 16, 2020 and generally applies to taxable years beginning on or after December 16, 2020.

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