Bulletin No. 2020–28
Agency decision
Ask Donna
What actually matters in this document.
Text
HIGHLIGHTS
OF THIS ISSUE
Bulletin No. 2020–28
July 6, 2020
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
EMPLOYEE PLANS
INCOME TAX
Notice 2020-50, page 35.
REG-119307-19, page 44.
This notice provides guidance relating to the application of
section 2202 of the CARES Act for qualified individuals and
eligible retirement plans. Under section 2202 of the CARES
Act, qualified individuals receive favorable tax treatment
with respect to distributions from eligible retirement plans
that are coronavirus-related distributions. A coronavirus-related distribution is not subject to the 10% additional tax
under § 72(t) of the Code, generally is includible in income
over a 3-year period, and, to the extent the distribution is
eligible for tax-free rollover treatment and is contributed
to an eligible retirement plan within a 3-year period, will
not be includible in income. Section 2202 of the CARES
Act also increases the allowable plan loan amount under §
72(p) of the Code and permits a suspension of payments
for plan loans that are made to qualified individuals. The
guidance in this notice is intended to assist employers and
plan administrators, trustees and custodians, and qualified
individuals in applying section 2202 of the CARES Act, including by providing guidance on how plans may report
coronavirus-related distributions and how individuals may
report these distributions on their individual federal income
tax returns.
Finding Lists begin on page ii.
These proposed regulations provide guidance under section 274 of the Internal Revenue Code (Code) regarding
certain amendments made to section 274 by the Tax Cuts
and Jobs Act of 2017 (TCJA). These 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 expenses for transportation and commuting benefits in taxable years beginning after December 31, 2017.
Rev. Rul. 2020-14, page 33.
Federal rates; adjusted federal rates; adjusted federal longterm rate, the long-term exempt rate, and the blended annual
rate. For purposes of sections 382, 1274, 1288, 7872 and
other sections of the Code, tables set forth the rates for July
2020.
The IRS Mission
Provide America’s taxpayers top-quality service by helping
them understand and meet their tax responsibilities and enforce the law with integrity and fairness to all.
Introduction
The Internal Revenue Bulletin is the authoritative instrument
of the Commissioner of Internal Revenue for announcing official rulings and procedures of the Internal Revenue Service
and for publishing Treasury Decisions, Executive Orders, Tax
Conventions, legislation, court decisions, and other items of
general interest. It is published weekly.
It is the policy of the Service to publish in the Bulletin all substantive rulings necessary to promote a uniform application
of the tax laws, including all rulings that supersede, revoke,
modify, or amend any of those previously published in the
Bulletin. All published rulings apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal management are not published; however, statements of
internal practices and procedures that affect the rights and
duties of taxpayers are published.
Revenue rulings represent the conclusions of the Service
on the application of the law to the pivotal facts stated in
the revenue ruling. In those based on positions taken in rulings to taxpayers or technical advice to Service field offices,
identifying details and information of a confidential nature are
deleted to prevent unwarranted invasions of privacy and to
comply with statutory requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned
against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on provisions
of the Internal Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions and Other Related Items, and Subpart B,
Legislation and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative
Rulings. Bank Secrecy Act Administrative Rulings are issued
by the Department of the Treasury’s Office of the Assistant
Secretary (Enforcement).
Part IV.—Items of General Interest.
This part includes notices of proposed rulemakings, disbarment and suspension lists, and announcements.
The last Bulletin for each month includes a cumulative index
for the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the last Bulletin of each semiannual period.
The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
July 6, 2020
Bulletin No. 2020–28
Part I
Section 1274.—
Determination of Issue
Price in the Case of Certain
Debt Instruments Issued for
Property
(Also Sections 42, 280G, 382, 467, 468, 482, 483,
1288, 7520, 7872.)
Rev. Rul. 2020-14
This revenue ruling provides various prescribed rates for federal income
Annual
AFR
110% AFR
120% AFR
130% AFR
0.18%
0.20%
0.22%
0.23%
AFR
110% AFR
120% AFR
130% AFR
150% AFR
175% AFR
0.45%
0.50%
0.54%
0.59%
0.68%
0.79%
AFR
110% AFR
120% AFR
130% AFR
1.17%
1.29%
1.40%
1.53%
Short-term adjusted AFR
Mid-term adjusted AFR
Long-term adjusted AFR
Bulletin No. 2020–28
tax purposes for July 2020 (the current
month). Table 1 contains the short-term,
mid-term, and long-term applicable federal rates (AFR) for the current month for
purposes of section 1274(d) of the Internal Revenue Code. Table 2 contains the
short-term, mid-term, and long-term adjusted applicable federal rates (adjusted
AFR) for the current month for purposes
of section 1288(b). Table 3 sets forth the
adjusted federal long-term rate and the
long-term tax-exempt rate described in
section 382(f). Table 4 contains the appropriate percentages for determining the
REV. RUL. 2020-14 TABLE 1
Applicable Federal Rates (AFR) for July 2020
Period for Compounding
Semiannual
Short-term
0.18%
0.20%
0.22%
0.23%
Mid-term
0.45%
0.50%
0.54%
0.59%
0.68%
0.79%
Long-term
1.17%
1.29%
1.40%
1.52%
Annual
0.14%
0.34%
0.89%
REV. RUL. 2020-14 TABLE 2
Adjusted AFR for July 2020
Period for Compounding
Semiannual
0.14%
0.34%
0.89%
33
low-income housing credit described in
section 42(b)(1) for buildings placed in
service during the current month. However, under section 42(b)(2), the applicable
percentage for non-federally subsidized
new buildings placed in service after July
30, 2008, shall not be less than 9%. Table
5 contains the federal rate for determining
the present value of an annuity, an interest
for life or for a term of years, or a remainder or a reversionary interest for purposes
of section 7520. Finally, Table 6 contains
the blended annual rate for 2020 for purposes of section 7872.
Quarterly
Monthly
0.18%
0.20%
0.22%
0.23%
0.18%
0.20%
0.22%
0.23%
0.45%
0.50%
0.54%
0.59%
0.68%
0.79%
0.45%
0.50%
0.54%
0.59%
0.68%
0.79%
1.17%
1.29%
1.40%
1.52%
1.17%
1.29%
1.40%
1.52%
Quarterly
0.14%
0.34%
0.89%
Monthly
0.14%
0.34%
0.89%
July 6, 2020
REV. RUL. 2020-14 TABLE 3
Rates Under Section 382 for July 2020
Adjusted federal long-term rate for the current month
Long-term tax-exempt rate for ownership changes during the current month (the highest of
the adjusted federal long-term rates for the current month and the prior two months.)
.89%
.89%
REV. RUL. 2020-14 TABLE 4
Appropriate Percentages Under Section 42(b)(1) for July 2020
Note: Under section 42(b)(2), the applicable percentage for non-federally subsidized new buildings placed in service after July
30, 2008, shall not be less than 9%.
Appropriate percentage for the 70% present value low-income housing credit
7.18%
Appropriate percentage for the 30% present value low-income housing credit
3.08%
REV. RUL. 2020-14 TABLE 5
Rate Under Section 7520 for July 2020
Applicable federal rate for determining the present value of an annuity, an interest for life or
a term of years, or a remainder or reversionary interest
.6%
REV. RUL. 2020-14 TABLE 6
Blended Annual Rate for 2020
Section 7872(e)(2) blended annual rate for 2020
Section 42.—Low-Income
Housing Credit
The applicable federal short-term, mid-term,
and long-term rates are set forth for the month of
July 2020. See Rev. Rul. 2020-14, page 33.
Section 280G.—Golden
Parachute Payments
The applicable federal short-term, mid-term,
and long-term rates are set forth for the month of
July 2020. See Rev. Rul. 2020-14, page 33.
Section 382.—Limitation
on Net Operating Loss
Carryforwards and
Certain Built-In Losses
Following Ownership
Change
The adjusted applicable federal long-term rate
is set forth for the month of July 2020. See Rev.
Rul. 2020-14, page 33.
July 6, 2020
.89%
Section 467.—Certain
Payments for the Use of
Property or Services
The applicable federal short-term, mid-term,
and long-term rates are set forth for the month of
July 2020. See Rev. Rul. 2020-14, page 33.
Section 468.—Special
Rules for Mining and Solid
Waste Reclamation and
Closing Costs
The applicable federal short-term rates are set
forth for the month of July 2020. See Rev. Rul.
2020-14, page 33.
Section 482.—Allocation
of Income and Deductions
Among Taxpayers
The applicable federal short-term, mid-term,
and long-term rates are set forth for the month of
July 2020. See Rev. Rul. 2020-14, page 33.
Section 483.—Interest on
Certain Deferred Payments
The applicable federal short-term, mid-term,
and long-term rates are set forth for the month of
July 2020. See Rev. Rul. 2020-14, page 33.
Section 1288.—Treatment
of Original Issue Discount
on Tax-Exempt Obligations
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of
July 2020. See Rev. Rul. 2020-14, page 33.
Section 7520.—Valuation
Tables
The applicable federal mid-term rates are set
forth for the month of July 2020. See Rev. Rul.
2020-14, page 33.
Section 7872.—Treatment
of Loans With BelowMarket Interest Rates
The applicable federal short-term, mid-term,
and long-term rates are set forth for the month of
July 2020. See Rev. Rul. 2020-14, page 33.
34
Bulletin No. 2020–28
Part III
Guidance for CoronavirusRelated Distributions and
Loans from Retirement
Plans Under the CARES Act
Notice 2020-50
PURPOSE
This notice provides guidance relating to
the application of section 2202 of the Coronavirus Aid, Relief, and Economic Security
Act, Pub. L. 116-136, 134 Stat. 281 (2020)
(CARES Act) for qualified individuals and
eligible retirement plans. The CARES Act
was enacted on March 27, 2020. Under
section 2202 of the CARES Act, qualified
individuals receive favorable tax treatment
with respect to distributions from eligible
retirement plans that are coronavirus-related
distributions. A coronavirus-related distribution is not subject to the 10% additional
tax under § 72(t) of the Internal Revenue
Code (Code) (including the 25% additional
tax under § 72(t)(6) for certain distributions
from SIMPLE IRAs), generally is includible
in income over a 3-year period, and, to the
extent the distribution is eligible for tax-free
rollover treatment and is contributed to an
eligible retirement plan within a 3-year period, will not be includible in income. Section
2202 of the CARES Act also increases the
allowable plan loan amount under § 72(p) of
the Code and permits a suspension of payments for plan loans outstanding on or after
March 27, 2020, that are made to qualified
individuals. The guidance in this notice is intended to assist employers and plan administrators, trustees and custodians, and qualified individuals in applying section 2202
of the CARES Act, including by providing
guidance on how plans may report coronavirus-related distributions and how individuals may report these distributions on their
individual federal income tax returns.
BACKGROUND
A. Distributions
Under § 402(c)(8), an eligible retirement plan includes an individual retire-
Bulletin No. 2020–28
ment arrangement (IRA) under § 408(a)
or (b), a qualified plan under § 401(a), an
annuity plan under § 403(a), a § 403(b)
plan, and a governmental deferred compensation plan under § 457(b). Distributions from these plans generally are includible in the distributee’s gross income in
the year of the distribution. For example,
for qualified plans, § 402(a) provides that
any amount actually distributed to a distributee is taxable to the distributee in the
taxable year of the distribution under §
72. Similar rules apply to § 403(b) plans
under § 403(b)(1), governmental § 457(b)
plans under § 457(a), and IRAs under
§ 408(d)(1).
Section 402(c)(4) provides that any
distribution of all or a portion of the balance to the credit of an employee under a
qualified plan is an eligible rollover distribution with certain exceptions. These
exceptions include substantially equal
periodic payments over a specified period of at least 10 years, or for the life
or the life expectancy of the employee
(or the employee and the employee’s
designated beneficiary); minimum distributions required under § 401(a)(9);
and any distribution that is made upon
the hardship of an employee. This same
definition of eligible rollover distribution
applies to distributions from § 403(b)
plans under § 403(b)(8) and governmental § 457(b) plans under § 457(e)(16).
Generally, any distribution from an IRA
is eligible for rollover except a required
minimum distribution or certain distributions from inherited IRAs. Section 2203
of the CARES Act provides that, for eligible retirement plans other than defined
benefit plans, no minimum distributions
under § 401(a)(9) are required for 2020.
Under § 401(a)(31)(A), if a distributee
elects to have an eligible rollover distribution paid directly to an eligible retirement
plan and specifies the eligible retirement
plan to receive the distribution, a qualified plan must pay the distribution to that
eligible retirement plan in a direct rollover. Similar rules apply to § 403(b) plans
under § 403(b)(10) and governmental §
457(b) plans under § 457(d)(1).
