Transportation and Parking Benefits: Cutting Through the Confusion

Since the Tax Cut and Jobs Act (TCJA) of 2017 was passed, many changes have affected both individuals and corporations.  One change that is still causing confusion is the tax treatment and calculation of qualified transportation fringes.

Qualified Transportation Fringe
Internal Revenue Code Section 132(f) defines qualified transportation fringe as any of the following provided by an employer to an employee:

  • Transportation in a commuter highway vehicle if the travel is between the employee’s residence and place of employment
  • Any transit pass
  • Qualified parking
  • Any qualified bicycle commuting reimbursement

Before the TCJA, these qualified transportation benefits were allowed as a deduction to the employer.  That deduction has been eliminated, but the benefits are still excludable as gross income to the employee, up to a certain threshold. The exclusion of bicycle commuting reimbursement has been suspended through December 31, 2025.

For the 2020 tax year, the amount of fringe benefits provided to an employee that can be excluded from their wages and compensation is $270 per month for transportation in a commuter highway vehicle or transit pass. While the amounts for transportation in a commuter highway vehicle or transit pass are straightforward, the amount for qualified parking is more complicated.  Qualified parking is parking provided to an employee on or near work premises, commuter lot or carpool.  It does not include parking on or near the employee’s residence.

Assigning Value to Parking
How does a business (the taxpayer) assign value to an employee who parks at a location that the taxpayer owns or leases? Final regulations have not been issued, but the IRS has provided interim guidance through a 4-step process. Note that this article deals only with the calculation of qualified parking for a tax paying entity (corporation, partnership, etc.).  There are different rules for tax-exempt organizations. 

Step 1 involves identifying the number of spots in the parking facility, or the taxpayer’s portion of that facility exclusively reserved for the taxpayer’s employees.  These spots may be reserved for employees by specific signage, a barrier or use of a separate facility or separate entry.  The taxpayer takes the number of reserved employee spots and divides by the total parking spots available.  That percentage is then multiplied by the taxpayer’s total parking expenses.

In step 2, the taxpayer identifies the remaining parking spots and determines whether their primary use (greater than 50%) is to provide parking to the general public.  If the remaining spots are for the general public, then the remaining total parking expense is a deductible expense on the taxpayer’s return.  If the primary use of the taxpayer’s remaining spots is not for the general public, the taxpayer moves onto step 3 which involves identifying spots reserved for nonemployees.   A nonemployee includes visitors, customers, partners, sole proprietors, and 2-percent shareholders of S-Corporations.   The taxpayer takes the nonemployee spots and divides it by the remaining total spots.  That percentage is multiplied by the taxpayer’s remaining total parking expense and the result is the amount permitted as a deduction.   If no reserved nonemployee spots exist, the taxpayer skips to step 4.

Step 4 only applies if after completing steps 1-3 there are remaining parking expenses not specifically categorized as deductible or nondeductible.  If that occurs, the taxpayer must determine the employee use of those remaining spots during normal business hours on a typical business day and apply the related expenses allocable to those spots.

The IRS has provided examples to help clarify steps 1-4:

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The Million Dollar Question
Now that we understand how to allocate the expenses between the various classes of parking spaces, one question remains:  what are the parking expenses comprised of?  According to IRS Notice 2018-99, total parking expenses include repairs, maintenance, utility costs, insurance, property taxes, interest, snow and ice removal, leaf removal, trash removal, cleaning, landscaping, parking lot attendant expenses, security, and rent or lease payments.  Depreciation expense is not a parking expense. 

There is, however, one catch. While lease payments and expenses can be easily tracked if the parking lot is leased separately, problems arise when the lease includes both the building and the parking lot. The IRS has remained silent on how to separately break out and calculate parking lot payments when those payments are combined with another building or structure.  Currently, the IRS is requesting questions and comments from accounting professionals and will address this issue in future regulations.

The TCJA continues to transform the landscape of tax preparation with changes that affect everyone, from individuals to corporations.  At Herbein + Company, we remain committed to keeping you informed of these changes. If you need more information, please contact a member of the Herbein tax team, or email us at

For detailed examples on the IRS website, click here.

Article contributed by William J Hall.