Q&A-14 of § 1.401(a)(31)-1 provides
that if a plan accepts an invalid rollover
contribution, for purposes of applying the
35
qualification requirements to the receiving plan, the contribution will be treated
as if it were a valid rollover contribution
if two conditions are satisfied. First, when
accepting the amount from the employee
as a rollover contribution, the plan administrator of the receiving plan reasonably concludes that the contribution is a
valid rollover contribution. Second, if the
plan administrator later determines that
the rollover contribution was an invalid
rollover contribution, any amount attributable to the invalid rollover contribution
(including earnings) must be distributed to
the employee within a reasonable amount
of time after the determination.
Under § 402(c), if an eligible rollover
distribution is contributed to an eligible
retirement plan in a direct rollover or within 60 days from the date of distribution as
a rollover contribution, the amount rolled
over is not includible in the distributee’s
gross income. In certain situations, the 60day rollover period is extended; for example, under § 402(c)(3), the rollover period
for qualified plan loan offsets is extended
to the federal income tax return deadline
for the year of the distribution.
Section 401(k)(2)(B)(i) generally provides that amounts attributable to elective contributions under a qualified cash
or deferred arrangement may not be distributable to participants or beneficiaries
earlier than severance from employment,
death or disability, plan termination, attainment of age 59½, hardship of the
employee, entitlement to a qualified reservist distribution, or, for amounts held
in lifetime income investments, 90 days
prior to the date that the lifetime income
investment is no longer held by the arrangement. Similar rules apply to custodial accounts under § 403(b)(7)(A)(i),
to annuity contracts under § 403(b)(11),
and to governmental § 457(b) plans under § 457(d)(1)(A).
Section 72(t)(1) imposes an additional tax on early distributions from eligible
retirement plans (other than governmental § 457(b) plans, unless a distribution is
attributable to an amount that was transferred to the § 457(b) plan from a plan
that was subject to § 72(t)). In general,
this additional tax is equal to 10% of the
portion of the distribution that is includi-
July 6, 2020
ble in income. For any amount distributed
from a SIMPLE IRA during the 2-year
period described in § 72(t)(6), the rate of
the additional tax is increased from 10%
to 25%. Section 72(t)(2) provides a number of exceptions to this additional tax,
including, for example, exceptions for
distributions made on or after the date on
which the employee attains age 59½, distributions made to a beneficiary on or after
the employee’s death, distributions made
because of the employee’s disability, and
distributions that are part of substantially
equal periodic payments made over the
employee’s life or life expectancy.
Section 402(f) provides that a plan is
required to provide a distributee, within a
reasonable period of time before an eligible rollover distribution is made, a written
explanation of the distributee’s rollover
rights and the tax and other potential consequences of the distribution or rollover.
B. Plan loans
Section 72(p) imposes certain requirements relating to plan loans. Unless these
requirements are satisfied, an amount received by a participant as a loan is treated as having been received as a distribution from the plan (deemed distribution).
Deemed distributions are includible in income and are subject to the 10% additional tax under § 72(t), unless an exception
applies.
Under § 72(p)(2)(A), a plan loan (when
added to the outstanding balance of all
other loans outstanding) must not exceed
the lesser of (1) $50,000, reduced by the
excess of the highest outstanding balance
of loans from the plan during the 1-year
period ending on the day before the date
on which the loan is made over the outstanding balance of loans from the plan
on the date that the loan is made, or (2)
the greater of $10,000 or one-half of the
present value of the participant’s nonforfeitable accrued benefit under the plan.
Section 72(p)(2)(B) provides that a loan
must be repaid within 5 years. However, an exception to the 5-year repayment
rule applies for loans used to acquire any
dwelling unit that will be used (determined at the time the loan is made) as the
participant’s principal residence. Section
72(p)(2)(C) requires substantially level
amortization of a plan loan (with pay-
July 6, 2020
ments not less frequently than quarterly)
over the term of the loan.
Q&A-10(a) of § 1.72(p)-1 provides
that the failure to make any installment
payment when due, in accordance with
the terms of a loan, violates § 72(p)
(2)(C) and, accordingly, results in a
deemed distribution at the time of the
failure. However, the plan administrator
may allow a cure period, and § 72(p)(2)
(C) will not be considered to have been
violated if the installment payment is
made not later than the end of the cure
period, which cannot continue beyond
the last day of the calendar quarter following the calendar quarter in which the
required installment payment was due.
If there is a failure to pay the installment
payments required under the terms of
the loan (taking into account any cure
period allowed under Q&A-10(a)), then
the amount of the deemed distribution
equals the entire outstanding balance
of the loan (including accrued interest)
at the time of the failure. Under Q&A13(b) of § 1.72(p)-1 and Q&A-9(b) of
§ 1.402(c)-2, a distribution of a plan
loan offset amount occurs when, under
the terms governing a plan loan, the accrued benefit of a participant or beneficiary is reduced (or offset) in order to
repay the loan (including the enforcement of the plan’s security interest in
the accrued benefit). In the event of a
plan loan offset, including a qualified
plan loan offset described in § 402(c)(3)
(C), the amount of the account balance
that is offset against the loan is an actual
distribution, not a deemed distribution.
SECTION 1. CORONAVIRUSRELATED DISTRIBUTIONS
A. Special tax treatment for coronavirusrelated distributions
Section 2202(a) of the CARES Act
provides for special tax treatment for a
coronavirus-related distribution. The
section provides an exception to the 10%
additional tax under § 72(t) of the Code
(including the 25% additional tax under
§ 72(t)(6) for certain distributions from
SIMPLE IRAs), allows the distribution
to be included in income ratably over 3
years, and provides that the distribution
will be treated as though it were paid in
36
a direct rollover to an eligible retirement
plan if the distribution is eligible for taxfree rollover treatment and is recontributed to an eligible retirement plan within
the 3-year period beginning on the day
after the date on which the distribution
was received. The section also permits
special treatment for coronavirus-related
distributions under employer retirement
plans (eligible retirement plans other
than IRAs), as described in section 2 of
this notice.
B. Definition of qualified individual
Pursuant to section 2202(a)(4)(A)(ii)
of the CARES Act, a qualified individual
for purposes of this notice is an individual:
• who is diagnosed with the virus
SARS-CoV-2 or with coronavirus
disease 2019 (referred to collectively
in this notice as COVID-19) by a test
approved by the Centers for Disease
Control and Prevention (including
a test authorized under the Federal
Food, Drug, and Cosmetic Act);
• whose spouse or dependent (as defined in section 152 of the Code) is
diagnosed with COVID-19 by a test
approved by the Centers for Disease
Control and Prevention (including
a test authorized under the Federal
Food, Drug, and Cosmetic Act); or
• who experiences adverse financial
consequences as a result of:
o the individual being quarantined,
being furloughed or laid off, or
having work hours reduced due
to COVID-19;
o the individual being unable to
work due to lack of childcare due
to COVID-19; or
o closing or reducing hours of a
business owned or operated by
the individual due to COVID-19.
In addition, pursuant to the authority of
the Secretary to issue guidance to provide
for other factors under section 2202(a)(4)
(A)(ii)(III) of the CARES Act, a qualified
individual for purposes of this notice is an
individual who experiences adverse financial consequences as a result of:
• the individual having a reduction in
pay (or self-employment income) due
to COVID-19 or having a job offer rescinded or start date for a job delayed
due to COVID-19;
Bulletin No. 2020–28
•
the individual’s spouse or a member
of the individual’s household (as defined below) being quarantined, being
furloughed or laid off, or having work
hours reduced due to COVID-19,
being unable to work due to lack of
childcare due to COVID-19, having a
reduction in pay (or self-employment
income) due to COVID-19, or having
a job offer rescinded or start date for
a job delayed due to COVID-19; or
• closing or reducing hours of a business owned or operated by the individual’s spouse or a member of
the individual’s household due to
COVID-19.
For purposes of applying these additional factors, a member of the individual’s household is someone who shares the
individual’s principal residence.
C. Definition of coronavirus-related
distribution
Section 2202(a)(4)(A) of the CARES
Act defines a coronavirus-related distribution as any distribution from an eligible
retirement plan made on or after January
1, 2020, and before December 31, 2020,
to a qualified individual. Section 2202(a)
(2) of the CARES Act limits the amount
of aggregate distributions from all eligible retirement plans that can be treated
as coronavirus-related distributions to no
more than $100,000.
In general, a qualified individual is
permitted to designate a distribution described in the preceding paragraph as a
coronavirus-related distribution. This
designation is permitted to be made with
respect to any distribution to a qualified
individual that would meet the requirements of a coronavirus-related distribution without regard to whether the plan
treated the distribution as a coronavirus-related distribution. Thus, periodic
payments and distributions that would
have been required minimum distributions but for section 2203 of the CARES
Act, received by a qualified individual
from an eligible retirement plan on or
after January 1, 2020, and before December 31, 2020, are permitted to be treated
as coronavirus-related distributions and,
therefore, permitted to be included in income ratably over 3 years. Similarly, any
distribution received by a qualified indi-
Bulletin No. 2020–28
vidual as a beneficiary can be treated as
a coronavirus-related distribution. In addition, a reduction or offset of a qualified
individual’s account balance in order to
repay a plan loan, as described in Q&A9(b) of § 1.402(c)-2, including a qualified
plan loan offset, is permitted to be treated
as a coronavirus-related distribution. See
section 1.D of this notice for rules relating to which coronavirus-related distributions are permitted to be recontributed
to an eligible retirement plan.
However, any amount described in
Q&A-4 of § 1.402(c)-2 is not permitted
to be treated as a coronavirus-related distribution. Thus, the following amounts
are not coronavirus-related distributions:
corrective distributions of elective deferrals and employee contributions that are
returned to the employee (together with
the income allocable thereto) in order to
comply with the § 415 limitations, excess
elective deferrals under § 402(g), excess
contributions under § 401(k), and excess
aggregate contributions under § 401(m);
loans that are treated as deemed distributions pursuant to § 72(p); dividends paid
on applicable employer securities under
§ 404(k); the costs of current life insurance protection; prohibited allocations
that are treated as deemed distributions
pursuant to § 409(p); distributions that are
permissible withdrawals from an eligible
automatic contribution arrangement within the meaning of § 414(w); and distributions of premiums for accident or health
insurance under § 1.402(a)-1(e)(1)(i).
The definition of a coronavirus-related
distribution under section 2202(a)(4) of
the CARES Act does not limit these distributions to amounts withdrawn solely
to meet a need arising from COVID-19.
Thus, for example, for an individual who
is a qualified individual as a result of experiencing adverse financial consequences as described above, coronavirus-related
distributions are permitted without regard to the qualified individual’s need for
funds, and the amount of the distribution
is not required to correspond to the extent
of the adverse financial consequences experienced by the qualified individual.
As explained in section 2.C of this
notice, an employer retirement plan also
is permitted, but not required, to treat a
plan distribution meeting the conditions
described in this section 1.C as a coro-
37
navirus-related distribution. It is possible
that a qualified individual’s designation
of a coronavirus-related distribution may
be different from the employer retirement
plan’s treatment of the distribution. This
different treatment could occur, for example, if a qualified individual has more
than one plan distribution that meets the
requirements of a coronavirus-related distribution, but one of those distributions
occurs before the effective date of the
plan amendment providing for coronavirus-related distributions. The different
treatment could also occur, for example,
if a qualified individual has distributions
from more than one eligible retirement
plan, and the aggregate amount of those
distributions exceeds $100,000.
D. Certain coronavirus-related
distributions are permitted to be
recontributed
Coronavirus-related distributions may
be included in income ratably over 3 years
and are not subject to the 10% additional
tax under § 72(t). However, only a coronavirus-related distribution that is eligible for tax-free rollover treatment under
§ 402(c), 403(a)(4), 403(b)(8), 408(d)(3),
or 457(e)(16) is permitted to be recontributed to an eligible retirement plan, and that
recontribution will be treated as having
been made in a trustee-to-trustee transfer
to that eligible retirement plan. Any coronavirus-related distribution (whether from
an employer retirement plan or an IRA)
paid to a qualified individual as a beneficiary of an employee or IRA owner (other
than the surviving spouse of the employee
or IRA owner) cannot be recontributed.
In general, a distribution from an employer retirement plan made on account
of hardship is not an eligible rollover distribution. However, if the distribution satisfies the requirements under section 1.C
of this notice, then, except as otherwise
provided in section 6 of this notice (relating to nonqualified deferred compensation
plans), the distribution is not treated as
made on account of hardship for purposes
of this notice and, thus, any portion of the
distribution is permitted to be recontributed to an eligible retirement plan.
See section 4.C of this notice for rules
relating to recontributions of coronavirus-related distributions.
July 6, 2020
SECTION 2. GUIDANCE FOR
EMPLOYER RETIREMENT
PLANS MAKING CORONAVIRUSRELATED DISTRIBUTIONS
A. Coronavirus-related distributions
generally are treated as satisfying certain
plan distribution restrictions
Under section 2202(a)(6) of the CARES
Act, a distribution designated as a coronavirus-related distribution by an employer
retirement plan is treated as meeting the
distribution restrictions for qualified cash
or deferred arrangements under § 401(k)(2)
(B)(i), custodial accounts under § 403(b)
(7)(A)(i), annuity contracts under § 403(b)
(11), governmental deferred compensation plans under § 457(d)(1)(A), and the
Thrift Savings Plan under 5 U.S.C. 8433(h)
(1). Thus, for example, an employer may
expand the distribution options under its
plan to allow an amount attributable to an
elective, qualified nonelective, qualified
matching, or safe harbor contribution under
a qualified cash or deferred arrangement to
be distributed as a coronavirus-related distribution even though it is distributed before an otherwise permitted distributable
event, such as severance from employment, disability, or attainment of age 59½.
Except as described above, section
2202 of the CARES Act does not change
the rules for when plan distributions are
permitted to be made from employer retirement plans. Thus, for example, a qualified plan that is a pension plan (such as
a money purchase pension plan) is not
permitted to make a distribution before
an otherwise permitted distributable event
merely because the distribution, if made,
would qualify as a coronavirus-related
distribution. Further, a pension plan is not
permitted to make a distribution under a
distribution form that is not a qualified
joint and survivor annuity without spousal
consent merely because the distribution,
if made, could be treated as a coronavirus-related distribution.
B. Direct rollover, § 402(f) notice, and
20% withholding requirements are
not applicable to coronavirus-related
distributions
If a distribution is treated as a coronavirus-related distribution by an employer re-
July 6, 2020
tirement plan, the rules for eligible rollover
distributions under §§ 401(a)(31), 402(f),
and 3405 are not applicable to the distribution. Thus, the plan is not required to offer
the qualified individual a direct rollover with
respect to the distribution. In addition, the
plan administrator is not required to provide
a § 402(f) notice. Finally, the plan administrator or payor of the coronavirus-related
distribution is not required to withhold an
amount equal to 20% of the distribution,
as is usually required under § 3405(c)(1).
However, a coronavirus-related distribution
is subject to the voluntary withholding requirements of § 3405(b) and § 35.3405-1T.
distributions under all its retirement plans
with respect to a qualified individual is
not permitted to exceed $100,000. For
purposes of this rule, the term “employer”
means the employer maintaining the plan
and those employers required to be aggregated with the employer under § 414(b),
(c), (m), or (o). However, a plan will not
fail to satisfy any requirement under the
Code merely because a qualified individual’s total coronavirus-related distributions exceed $100,000 taking into account
distributions from IRAs or other eligible
retirement plans maintained by unrelated
employers.
C. Treatment of distributions as
coronavirus-related distributions
E. Reliance on certifications
An employer is permitted to choose
whether, and to what extent, to treat distributions under its plans as coronavirus-related distributions (as well as whether, and
to what extent, to apply coronavirus-related
plan loan rules described in section 5 of this
notice). Thus, for example, an employer
may choose to provide for coronavirus-related distributions but choose not to change
its plan loan provisions or loan repayment
schedules. Further, the employer (or plan
administrator) is permitted to develop any
reasonable procedures for identifying which
distributions are treated as coronavirus-related distributions under its retirement plans.
However, if, under an employer retirement
plan, any distribution of an amount subject
to § 401(k)(2)(B)(i), 403(b)(7)(A)(i), 403(b)
(11) or 457(d)(1)(A) is treated as a coronavirus-related distribution, the plan must be
consistent in its treatment of similar distributions. Accordingly, the amount of the
distribution must be taken into account in
determining the $100,000 limit on coronavirus-related distributions made under all the
retirement plans maintained by the employer. Even if, under a plan, a distribution is not
treated as coronavirus-related, a qualified individual may treat a distribution that meets
the requirements of section 1.C of this notice
as a coronavirus-related distribution on the
individual’s federal income tax return.
D. Distribution limits on coronavirusrelated distributions
The total amount of distributions treated by an employer as coronavirus-related
38
The administrator of an eligible retirement plan may rely on an individual’s
certification that the individual satisfies
the conditions to be a qualified individual
in determining whether a distribution is a
coronavirus-related distribution, unless
the administrator has actual knowledge to
the contrary. The requirement that an administrator not have “actual knowledge”
that is contrary to an individual’s certification does not mean that the administrator
has an obligation to inquire into whether
an individual has satisfied the conditions
described in section 1.B of this notice to
be a qualified individual. Rather, this requirement is limited to situations in which
the administrator already possesses sufficiently accurate information to determine
the veracity of a certification.
The following is an example of an acceptable certification:
Name: _______________________
(and other identifying information requested by the employer for administrative purposes).
I certify that I meet at least one of the
following conditions: (1) I was diagnosed with the virus SARS-CoV-2 or
with coronavirus disease 2019 (referred to collectively as COVID-19) by
a test approved by the Centers for Disease Control and Prevention (including a test authorized under the Federal
Food, Drug, and Cosmetic Act); (2) my
spouse or my dependent was diagnosed
with COVID-19 by a test approved by
the Centers for Disease Control and
Prevention (including a test authorized
Bulletin No. 2020–28
under the Federal Food, Drug, and
Cosmetic Act); or (3) I have experienced adverse financial consequences
because: (i) I, my spouse, or a member
of my household was quarantined, furloughed or laid off, or had work hours
reduced due to COVID-19; (ii) I, my
spouse, or a member of my household
was unable to work due to lack of childcare due to COVID-19; (iii) a business
owned or operated by me, my spouse,
or a member of my household closed
or reduced hours due to COVID-19;
or (iv) I, my spouse, or a member of
my household had a reduction in pay
(or self-employment income) due to
COVID-19 or had a job offer rescinded
or start date for a job delayed due to
COVID-19.
Signature: ______________________
Although an administrator may rely on
an individual’s certification in making and
reporting a distribution, the individual is
entitled to treat the distribution as a coronavirus-related distribution for purposes
of the individual’s federal income tax return only if the individual actually meets
the eligibility requirements for that treatment under section 1 of this notice.
F. An employer retirement plan will be
treated as operating in accordance with
its terms if certain requirements are
satisfied
An employer retirement plan will not
be treated as failing to operate in accordance with its terms merely because the
plan implements the provisions of section
2202 of the CARES Act if the employer
amends its plan by the dates described in
this paragraph. For employer retirement
plans other than governmental plans under
§ 414(d) of the Code, the date by which
any plan amendment to reflect the CARES
Act is required to be made is the last day
of the first plan year beginning on or after
January 1, 2022. For governmental plans
under § 414(d) of the Code, the date by
which any plan amendment to reflect the
CARES Act is required to be made is the
last day of the first plan year beginning on
or after January 1, 2024. Pursuant to the
authority of the Secretary under section
1
2202(c)(2) of the CARES Act, these dates
may be extended in future guidance.
SECTION 3. GUIDANCE FOR
ELIGIBLE RETIREMENT PLANS
MAKING OR ACCEPTING
RECONTRIBUTION OF
CORONAVIRUS-RELATED
DISTRIBUTIONS
This section provides guidance for eligible retirement plans (that is, employer
retirement plans and IRAs) making, or accepting recontribution of, coronavirus-related distributions.
A. Tax reporting on coronavirus-related
distributions
An eligible retirement plan must report
the payment of a coronavirus-related distribution to a qualified individual on Form
1099-R, Distributions from Pensions,
Annuities, Retirement or Profit-Sharing
Plans, IRAs, Insurance Contracts, etc.
This reporting is required even if the qualified individual recontributes the coronavirus-related distribution to the same eligible retirement plan in the same year. If
a payor is treating the payment as a coronavirus-related distribution and no other appropriate code applies, the payor is
permitted to use distribution code 2 (early
distribution, exception applies) in box 7
of Form 1099-R. However, a payor also is
permitted to use distribution code 1 (early
distribution, no known exception) in box 7
of Form 1099-R.
B. Accepting recontributions of
coronavirus-related distributions
In general, a qualified individual who
receives a coronavirus-related distribution
that is eligible for tax-free rollover treatment is permitted to recontribute, at any
time in a 3-year period, any portion of the
distribution to an eligible retirement plan
that is permitted to accept eligible rollover
contributions. The relief in Q&A-14 of
§ 1.401(a)(31)-1 applies to an employer retirement plan accepting recontributions of
coronavirus-related distributions. In order
to obtain the relief described in Q&A-14
of § 1.401(a)(31)-1, a plan administrator
accepting the recontribution of a coronavirus-related distribution must reasonably
conclude that the recontribution is eligible
for direct rollover treatment under section
2202(a)(3) of the CARES Act and that
the recontribution is made in accordance
with the rules under section 4.C of this
notice. In making this determination, the
rule in section 2.E of this notice applies.
Thus, the administrator of an eligible retirement plan may rely on an individual’s
certification that the individual satisfies
the conditions to be a qualified individual
in determining whether a distribution is a
coronavirus-related distribution, unless
the administrator has actual knowledge to
the contrary.
In general, it is anticipated that eligible
retirement plans will accept recontributions of coronavirus-related distributions,
which are to be treated as rollover contributions. However, eligible retirement
plans generally are not required to accept
rollover contributions. For example, if a
plan does not accept any rollover contributions, the plan is not required to change
its terms or procedures to accept recontributions of coronavirus-related distributions.
SECTION 4. GUIDANCE FOR
INDIVIDUALS RECEIVING
CORONAVIRUS-RELATED
DISTRIBUTIONS UNDER SECTION
2202 OF THE CARES ACT
This section provides guidance for
qualified individuals requesting and receiving coronavirus-related distributions.
A qualified individual receiving a coronavirus-related distribution is entitled to
the following favorable tax treatment with
respect to the distribution by reporting the
distribution on the individual’s federal
income tax return for 2020 and on Form
8915-E, Qualified 2020 Disaster Retirement Plan Distributions and Repayments
(or if there is no federal income tax return
for 2020, by filing just Form 8915-E).1
First, the 10% additional tax under § 72(t)
(including the 25% additional tax under
§ 72(t)(6) for certain distributions from
SIMPLE IRAs) does not apply to any
coronavirus-related distribution. Second,
a coronavirus-related distribution is per-
Form 8915-E is expected to be available before the end of 2020.
Bulletin No. 2020–28
39
July 6, 2020
mitted to be included in income ratably
over 3 years. Third, a qualified individual
is permitted to recontribute any portion
of a coronavirus-related distribution that
is eligible for tax-free rollover treatment
to an eligible retirement plan within the
3-year period beginning on the day after
the date on which the distribution was received, and the recontribution will be treated as if it were paid in a trustee-to-trustee
transfer to an eligible retirement plan. See
section 1.D of this notice for rules relating
to which coronavirus-related distributions
are permitted to be recontributed. Qualified individuals will use Form 8915-E to
report any recontribution made during the
taxable year and to determine the amount
of the coronavirus-related distribution includible in income for the taxable year.
A. Election to designate a distribution as
a coronavirus-related distribution
A qualified individual is permitted to
designate any distribution described in
section 1.C of this notice as a coronavirus-related distribution provided the total amount treated by the individual as
coronavirus-related distributions from all
eligible retirement plans does not exceed
$100,000.
Example 1. If a qualified individual
receives a distribution of $50,000 in August of 2020 and a distribution of $75,000
in September of 2020 and both distributions satisfy the definition of a coronavirus-related distribution, only $100,000
of the $125,000 received by the qualified
individual can be treated as a coronavirus-related distribution. Thus, the individual can only treat $100,000 of the August
and September distributions as coronavirus-related distributions on the individual’s 2020 federal income tax return. Assuming no § 72(t)(2) exception applies,
the remaining $25,000 of the distribution
is an early distribution that is subject to the
10% additional tax. This amount must be
included on the individual’s 2020 federal
income tax return and will not be eligible
for 3-year recontribution to an eligible retirement plan.
Example 2. A § 401(k) plan distributes
$35,000 to a qualified individual on December 1, 2020. The qualified individual
also receives a distribution from the individual’s IRA on December 1, 2020, of
July 6, 2020
$15,000. The individual is permitted to
treat both the $35,000 from the plan and
the $15,000 from the IRA as coronavirus-related distributions on the individual’s 2020 federal income tax return.
B. Income inclusion for coronavirusrelated distributions
There are two methods for a qualified
individual to include the taxable portion
of a coronavirus-related distribution in
income. A qualified individual who receives a coronavirus-related distribution
is permitted to include the taxable portion of the distribution in income ratably
over a 3-year period that begins in the
year of the distribution. Alternatively, a
qualified individual is permitted to elect
out of the 3-year ratable income inclusion
and include the entire amount of the taxable portion of the distribution in income
in the year of the distribution. This election cannot be made or changed after the
timely filing of the individual’s federal
income tax return (including extensions)
for the year of the distribution. All coronavirus-related distributions received in a
taxable year must be treated consistently
(either all distributions must be included
in income over a 3-year period or all distributions must be included in income in
the current year).
Example. Taxpayer A receives a
$30,000 distribution from his or her IRA
on October 1, 2020. Taxpayer A is a qualified individual and elects to treat the distribution as a coronavirus-related distribution. Taxpayer A uses the 3-year ratable
income inclusion method for the $30,000
distribution. Taxpayer A should include
$10,000 in income with respect to the
coronavirus-related distribution on each
of the individual’s 2020, 2021, and 2022
federal income tax returns.
C. Tax treatment of recontributions of
coronavirus-related distributions
If a coronavirus-related distribution
is eligible for tax-free rollover treatment
(taking into account section 1.D of this
notice), a qualified individual is permitted,
at any time in the 3-year period beginning
the day after the date of a coronavirus-related distribution, to recontribute any portion of the distribution, but not an amount
40
in excess of the amount of the distribution, to an eligible retirement plan. A recontribution of a coronavirus-related distribution will not be treated as a rollover
contribution for purposes of the one-rollover-per-year limitation under § 408(d)(3)
(B).
D. Tax treatment of recontributions of a
coronavirus-related distribution made to
a taxpayer who uses the 1-year income
inclusion method
If a qualified individual elects to include all coronavirus-related distributions
received in a year in gross income for that
year and recontributes any portion of the
coronavirus-related distributions to an eligible retirement plan at any time during
the 3-year recontribution period, then the
amount of the recontribution will reduce
the amount of the coronavirus-related distribution included in gross income for the
year of the distribution. The qualified individual will report the amount of the recontribution on Form 8915-E (which will be
filed with the individual’s federal income
tax return, if applicable).
If a qualified individual includes a
coronavirus-related distribution in gross
income in the year of the distribution and
recontributes the distribution to an eligible
retirement plan after the timely filing of the
individual’s federal income tax return for
the year of the distribution (that is, after the
due date, including extensions), the individual will need to file an amended federal
income tax return for the year of the distribution. The qualified individual will need
to file a revised Form 8915-E (with his or
her amended federal income tax return) to
report the amount of the recontribution and
should reduce his or her gross income by
the amount of the recontribution, but not
in an amount exceeding the amount of the
coronavirus-related distribution.
Example 1. Taxpayer B receives a
$45,000 distribution from a § 403(b) plan
on November 1, 2020. Taxpayer B is a
qualified individual and treats the distribution as a coronavirus-related distribution.
Taxpayer B receives no other coronavirus-related distribution from any eligible
retirement plan. Taxpayer B recontributes
$45,000 to an IRA on March 31, 2021.
Taxpayer B reports the recontribution on
Form 8915-E and files the 2020 federal
Bulletin No. 2020–28
income tax return on April 10, 2021. For
Taxpayer B, no portion of the coronavirus-related distribution is includible as income for the 2020 tax year.
Example 2. The facts are the same as in
Example 1 of this section 4.D, except that
Taxpayer B timely requests an extension
of time to file the 2020 federal income tax
return and makes a recontribution on August 2, 2021, before filing the 2020 federal income tax return. Taxpayer B files the
2020 federal income tax return on August
10, 2021. As in Example 1, no portion of
the coronavirus-related distribution is includible in income for the 2020 tax year
because Taxpayer B made the recontribution before the timely filing of the 2020
federal income tax return.
Example 3. Taxpayer C receives a
$15,000 distribution from a governmental
§ 457(b) plan on March 30, 2020. Taxpayer C is a qualified individual and treats
the distribution as a coronavirus-related
distribution. Taxpayer C elects out of the
3-year ratable income inclusion method
on Form 8915-E and includes the entire
$15,000 in gross income for the 2020 taxable year. On December 31, 2022, Taxpayer C recontributes $15,000 to the §
457(b) plan. Taxpayer C will need to file
an amended federal income tax return for
the 2020 tax year to report the amount of
the recontribution and reduce the gross
income by $15,000 with respect to the
coronavirus-related distribution included
on the 2020 original federal income tax
return.
E. Tax treatment for year of
recontribution of a coronavirus-related
distribution made to a taxpayer who
uses the 3-year ratable income inclusion
method
As explained above, a qualified individual is permitted to include a coronavirus-related distribution in income ratably
over a 3-year period. If a qualified individual includes a coronavirus-related distribution ratably over a 3-year period and
the individual recontributes any portion of
the coronavirus-related distribution to an
eligible retirement plan at any date before
the timely filing of the individual’s federal
income tax return (that is, by the due date,
including extensions) for a tax year in the
3-year period, the amount of the recontri-
Bulletin No. 2020–28
bution will reduce the ratable portion of
the coronavirus-related distribution that
is includible in gross income for that tax
year. See section 4.F of this notice for recontributions that affect income inclusion
in other tax years.
Example 1. Taxpayer D receives
$75,000 from a § 401(k) plan on December 1, 2020. Taxpayer D is a qualified individual and treats the $75,000 distribution as a coronavirus-related distribution.
Taxpayer D uses the 3-year ratable income
inclusion method for the distribution.
Taxpayer D makes one recontribution of
$25,000 to the § 401(k) plan on April 10,
2022. Taxpayer D files the 2021 federal
income tax return on April 15, 2022. Without the recontribution, Taxpayer D should
include $25,000 in income with respect
to the coronavirus-related distribution on
each of D’s 2020, 2021, and 2022 federal
income tax returns. However, as a result
of the recontribution to the § 401(k) plan,
Taxpayer D should include $25,000 in income with respect to the coronavirus-related distribution on the 2020 federal income tax return, $0 in income with respect
to the coronavirus-related distribution on
the 2021 federal income tax return, and
$25,000 in income with respect to the
coronavirus-related distribution on the
2022 federal income tax return.
Example 2. The facts are the same as in
Example 1 of this section 4.E, except that
Taxpayer D recontributes $25,000 to the
§ 401(k) plan on August 10, 2022. Taxpayer D files the 2021 federal income tax return
on April 15, 2022, and does not request an
extension of time to file that federal income
tax return. As a result of the recontribution
to the § 401(k) plan, Taxpayer D should
include $25,000 in income with respect to
the coronavirus-related distribution on the
2020 federal income tax return, $25,000
in income with respect to the coronavirus-related distribution on the 2021 federal
income tax return, and $0 in income with
respect to the coronavirus-related distribution on the 2022 federal income tax return.
F. Recontributions of a coronavirusrelated distribution may be carried back
or forward when using the 3-year ratable
income inclusion method
If a qualified individual using the
3-year ratable income inclusion meth-
41
od recontributes an amount of a coronavirus-related distribution for a tax
year in the 3-year period that exceeds
the amount that is otherwise includible in gross income for that tax year, as
described in section 4.E of this notice,
the excess amount of the recontribution
is permitted to be carried forward to reduce the amount of the coronavirus-related distribution that is includible in
gross income in the next tax year in the
3-year period. Alternatively, the qualified
individual is permitted to carry back the
excess amount of the recontribution to a
prior taxable year or years in which the
individual included income attributable
to a coronavirus-related distribution. The
individual will need to file an amended
federal income tax return for the prior
taxable year or years to report the amount
of the recontribution on Form 8915-E
and reduce his or her gross income by the
excess amount of the recontribution.
Example. Taxpayer E receives a distribution of $90,000 from his or her IRA
on November 15, 2020. Taxpayer E is a
qualified individual and treats the distribution as a coronavirus-related distribution.
Taxpayer E ratably includes the $90,000
distribution in income over a 3-year period. Without any recontribution, Taxpayer
E will include $30,000 in income with respect to the coronavirus-related distribution on each of the 2020, 2021, and 2022
federal income tax returns. Taxpayer E
includes $30,000 in income with respect
to the coronavirus-related distribution on
the 2020 federal income tax return. Taxpayer E then recontributes $40,000 to an
IRA on November 10, 2021 (and makes
no other recontribution in the 3-year period). Taxpayer E is permitted to do either
of the following:
Option 1. Taxpayer E includes $0 in
income with respect to the coronavirus-related distribution on the 2021 federal income tax return. Taxpayer E carries forward the excess recontribution of $10,000
to 2022 and includes $20,000 in income
with respect to the coronavirus-related
distribution on E’s 2022 federal income
tax return.
Option 2. Taxpayer E includes $0 in
income with respect to the coronavirus-related distribution on the 2021 tax return
and $30,000 in income on the 2022 federal income tax return. Taxpayer E also files
July 6, 2020
an amended federal income tax return for
2020 to reduce the amount included in
income as a result of the coronavirus-related distribution to $20,000 (that is, the
$30,000 original amount includible in
income for 2020 minus the remaining
$10,000 recontribution that is not offset
on either the 2021 or 2022 federal tax return).
G. Special rule for 3-year ratable income
inclusion method for coronavirus-related
distributions
If a qualified individual dies before
the full taxable amount of the coronavirus-related distribution has been included in gross income, then the remainder
must be included in gross income for the
taxable year that includes the individual’s
death.
H. Coronavirus-related distributions
will not be treated as a change in
substantially equal periodic payments
In the case of an individual receiving
substantially equal periodic payments
from an eligible retirement plan, the receipt of a coronavirus-related distribution
from that plan will not be treated as a
change in substantially equal payments as
described in § 72(t)(4) merely because of
the coronavirus-related distribution.
SECTION 5. APPLICATION OF
SECTION 2202 OF THE CARES ACT
TO PLAN LOANS
This section provides guidance regarding the application of section 2202(b) of
the CARES Act to plan loans, including
a safe harbor under which suspensions of
payments and extensions of loan terms will
be treated as satisfying section 2202(b)(2)
of the CARES Act. As described in section
2.C of this notice, an employer is permitted to choose whether, and to what extent,
to apply coronavirus-related plan loan
rules described in this section (regardless
of how coronavirus-related distributions
are treated).
A. Increase in the allowable loan amount
Special rules apply to a loan made from
a qualified employer plan (as defined in §
1.72(p)-1, Q&A-2) to a qualified individual on or after March 27, 2020 (the date of
enactment of the CARES Act) and before
September 23, 2020. For these loans, section 2202(b)(1) of the CARES Act changes the limits under § 72(p)(2)(A) of the
Code. In applying § 72(p) to a plan loan,
the $50,000 aggregate limit in § 72(p)(2)
(A)(i) is increased to $100,000 and the
rule in § 72(p)(2)(A)(ii) limiting the aggregate amount of loans to 50 percent of
the employee’s vested accrued benefit is
increased to 100 percent of the employee’s vested accrued benefit.2
B. Suspension of payments and extension
of term of loan
A special rule applies if a qualified
individual has an outstanding loan from
a qualified employer plan on or after
March 27, 2020. Section 2202(b)(2) of the
CARES Act provides that, for purposes of
§ 72(p), in the case of a qualified individual with a loan from a qualified employer plan outstanding on or after March 27,
2020, if the due date pursuant to § 72(p)
(2)(B) or (C) for any repayment with respect to the loan occurs during the period
beginning on March 27, 2020, and ending
on December 31, 2020, the due date shall
be delayed for 1 year. In addition, any
subsequent repayments of the loan shall
be adjusted appropriately to reflect the
delay and any interest accruing during the
delay, and the period of delay must be disregarded in determining the 5-year period
and the term of the loan under § 72(p)(2)
(B) and (C). The effect of section 2202(b)
(2) of the CARES Act is to permit a delay in certain plan loan repayments without causing the loans to violate § 72(p)(2)
(B) and (C). It does not, however, require
a delay in plan loan repayments in order
to satisfy § 72(p)(2)(B) and (C). Thus, an
employer is permitted to choose to allow
this delay in loan repayments under its
plan with respect to qualified individuals,
and, if it does, there will not be a deemed
distribution to those individuals under §
72(p) due to the delay. For example, each
repayment that becomes due during the
period from March 27, 2020, through December 31, 2020, may be delayed for up
to 1 year and then reamortized (taking into
account interest) over a period that is up to
1 year longer than the original term of the
loan. Each reamortized repayment may
then be added to other reamortized repayments and to non-reamortized repayments
to construct an overall loan reamortization
schedule.
This notice provides a safe harbor
for satisfying section 2202(b)(2) of the
CARES Act. Under this safe harbor, a
qualified employer plan will be treated as
satisfying the requirements of § 72(p) pursuant to section 2202(b)(2) of the CARES
Act if a qualified individual’s obligation to
repay a plan loan is suspended under the
plan for any period beginning not earlier
than March 27, 2020, and ending not later
than December 31, 2020 (suspension period). The loan repayments must resume
after the end of the suspension period, and
the term of the loan may be extended by
up to 1 year from the date the loan was
originally due to be repaid. If a qualified
employer plan suspends loan repayments
during the suspension period, the suspension will not cause the loan to be deemed
distributed even if, due solely to the suspension, the term of the loan is extended
beyond 5 years. Interest accruing during
the suspension period must be added to
the remaining principal of the loan. A plan
satisfies these rules if the loan is reamortized and repaid in substantially level installments over the remaining period of
the loan (that is, 5 years from the date of
the loan, assuming that the loan is not a
principal residence loan, plus up to 1 year
from the date the loan was originally due
to be repaid). If an employer, under its
plan, chooses to permit a suspension period that is less than the maximum suspension period described above, the employer
is permitted to extend the suspension period subsequently, but not beyond December 31, 2020.
The Department of Labor has advised the Department of the Treasury and the IRS that it will not treat any person as having violated the provisions of Title I of the Employee Retirement
Income Security Act (ERISA), including the adequate security and reasonably equivalent basis requirements in ERISA section 408(b)(1) and 29 CFR 2550.408b-1, solely because the person
made a plan loan to a qualified individual during the period beginning on March 27, 2020, and ending on September 22, 2020, in compliance with CARES Act section 2202(b)(1) and the
provisions of this notice. See EBSA Disaster Relief Notice 2020-01.
<?>
July 6, 2020
42
Bulletin No. 2020–28
Example applying the safe harbor. On
April 1, 2020, a participant with a nonforfeitable account balance of $40,000 borrowed $20,000 to be repaid in level monthly
installments of $368.33 each over 5 years,
with the repayments to be made by payroll
withholding. The participant makes payments for 3 months through June 30, 2020.
The participant is a qualified individual
(as described in section 1.B of this notice).
The participant’s employer takes action to
suspend payroll withholding repayments,
for the period from July 1, 2020, through
December 31, 2020, for loans to qualified
individuals that are outstanding on or after
March 27, 2020. Because the participant is
a qualified individual, no further repayments
are made on the participant’s loan until January 1, 2021 (when the balance is $19,477).
At that time, repayments on the loan resume,
with the amount of each monthly installment reamortized to be $343.27 in order
for the loan to be repaid by March 31, 2026
(which is the date the loan originally would
have been fully repaid, plus 1 year).
The Department of the Treasury and the
IRS recognize that there may be additional reasonable, if more complex, ways to
administer section 2202(b) of the CARES
Act. For example, in a plan with a suspension period beginning April 1, 2020, each
repayment that becomes due during the
suspension period may be delayed to April
Bulletin No. 2020–28
1, 2021 (the 1-year anniversary of the beginning of the suspension period). After
originally scheduled repayments for January through March of 2021 are made, the
outstanding balance of the loan on April
1, 2021, including the delayed repayments
with interest, may be reamortized over a
period that is up to 1 year longer than the
original term of the loan.
C. Reliance on certifications
The administrator of a qualified employer plan may rely on an individual’s
certification that the individual satisfies
the conditions to be a qualified individual, and therefore qualifies for the special
treatment for loans under section 2202(b)
of the CARES Act, unless the administrator has actual knowledge to the contrary
under the standard described in section
2.E of this notice. See section 2.E of this
notice for an example of an acceptable
certification.
SECTION 6. PERMITTED
CANCELLATION OF
DEFERRAL ELECTION UNDER
NONQUALIFIED DEFERRED
COMPENSATION PLAN
Under § 1.409A-3(j)(4)(viii), a nonqualified deferred compensation plan
43
subject to § 409A may provide for a cancellation of a service provider’s deferral
election, or such a cancellation may be
made, due to an unforeseeable emergency or a hardship distribution pursuant to
§ 1.401(k)-1(d)(3). If a service provider
receives a distribution from an eligible
retirement plan that constitutes a coronavirus-related distribution, that distribution will be considered a hardship distribution pursuant to § 1.401(k)-1(d)(3) for
purposes of § 1.409A-3(j)(4)(viii). As a
result, a nonqualified deferred compensation plan may provide for a cancellation
of the service provider’s deferral election, or such a cancellation may be made,
due to a coronavirus-related distribution
described in section 1.C of this notice.
The deferral election must be cancelled,
not merely postponed or otherwise delayed.
DRAFTING INFORMATION
The principal author of this notice
is Jamie Dvoretzky of the Office of the
Associate Chief Counsel (Employee
Benefits, Exempt Organizations, and
Employment Taxes). For further information regarding this notice, contact Ms.
Dvoretzky at (202) 317-4102 (not a tollfree number).
July 6, 2020
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
July 6, 2020
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
44
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.
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-
Bulletin No. 2020–28
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
45
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-
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).
Notice 2018-99 provides that if a taxpayer owns or leases all or a portion of
one or more parking facilities where its
employees park, the section 274(a)(4)
disallowance may be calculated using any
reasonable method and provides a fourstep methodology that is deemed to be a
reasonable method. However, using the
value of employee parking to determine
expenses allocable to employee parking
in a parking facility owned or leased by
the taxpayer is not a reasonable method because section 274(a)(4) disallows a
deduction for the expense of providing a
QTF, regardless of its value. Furthermore,
for taxable years beginning on or after
January 1, 2019, a method under Notice
2018-99 that fails to allocate expenses to
reserved employee spaces cannot be a reasonable method.
For purposes of Notice 2018-99, a
“parking facility” includes indoor and outdoor garages and other structures, as well
as parking lots and other areas, where employees may park 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. If
a taxpayer owns or leases more than one
parking facility in a single geographic
location, the taxpayer may aggregate the
number of spaces in those parking facilities. However, if a taxpayer owns or
leases parking facilities in more than one
geographic location, the taxpayer may not
aggregate the spaces in parking facilities
that are in different geographic locations.
Also for purposes of Notice 2018-99,
“total parking expenses” include, but are
not limited to, repairs, maintenance, utility costs, insurance, property taxes, interest, snow and ice removal, leaf removal,
trash removal, cleaning, landscape costs,
parking lot attendant expenses, security,
and rent or lease payments or a portion
of a rent or lease payment (if not broken out separately). A deduction for an
July 6, 2020
allowance for depreciation on a parking
structure owned by a taxpayer and used
for parking by the taxpayer’s employees
is an allowance for the exhaustion, wear
and tear, and obsolescence of property,
and not a parking expense for purposes of
Notice 2018-99. Compare section 274(a)
(1) (disallowing deductions for any “item”
with respect to entertainment activities or
facilities) with section 274(a)(4) (disallowing deductions for the “expense” of
any QTF). See also W.L. Schautz v. United
States, 567 F.2d 373, 376 (Ct. Cl. 1977)
(noting that section 274(a)(1) applies to
deductions broadly, not to expenses), and
Gordon v. Commissioner, 37 T.C. 986,
987 (1962) (“Any allowance for depreciation is not an ‘expense paid’ or ‘amount
paid.’”). Expenses paid or incurred for
items not located on or in the parking facility, including items related to property
next to the parking facility, such as landscaping or lighting, also are not included.
The term “employee”, as used in Notice 2018-99, is defined in §§1.132-1(b)
(2)(i) and 1.132-9(b), Q/A-5, as any individual who is currently employed by the
employer; the term includes common law
employees and other statutory employees,
such as officers of corporations. Section
1.132-9(b), Q/A-24, explains that partners, 2-percent shareholders of S corporations, sole proprietors, and independent
contractors are not employees for purposes of section 132(f).
Notice 2018-99 provides a four-step
method deemed to be a reasonable method
for calculating the amount of parking expenses that is nondeductible under section
274(a)(4).
i. Step 1
First, the taxpayer calculates the disallowance for reserved employee spaces.
A taxpayer that owns or leases all or a
portion of one or more parking facilities
must identify the number of spaces in the
parking facility, or the taxpayer’s portion
thereof, exclusively reserved for the taxpayer’s employees (reserved employee
spaces). Employee spaces in the parking
facility, or portion thereof, may be exclusively reserved for employees by a variety
of methods, including, but not limited to,
specific signage (for example, “Employee
Parking Only”) or a separate facility or
46
portion of a facility segregated by a barrier to entry or limited by terms of access.
The taxpayer must then determine the
percentage of reserved employee spaces in relation to total parking spaces and
multiply that percentage by the taxpayer’s
total parking expenses for the parking facility. The product is the amount of the
deduction for total parking expenses that
is disallowed under section 274(a)(4) for
reserved employee spaces.
ii. Step 2
Second, the taxpayer determines the
primary use of remaining spaces (primary
use test). The taxpayer may identify the remaining parking spaces in the parking facility and determine whether their primary
use is to provide parking to the general
public. If the primary use of the remaining
parking spaces in the parking facility is to
provide parking to the general public, then
the remaining total parking expenses for
the parking facility are excepted from the
section 274(a) disallowance by the general public exception under section 274(e)
(7).
For purposes of calculating the disallowance, the term “primary use” means
greater than 50 percent of actual or estimated usage of the parking spaces in the
parking facility. Primary use of the parking spaces is tested during normal business hours on a typical business day. Nonreserved parking spaces that are available
to the general public but empty during
normal business hours on a typical business day are treated as provided to the
general public. In addition, if the actual or
estimated usage of the parking spaces varies significantly between days of the week
or times of the year, the taxpayer may use
any reasonable method to determine the
average actual or estimated usage.
For purposes of Notice 2018-99, the
term “general public” includes, but is not
limited to, customers, clients, visitors,
individuals delivering goods or services
to the taxpayer, students of an educational institution, patients of a health care
facility, and congregants of a religious
organization. As noted in part 1 of the
Background, section 512(a)(7) was retroactively repealed, therefore “congregants
of a religious organization” is not included
in the definition of the “general public” in
Bulletin No. 2020–28
these proposed regulations. The general
public does not include employees, partners, 2-percent shareholders of S corporations, or independent contractors of the
taxpayer.
iii. Step 3
Third, the taxpayer calculates the allowance for reserved nonemployee spaces. If the primary use of a taxpayer’s remaining parking spaces is not to provide
parking to the general public, the taxpayer
may identify the number of spaces in the
parking facility, or the taxpayer’s portion
thereof, exclusively reserved for nonemployees (reserved nonemployee spaces).
For example, reserved nonemployee spaces include spaces reserved for visitors and
customers, as well as spaces reserved for
partners, sole proprietors, and 2-percent
shareholders of S corporations.
Notice 2018-99 explains that the number of reserved nonemployee spaces in the
parking facility, or portion thereof, may
be exclusively reserved for nonemployees
by a variety of methods, including, but not
limited to, specific signage (for example,
“Customer Parking Only”) or a separate
facility or portion of a facility segregated
by a barrier to entry or limited by terms
of access. A taxpayer that has no reserved
nonemployee spaces may proceed to
Step 4.
A taxpayer that has reserved nonemployee spaces may determine the percentage of reserved nonemployee spaces
in relation to the remaining total parking
spaces and multiply that percentage by
the taxpayer’s remaining total parking
expenses. The product is the amount of
the deduction for remaining total parking
expenses that is not disallowed under section 274(a)(4).
iv. Step 4
Fourth, the taxpayer determines the remaining use and allocable expenses of any
remaining parking spaces. If the taxpayer
completes Steps 1 through 3 of the method
in Notice 2018-99 and has any remaining
parking expenses not specifically categorized as deductible or nondeductible,
the taxpayer must reasonably determine
the employee use of the remaining parking spaces during normal business hours
Bulletin No. 2020–28
on a typical business day and the related
expenses allocable to employee parking
spaces. Methods to determine employee
use of the remaining parking spaces may
include specifically identifying the number of employee spaces based on actual or
estimated usage. Actual or estimated usage may be based on the number of spaces, the number of employees, the hours of
use, or other measures.
Several of the comments addressing
section 274(a)(4) are summarized in the
Explanation of Provisions. However,
comments recommending statutory revisions or addressing issues outside the
scope of these proposed regulations, such
as environmental policy issues, are not addressed.
C. Comments on Notice 2018-99
The proposed regulations describe and
clarify the statutory requirements of section 274(a)(4) and 274(l), as well as the
applicability of certain exceptions under
section 274(e) to QTF expenses. To implement the TCJA’s disallowance of deductions for QTF expenses under section
274(a)(4), the proposed regulations create
a new §1.274-13 (proposed §1.274-13) to
address QTF expenses paid or incurred by
an employer, and the application of certain exceptions in section 274(e) to QTF
expenses. Further, the proposed regulations create a new §1.274-14 (proposed
§1.274-14) to address transportation and
commuting expenses paid or incurred by
an employer. As discussed in part 2 of the
Background, the statutory changes made
by the TCJA apply to QTF expenses paid
or incurred by employers after December
31, 2017.
Notice 2018-99 requested comments
for future guidance to further clarify the
treatment of QTFs under section 274. In
particular, the Treasury Department and
the IRS requested comments on the definitions of “primary use” and “general public”, whether primary use should be used
to determine the extent to which parking is
made available to the general public under
section 274(e)(7), other methodologies for
determining the use of the parking spaces
and the related expenses allocable to employee parking, the applicability of section 274(e)(8) to expenses for any goods
or services that constitute a QTF sold by
the taxpayer to an employee in a bona fide
transaction for an adequate and full consideration in money or money’s worth,
and the circumstances under which such
a transaction should be excluded from the
term QTF for purposes of section 274(a)
(4).
The Treasury Department and the IRS
received approximately 500 comments
in response to Notice 2018-99. All comments were considered in drafting these
proposed regulations and are available
at www.regulations.gov or upon request.
Approximately 200 comments addressed
issues involving section 512(a)(7), which
was retroactively repealed, as explained in
part 1 of the Background. Approximately
70 comments expressed support for the
disallowance of parking expenses in section 274(a)(4) on environmental policy
grounds and encouraged the Treasury Department and the IRS to further discourage employers from subsidizing employees that drive to work. The majority of the
remaining comments requested additional
methodologies and simplified rules for
taxpayers that own or lease parking facilities to calculate the amount of the parking
expense disallowance.
47
Explanation of Provisions
1. Qualified Transportation Fringes
A. In General
Proposed §1.274-13 restates the statutory rules under section 274(a)(4), defines relevant terms, and modifies certain
guidance in Notice 2018-99, providing a
general rule and three simplified methodologies to determine the amount of nondeductible parking expenses when a parking
facility is owned or leased by the taxpayer. Additionally, the proposed regulations
build on Notice 2018-99 to include rules
addressing the deduction disallowance for
expenses related to providing employees
transportation in a commuter highway vehicle and transit pass QTFs.
The proposed regulations include special rules to clarify and simplify the calculations underlying the methodologies to
determine the amount of QTF parking expenses. In addition, the proposed regulations generally apply the guidance in No-
July 6, 2020
tice 2018-99 and the applicable exceptions
in section 274(e) to all QTF e xpenses.
Specifically, as in Notice 2018-99, the
proposed regulations provide that if the
taxpayer pays a third party for its employee’s QTF, the section 274(a)(4) disallowance is generally calculated as the
taxpayer’s total annual cost of the QTF
paid to the third party. With regard to
QTF parking expenses, the proposed regulations provide that if the taxpayer owns
or leases all or a portion of one or more
parking facilities, the section 274(a)(4)
disallowance may be calculated using a
general rule, as defined below, or any one
of three simplified methodologies. Taxpayers may choose to apply the general
rule or a simplified methodology for each
taxable year and for each parking facility.
Special rules and definitions are included
in the proposed regulations for allocating
certain mixed parking expenses, aggregating parking spaces by geographic location, removing inventory/unusable spaces
from available parking spaces, defining
general public for multi-tenant building
parking facilities, and disregarding five
or fewer reserved parking spaces if the
reserved spaces are 5 percent or less of
total parking spaces. Taxpayers may use
statistical sampling with the general rule
or simplified methodologies if they follow the procedures in Rev. Proc. 2011-42,
2011-37 I.R.B. 318, as corrected by Ann.
2013-46, 2013-48 I.R.B. 593.
The general rule in the proposed regulations allows taxpayers to calculate the
disallowance based on a reasonable interpretation of section 274(a)(4). However,
taxpayers must use the expense paid or
incurred in providing a QTF instead of its
value to an employee, allocate parking expenses to reserved employee spaces, and
properly apply the exception for parking
made available to the general public. A
special rule for aggregating parking spaces by geographic location may be used
with the general rule.
The proposed regulations also include
three simplified methodologies that taxpayers may use instead of the general rule.
Under the first simplified methodology,
the “qualified parking limit methodology,” taxpayers calculate the disallowance
by multiplying the total number of spaces
used by employees during the peak demand period, or, alternatively, the total
July 6, 2020
number of the taxpayer’s employees, by
the section 132(f)(2) monthly per employee limitation on exclusion for qualified
parking ($270), for each month in the taxable year.
The second simplified methodology,
the “primary use methodology,” is largely
based on the method deemed reasonable
in Notice 2018-99, modified in response
to comments received. Special rules for
allocating certain mixed parking expenses
and aggregating parking spaces by geographic location may be used with the primary use methodology. Definitions in Notice 2018-99 for employee, general public,
parking facility, total parking spaces, reserved employee spaces, reserved nonemployee spaces, primary use, and total
parking expenses, as modified in response
to comments, are also included in the proposed regulations. New definitions for
geographic location, inventory/unusable
spaces, available parking spaces, peak demand period, and mixed parking expense
are included in the proposed regulations
to clarify the methodology in response to
comments received.
The final simplified methodology is
the “cost per space methodology,” which
allows taxpayers to calculate the disallowance by multiplying the cost per parking
space by the number of available parking
spaces to be used by employees during
the peak demand period. Cost per space
is calculated by dividing total parking expenses (including expenses for inventory/
unusable spaces) by total parking spaces
(including inventory/unusable spaces).
Special rules for allocating certain mixed
parking expenses and aggregating parking spaces by geographic location may be
used with the cost per space methodology.
B. Definitions
As described below, the proposed regulations generally include the definitions
from Notice 2018-99, modified in response to comments received, along with
new definitions to clarify terms as needed.
i. Qualified Transportation Fringe
The proposed regulations add a definition for the term “qualified transportation
fringe.” The definition is based on section
132(f)(1), except that it does not include
48
qualified bicycle commuting reimbursements for the reasons described in part 2
of the Background. Thus, the proposed
regulations provide that the term “qualified transportation fringe” means any of
the following provided by an employer to
an employee: transportation in a commuter highway vehicle if such transportation
is in connection with travel between the
employee’s residence and place of employment (as described in sections 132(f)
(1)(A) and 132(f)(5)(B)); any transit pass
(as described in sections 132(f)(1)(B) and
132(f)(5)(A)); or qualified parking (as
described in sections 132(f)(1)(C) and
132(f)(5)(C)).
ii. Employee
The proposed regulations include the
definition of the term “employee,” which
is taken from §§1.132-1(b)(2)(i) and
1.132-9(b), Q/A-5 and Q/A-24. Commenters have asked whether volunteers
are treated as employees under Notice
2018-99, although most of the comments
concerning the status of volunteers related
to section 512(a)(7), which has been retroactively repealed. The term “employee” for Federal tax purposes generally
is understood to refer to a common-law
employee (although the regulations under
section 132 also include certain statutory
employees such as officers of corporations
in the definition of employee for purposes
of QTFs). Whether a service provider is a
common-law employee generally turns on
whether the service recipient has the right
to direct and control the service provider,
not only as to the result to be accomplished
by the work but also as to the details and
means by which that result is accomplished. See, e.g., §31.3121(d)-1(c)(2) of
the Employment Taxes and Collection of
Income Tax at Source Regulations. The
determination does not depend on whether or how the individual is compensated,
or by which person. The employment status of a volunteer depends on the facts and
circumstances in each case. Accordingly,
the proposed regulations do not address
the employment status of volunteers.
iii. General Public
Commenters raised concerns that, for
taxpayers that lease space in a multi-
Bulletin No. 2020–28
tenant building, Notice 2018-99 did not
include employees, partners, 2-percent
shareholders of S corporations, independent contractors, clients, or customers
of unrelated tenants in the building as
members of the general public. In response to these comments, the proposed
regulations modify the definition of the
term “general public” from Notice 201899 to include employees, partners, 2-percent shareholders of S corporations, sole
proprietors, independent contractors,
clients, or customers of unrelated tenants in multi-tenant buildings, as well
as customers, clients, or visitors of the
taxpayer, individuals delivering goods or
services to the taxpayer, students of an
educational institution, and patients of a
health care facility.
iv. Parking Facility
The proposed regulations include a
definition of the term “parking facility”
that follows the definition of qualified
parking in section 132(f)(5)(C) and includes one or more indoor or outdoor
garages and other structures, as well as
parking lots and other areas where employees may park. Commenters suggested
that because qualified parking as defined
in section 132(f)(5)(C) and §1.132-9(b),
Q/A-4(c) does not include any parking on
or near property used by the employee for
residential purposes, including parking for
resident employees of residential rental
buildings, the definition of “total parking
spaces” should exclude such spaces. In response to these comments, the proposed
regulations specifically exclude parking
spaces on or near property used by the
employee for residential purposes from
the definition of parking facility.
v. Geographic Location
Commenters have asked how a geographic location is defined for purposes of aggregating the number of parking
spaces to determine the section 274(a)(4)
disallowance using the primary use methodology. Specifically, Notice 2018-99
provides that if a taxpayer owns or leases
more than one parking facility in a single
geographic location, the taxpayer may
aggregate the number of spaces in those
parking facilities. However, if a taxpayer
Bulletin No. 2020–28
owns or leases parking facilities in more
than one geographic location, the taxpayer
may not aggregate the spaces in parking
facilities that are in different geographic
locations.
In response to these comments, the
proposed regulations add a definition of
the term “geographic location” as contiguous tracts or parcels of land owned or
leased by the taxpayer. Two or more tracts
or parcels of land are contiguous if they
share common boundaries or would share
common boundaries but for the interposition of a road, street, railroad, stream, or
similar property. Tracts or parcels of land
which touch only at a common corner are
not contiguous. The proposed regulations
follow Notice 2018-99 and allow taxpayers to aggregate the number of parking
spaces in a single geographic location to
determine the section 274(a)(4) disallowance using the general rule, primary use
methodology, or cost per space methodology.
vi. Total Parking Spaces
The proposed regulations define the
term “total parking spaces” as the total
number of parking spaces in the parking
facility. New terms “available parking
spaces” and “inventory/unusable spaces”
are added to the proposed regulations and
the definition of the term “parking facility” is clarified in response to comments
received.
vii. Reserved Employee Spaces
A commenter recommended that the
definition of the term “reserved employee spaces” be limited to parking spaces
actually used by employees on a typical
business day. Because section 274(a)(4)
disallows the deduction for the expense
of providing a QTF to an individual employee, the commenter reasoned that the
taxpayer should identify the expense for
each QTF provided to each individual employee when determining the amount that
is disallowed.
After considering the comment, the
Treasury Department and the IRS have
determined that costs allocated to reserved
employee spaces should be disallowed regardless of actual use of the reserved spaces. However, a special rule is included in
49
step 1 of the primary use methodology
providing that there is no disallowance for
reserved employee spaces if the primary use of the available parking spaces is
to provide parking to the general public,
there are five or fewer reserved employee
spaces, and the number of reserved employee spaces is 5 percent or less of the
total parking spaces in the parking facility.
viii. Reserved Nonemployee Spaces
A commenter suggested that parking
spaces reserved for drivers with disabilities be treated as “reserved nonemployee
spaces” and as such, any related expenses not be disallowed under section 274(a)
(4). After considering the comment, the
Treasury Department and the IRS have
determined that the proposed regulations should not include parking spaces
reserved for drivers with disabilities in
the definition of reserved nonemployee
spaces. Unlike parking spaces reserved
for customers or visitors, parking spaces
reserved for drivers with disabilities may
be used by employees (with disabilities),
and section 274(a)(4) would then apply
to disallow the expense. Parking spaces
reserved for drivers with disabilities are
also not included in “reserved employee
spaces” because they may or may not be
exclusively reserved for employees.
ix. Inventory/Unusable Spaces
The Treasury Department and the IRS
received questions and comments on how
parking spaces reserved for, or used by,
inventoried vehicles are to be treated for
purposes of determining the disallowance.
For example, taxpayers asked whether
parking spaces reserved exclusively for,
or used by, vehicles to be sold or leased to
customers at a car dealership or car rental
agency are treated as spaces available to
the general public.
In response to the comments and questions received, the proposed regulations
add a new definition for the term “inventory/unusable spaces” that includes parking spaces used for inventoried vehicles,
qualified nonpersonal use vehicles (as
described in §1.274-5(k)), other fleet vehicles used in a taxpayer’s trade or business, or otherwise not usable for parking
by employees.
July 6, 2020
Inventory/unusable spaces are specifically excluded from the definitions of
“available parking spaces,” discussed later, and “reserved nonemployee spaces,”
discussed earlier, under the primary use
methodology and primary use test in the
proposed regulations. The proposed regulations exclude inventory/unusable spaces
because those spaces are generally not
available to employees or the general public but are instead used for other purposes.
Inventory/unusable spaces are included
in total parking spaces under the cost per
space methodology because taxpayers do
incur costs in maintaining the spaces.
x. Available Parking Spaces
The proposed regulations add a new
definition for the term “available parking
spaces” to clarify that reserved employee
spaces and inventory/unusable spaces are
not included in determining primary use
under the primary use methodology.
xi. Primary Use
The Treasury Department and the IRS
received numerous comments on the primary use test used in step 2 of the fourstep method in Notice 2018-99 to determine the extent to which parking is made
available to the general public under section 274(e)(7). Notice 2018-99 provides
that “primary use” means greater than 50
percent of actual or estimated usage by the
general public of the parking spaces in the
parking facility.
Several commenters suggested that primary use should mean greater than 85, 90,
or 95 percent of actual or estimated usage
by the general public, thereby applying
the exception in section 274(e)(7) only to
taxpayers with less than 15 percent actual
or estimated usage by employees. Other
commenters suggested that 50 percent is
fair and reasonable.
After considering the comments received, the Treasury Department and the
IRS have decided to retain the primary
use test as described in Notice 2018-99 as
a reasonable interpretation of the exception in section 274(e)(7) for parking made
available to the general public. This interpretation is consistent with recent proposed regulations addressing the application of the section 274(e)(7) exception to
July 6, 2020
the limitation on deduction for meals and
entertainment expenses. See 85 FR 11020
(February 26, 2020). Specifically, the proposed regulations for meals and entertainment expenses (proposed §1.274-11 and
§1.274-12) include a definition of the term
“primarily consumed” that means greater
than 50 percent of actual or reasonably estimated consumption.
xii. Total Parking Expenses
Commenters suggested that safety-related expenses, such as lighting, snow and
ice removal, leaf removal, trash removal,
cleaning, and security, should be excluded from the definition of “total parking
expenses.” Commentators reasoned that
including the expenses may encourage
unsafe parking conditions and neglect of
care in maintaining the parking facilities.
Commenters also requested the removal of indirect costs, such as utility costs,
insurance, property taxes, snow and ice
removal, leaf removal, trash removal,
cleaning, parking lot attendant expenses,
and security. Multiple commenters also
suggested adding depreciation to total
parking expenses, reasoning that these are
costs of parking facilities.
After considering the comments received, the Treasury Department and the
IRS have determined that the proposed regulations should adopt the definition of the
term “total parking expenses” from Notice
2018-99. Section 274(a)(4) disallows a deduction for the expense of providing a QTF,
without regard to whether the expense is
required for safety reasons. Further, QTF
parking expenses include indirect costs such
as allocable salaries for security and maintenance personnel, property taxes, repairs
and maintenance, etc. See Joint Committee
on Taxation, General Explanation of Public
Law 115-97 (JCS-1-18), at 190, December 2018. However, as explained in Notice
2018-99 and in part 2.B. of the Background,
a deduction for an allowance for depreciation is not included in total parking expenses
because it is an allowance for the exhaustion,
wear and tear, and obsolescence of property,
and not a parking expense.
xiii. Mixed Parking Expense
Numerous commenters expressed concerns and asked questions about how to
50
determine the amount of expenses allocable to a parking facility if the invoice does
not separate parking facility expenses
from nonparking facility expenses. Commenters explained that determining and
allocating expenses may impose excessive and unduly burdensome recordkeeping requirements on taxpayers and may be
difficult for taxpayers and the IRS to administer. Commenters noted that such expenses for parking and nonparking property may include rent or lease payments,
repairs, maintenance, utility costs, insurance, property taxes, interest, snow or ice
removal, and security. In response to the
comments, the Treasury Department and
the IRS have included in the proposed regulations a definition for the term “mixed
parking expense” and a special rule for
allocating certain mixed parking expenses. “Mixed parking expense” is defined as
an amount paid or incurred by a taxpayer
for both a parking facility and nonparking
facility property that a taxpayer owns or
leases. The special rule for allocating certain mixed parking expenses to a parking
facility is explained in part 1.C of this Explanation of Provisions.
xiv. Peak Demand Period
In these proposed regulations, several of the methodologies for determining
the section 274(a)(4) disallowance for
parking facilities require the taxpayer to
determine the total number of parking
spaces used by employees during the peak
demand period for employee parking on a
typical business day. Thus, the proposed
regulations provide that for purposes of
proposed §1.274-13, the term “peak demand period” means the period of time on
a typical business day when the greatest
number of the taxpayer’s employees are
utilizing parking spaces in the taxpayer’s
parking facility. If a taxpayer’s employees
work in shifts, the peak demand period
would take into account the shift during
which the largest number of employees
park in the taxpayer’s parking facility.
However, a brief transition period during
which two shifts overlap in their use of
parking spaces, as one shift of employees
is getting ready to leave and the next shift
is reporting to work, may be disregarded.
Taxpayers may use any reasonable methodology to determine the total number of
Bulletin No. 2020–28
spaces used by employees during the peak
demand period on a typical business day,
for example based on periodic inspections
or employee surveys.
The recent Coronavirus Disease
(COVID-19) pandemic highlights that
taxpayers may experience significant
variations in employee parking during the
taxable year due to a national emergency
or other type of disaster. The Treasury
Department and the IRS request comments on what additional rules, if any, are
needed to address significant variations in
employee parking during the taxable year
and whether any additional rules should
apply to all taxpayers generally or should
be triggered only upon certain events.
C. Special Rules for QTF Parking
Expenses
Multiple commenters expressed concerns and asked questions regarding how
to allocate mixed parking expenses. Commenters suggested the use of a special rule
that would allow the taxpayer to allocate
a certain percentage of the taxpayer’s
mixed parking expenses, such as 5 percent, to a parking facility. Commenters
also recommended that taxpayers be permitted to allocate mixed parking expenses
by comparing rent or lease payments for
leases with and without parking facilities
or comparing the value of similar nonparking facilities with and without parking facilities.
In response to concerns raised by commenters, the proposed regulations include
a special rule for certain mixed parking
expenses to reduce administrative burdens
for taxpayers and simplify calculations in
complying with section 274(a)(4). Specifically, the proposed regulations provide
that a taxpayer may choose to allocate 5
percent of certain mixed parking expenses to the parking facility. This special rule
applies to mixed parking expenses related
to payments under a lease or rental agreement, and payments for utilities, insurance, interest and property taxes. The special rule to allocate certain mixed parking
expenses may only be used in the primary
use methodology and cost per space methodology and may not be used with the
general rule or the qualified parking limit
methodology. Taxpayers are not required
to use the special rule for certain mixed
Bulletin No. 2020–28
parking expenses and may instead use any
reasonable methodology for mixed parking expenses.
The proposed regulations also include
a special rule allowing taxpayers to aggregate the number of parking spaces in a
single geographic location. The rule generally follows the rule in Notice 2018-99,
but in response to comments adds a definition of the term “geographic location,”
which is based on tracts or parcels of land
that are contiguous. The special rule for
aggregation of parking spaces in a single
geographic location may be used with the
general rule, primary use methodology,
and cost per space methodology, but may
not be used with the qualified parking limit methodology.
D. Calculation of Disallowance of QTF
Parking Expenses
The proposed regulations follow Notice 2018-99 and provide that if a taxpayer pays one or more third parties an
amount for its employees’ QTFs, the section 274(a)(4) disallowance is equal to the
taxpayer’s total annual cost for the QTFs
paid or incurred to third parties. A commenter suggested that if a taxpayer pays a
third party for parking spaces that are not
assigned to specific employees, some of
which are not used (for example, taxpayer
leases 10 spaces and only has 8 employees), the disallowance should be limited
to parking spaces actually used by employees on a typical business day. After
considering the comment, the Treasury
Department and the IRS determined that
amounts paid to a third party for qualified
parking in such situations should be disallowed regardless of actual employee use
of the spaces because the taxpayer paid
or incurred the expense for its employees’
QTFs regardless of employee use.
If instead, the taxpayer owns or leases a parking facility, the taxpayer may
use the general rule or choose any of the
following three simplified methodologies
for each parking facility to determine the
section 274(a)(4) disallowance for each
taxable year.
i. General Rule
Multiple commenters requested guidance on additional methodologies that
51
may be used to calculate the disallowance
under section 274(a)(4). In response to
these comments, the Treasury Department
and the IRS determined that taxpayers
may calculate the disallowance using a
general rule if the calculation is based on a
reasonable interpretation of section 274(a)
(4), as long as the taxpayer’s methodology
does not use the value of a QTF instead
of its expense, fail to allocate parking
expense to reserved employee spaces, or
improperly apply the exception for qualified parking made available to the public
(for example, by treating a parking facility
regularly used by employees as available
to the public merely because the public
has access to the parking facility).
ii. Qualified Parking Limit Methodology
Multiple commenters suggested that a
standard cost per parking space similar to
the standard mileage rate or per diem rate
be used to determine the disallowance under section 274(a)(4). Other commenters
suggested that a national average fair market value per parking space be used.
In response to the comments received, the Treasury Department and the
IRS have determined that the maximum
monthly dollar amount under section
132(f)(2), adjusted for inflation, may
be used as a simple estimate of the taxpayer’s monthly total cost per parking
space. The adjusted maximum monthly
excludable amount for 2020 is $270 per
employee. Using the qualified parking
limit methodology, taxpayers may determine the disallowance simply by multiplying the section 132(f)(2) monthly per
employee limitation on the exclusion by
the total number of spaces used by employees during the peak demand period.
Alternatively, the proposed regulations
provide that taxpayers using this methodology may instead multiply the section
132(f)(2) monthly per employee limitation on the exclusion by the total number
of the taxpayer’s employees.
Section 274(e)(2) and proposed
§1.274-13(e)(2)(i) provide that the section 274(a)(4) disallowance for QTFs
does not apply to the extent that a QTF
is treated as compensation to an employee on the taxpayer’s return and as wages
to the employee. A taxpayer using this
qualified parking limit methodology who
July 6, 2020
has monthly expenses per parking space
exceeding the section 132(f)(2) monthly
per employee limitation on the exclusion
can deduct those excess expenses without regard to how much (if any) of the
value of the parking space to the employee exceeds the section 132(f)(2) monthly
per employee limitation on exclusion.
However, these proposed regulations
provide that the qualified parking limit methodology may be used only if the
value of the QTF, to the extent it exceeds
the sum of the amount paid (if any) by the
employee for the QTF and the applicable
statutory monthly limit in section 132(f)
(2), is included on the taxpayer’s Federal income tax return as originally filed as
compensation paid to the employee and
as wages to the employee for purposes
of withholding under chapter 24 (relating to collection of Federal income tax at
source on wages).
Section 132(a)(5) excludes from gross
income the value of a QTF up to the section 132(f)(2) monthly per employee
limitation on exclusion, and therefore
no amount for the value of QTFs up to
the section 132(f)(2) monthly limitation
can be included in an employee’s wages. Thus, the exception in section 274(e)
(2) and proposed §1.274-13(e)(2)(i)(A)
cannot be applied to the value of a QTF
that is less than or equal to the monthly
per employee limitation on exclusion in
section 132(f)(2). Because this qualified
parking limit methodology already limits the taxpayer’s expenses per parking
space to the section 132(f)(2) monthly per employee limitation on exclusion, section 274(e)(2) cannot be used
to reduce the disallowed expenses even
further. For this reason, the proposed
regulations provide that the exception
to the disallowance for amounts treated as employee compensation provided
for in section 274(e)(2) and in proposed
§1.274-13(e)(2)(i) cannot be applied to
reduce a section 274(a)(4) disallowance
calculated using this method.
iii. Primary Use Methodology
The Treasury Department and the IRS
received numerous comments on the
four-step method in Notice 2018-99. The
proposed regulations adopt the four-step
method in Notice 2018-99, with revisions
July 6, 2020
in response to comments, and rename it
as the “primary use methodology.” Comments received on the definition of primary use in Notice 2018-99 are discussed in
part 1.B.xi. of this Explanation of Provisions.
The four-step method in Notice 201899 provides that employee use of parking
spaces is determined by identifying the
actual or estimated usage of the parking
spaces during normal business hours on
a typical business day. Multiple commenters suggested that taxpayers should
instead be required to count the number
of parking spaces in the parking facility
actually used by employees. The Treasury Department and the IRS considered
these comments and determined that, to
ease the burden of counting actual spaces
used by employees and provide a clearer standard, taxpayers must identify the
number of available parking spaces used
by employees during the peak demand
period.
iv. Cost Per Space Methodology
Multiple commenters stated that the
four-step method in Notice 2018-99 is
cumbersome and complex. As an alternative, the Treasury Department and the IRS
include in the proposed regulations the
cost per space methodology, which allows
taxpayers to calculate the disallowance by
multiplying the cost per space by the number of spaces used by employees. Taxpayers must identify the number of available
parking spaces used by employees during
the peak demand period. Cost per space
is calculated by dividing total parking
expenses (including expenses related to
inventory/unusable spaces) by the total
number of spaces (including inventory/
unusable spaces).
v. Expenses for Transportation in a
Commuter Highway Vehicle and Transit
Pass QTFs
Notice 2018-99 addresses only expenses related to parking QTFs. The proposed
regulations include rules addressing the
disallowance of deductions for expenses
for transportation in a commuter highway
vehicle and transit pass QTFs, as well as
the applicability of certain exceptions under section 274(e).
52
E. Specific Exceptions to Section 274(a)
for QTF Expenses
The Treasury Department and the IRS
received multiple questions and comments about whether the exceptions in
section 274(e) apply to QTF expenses that
are otherwise nondeductible under section
274(a)(4). Section 274(e) provides that
the deduction disallowance under section
274(a) does not apply to any expense described in section 274(e). The Treasury
Department and the IRS considered the
comments and note that while section
274(e) was not amended by the TCJA, it
provides that section 274(a) “shall not apply to” deductions for expenses described
in section 274(e). Therefore, except as described in part 1.E.i. of this Explanation of
Provisions, the proposed regulations provide that the deduction disallowance does
not apply to expenditures for QTFs that
meet the requirements of sections 274(e)
(2), (7) and (8).
Numerous commenters also recommended providing exceptions from the
section 274(a)(4) disallowance for QTFs
with a zero or a de minimis fair market
value, QTFs required to be provided to
employees under certain laws, or QTFs
provided by small business taxpayers.
Exceptions for QTFs with a zero or a de
minimis fair market value, QTFs required
under certain laws, and small business
taxpayers are not provided for in any of
the exceptions under section 274(e) and
therefore are not exceptions to the section
274(a)(4) disallowance.
i. Certain QTF Expenses Treated as
Compensation under Section 274(e)(2)
Pursuant to section 274(e)(2), the proposed regulations provide that the disallowance under section 274(a) does not
apply to expenditures for QTFs to the
extent the taxpayer treats the expenses
as compensation to the employee on the
taxpayer’s Federal income tax return as
originally filed, and as wages to the employee for purposes of withholding under
chapter 24 relating to collection of Federal
income tax at source on wages. However, section 132(a)(5) excludes the value of
QTFs from an employee’s gross income
subject to the limitations on exclusion
provided by section 132(f)(2). Therefore,
Bulletin No. 2020–28
in determining whether the section 274(e)
(2) exception for expenses treated as compensation applies, the proposed regulations provide that the exception in section
274(e)(2) does not apply to expenses paid
or incurred for QTFs the value of which
(including a purported value of zero) is
excluded from an employee’s gross income under section 132(a)(5).
The Treasury Department and the IRS
are aware that some taxpayers may attempt to claim a deduction under section
274(e)(2) by including a value that is less
than the amount required to be included
under §1.61-21, which provides the rules
for valuation of fringe benefits, or by including a purported value of zero, as compensation and as wages to the employee.
The proposed regulations therefore provide that the exception in section 274(e)
(2) does not apply to expenses paid or incurred for QTFs for which the value that
is included in gross income is less than the
amount required to be included in gross
income under §1.61-21. Similarly, if the
amount required to be included in gross
income under §1.61-21 is purportedly
zero, the exception in section 274(e)(2)
and proposed §1.274-13(e)(2)(i) does not
apply.
As noted above, section 132(a)(5) excludes the value of QTFs from an employee’s gross income subject to the monthly
per employee limitations on exclusion
provided by section 132(f)(2). Section
132(f)(2) provides that the amount of
QTFs that can be excluded from gross income cannot exceed a maximum monthly dollar amount, adjusted for inflation.
For taxable years beginning in 2020, the
monthly per employee limitation under
section 132(f)(2)(A) regarding the aggregate fringe benefit exclusion amount for
transportation in a commuter highway
vehicle and any transit pass is $270 per
employee. The monthly limitation under
section 132(f)(2)(B) regarding the fringe
benefit exclusion amount for qualified
parking is $270 per employee. Rev. Proc.
2019-44, 2019-47 I.R.B. 1093. Therefore,
if an employer provides an employee
with QTFs, the value of which exceeds
the sum of the amount, if any, paid by the
employee for the fringe benefits and the
applicable statutory monthly per employee limit, then the employer must include
the value of the benefits provided in ex-
Bulletin No. 2020–28
cess of the amount paid by the employee
and the applicable statutory per employee
monthly limit in the employee’s wages
for income and employment tax purposes.
See §1.61–21(b)(1) and §1.132-9(b), Q/A8. The proposed regulations provide that
the employer must follow this treatment in
order to rely on the exception in section
274(e)(2).
ii. Expenses for Transportation in a
Commuter Highway Vehicle, Transit
Pass, or Parking Made Available to the
Public
As noted in part 2.A. of the Background, section 274(e)(7) applies to expenses for goods, services, and facilities
made available by the taxpayer to the general public. When enacting section 274(n)
in 1986 (limiting the deduction for meal
and entertainment expenses), Congress
indicated that a taxpayer’s customers and
potential customers are members of the
general public for purposes of section
274(e)(7):
The reduction rule [in section 274(n)]
does not apply in the case of items, such
as samples and promotional activities,
that are made available to the general
public. For example, if the owner of a
hardware store advertises that tickets to
a baseball game will be provided to the
first 50 people who visit the store on
a particular date, or who purchase an
item from the store during a sale, then
the full amount of the face value of the
tickets is deductible by the owner.
H.R. Rep. No. 99-426 (1986), reprinted in 1986-3 (Vol. 2) C.B. 1, 124, and
S. Rep. No. 99-313 (1986), reprinted in
1986-3 (Vol. 3) C.B. 1, 72. Thus, the Treasury Department and the IRS have determined that expenses for transportation in
a commuter highway vehicle, any transit
pass, and parking that otherwise qualify as
QTFs and are made available to the general public, which includes a taxpayer’s customers and potential customers, are within
this exception. However, goods, services,
and facilities are not made available to the
general public if they are made available
only to an exclusive list of guests. See
Churchill Downs, Inc. v. Commissioner,
307 F.3d 423 (6th Cir. 2002).
Pursuant to section 274(e)(7), the proposed regulations provide that any tax-
53
payer expense for transportation in a commuter highway vehicle, a transit pass, or
parking that otherwise qualifies as a QTF
under section 132(f)(1) and that is also
made available to the general public is
not subject to the deduction disallowance
under section 274(a) to the extent such
transportation, transit pass, or parking is
made available to the general public. As
described further in part 1.B.iii. of this Explanation of Provisions, “general public”
includes, but is not limited to, customers,
clients, visitors, individuals delivering
goods or services to the taxpayer, and patients of a health care facility. The general
public does not include employees, partners, 2-percent shareholders of S corporations, sole proprietors, or independent
contractors of the taxpayer. If a taxpayer
owns or leases space in a multi-tenant
building, employees, partners, 2-percent
shareholders of S corporations, sole proprietors, independent contractors or customers of unrelated tenants in the building
are included in the definition of general
public.
iii. Expenses for Transportation in a
Commuter Highway Vehicle, Transit
Pass, or Parking Sold to Customers
As noted in part 2.A. of the Background, section 274(e)(8) applies to expenses for goods or services (including the
use of facilities) that are sold by the taxpayer in a bona fide transaction for an adequate and full consideration in money or
money’s worth. The Treasury Department
and the IRS have determined that expenses
for transportation in a commuter highway
vehicle, any transit pass, and parking that
otherwise qualify as QTFs and that are sold
by a taxpayer fall within this exception.
Pursuant to section 274(e)(8), the proposed regulations provide that any taxpayer expense for transportation in a commuter highway vehicle, a transit pass, or
parking that otherwise qualifies as a QTF
under section 132(f)(1) that is sold to customers in a bona fide transaction for an adequate and full consideration in money or
money’s worth is not subject to the deduction disallowance under section 274(a).
The proposed regulations also provide
that for purposes of this section, the term
“customer” includes an employee of the
taxpayer who purchases the transportation
July 6, 2020
in a commuter highway vehicle, transit
pass, or parking in a bona fide transaction
for an adequate and full consideration in
money or money’s worth.
Some commenters have stated that
QTFs offered through a compensation reduction agreement should not be subject
to the disallowance under section 274(a)
(4) because an employer should not be
disallowed a deduction for expenses
for otherwise deductible compensation
when an employee chooses to use that
compensation towards the purchase of a
QTF through a compensation reduction
agreement. Pursuant to section 132(f)(4),
no amount for a QTF is included in the
gross income of an employee solely because the employee can choose between
any QTF (other than a qualified bicycle
commuting reimbursement) and compensation that would otherwise be includible
in the employee’s gross income. Thus, an
employee who is offered this choice and
who elects QTFs is not required to include the foregone cash compensation in
income if the election is made pursuant
to a compensation reduction agreement
and the relevant requirements are met.
See §1.132-9(b), Q/A-11 through 15. In
other words, an employer who provides
an employee a QTF through a compensation reduction agreement is incurring an
expense for an excludible QTF (assuming
the relevant requirements are met), rather than an expense for the compensation
that was reduced. Therefore, the Treasury
Department and the IRS do not adopt this
approach because a QTF is subject to the
section 274(a)(4) disallowance regardless
of whether the benefit is provided by the
employer in-kind, through a bona fide cash
reimbursement arrangement, or through a
compensation reduction agreement.
2. Transportation and Commuting
Expenses
Proposed §1.274-14 addresses the disallowance of deductions under section
274(l) for amounts paid or incurred after December 31, 2017, for any expense
incurred to provide 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
July 6, 2020
the employee. Travel between the employee’s residence and place of employment includes travel that originates at a
transportation hub near the employee’s
residence or place of employment. For
example, an employee who commutes to
work by airplane from an airport near the
employee’s residence to an airport near
the employee’s place of employment
is traveling between the residence and
place of employment.
Responding to comments received, the
proposed regulations provide a definition
for an employee’s “residence,” referencing the definition of the term “residence”
in §1.121-1(b)(1). Under §1.121-1(b)(1),
whether property is used by the taxpayer as
the taxpayer’s residence depends upon all
the facts and circumstances. A property used
by the taxpayer as the taxpayer’s residence
may include a houseboat, a house trailer, or
the house or apartment that the taxpayer is
entitled to occupy as a tenant-stockholder
in a cooperative housing corporation. The
proposed regulations also define the term
“safety of the employee,” referencing the
description of a bona fide business-oriented
security concern in §1.132-5(m).
Commentators have asked whether section 274(l) applies to expenses for
QTFs provided to an employee of the
taxpayer for which a deduction would be
disallowed under section 274(a)(4) except
that one of the exceptions under section
274(e) applies. The Treasury Department
and the IRS have determined that section
274(l) does not apply to deductions for
such expenses.
The Treasury Department and the IRS
also received comments suggesting that the
exception in section 274(e)(2) for expenses treated as compensation should apply
to section 274(l) transportation and commuting expenses. However, the exceptions
in section 274(e) apply only to amounts
that are disallowed under section 274(a),
and not to those disallowed under section
274(l). The Joint Committee on Taxation’s
Bluebook on the TCJA confirms that the
exception in section 274(e)(2) does not apply to section 274(l) expenses:
The provision is intended to include
qualified transportation fringe expenses in the exception to the deduction
disallowance for expenses that are
treated as compensation. Any expenses incurred for providing any form of
54
transportation which are not qualified
transportation fringes (or any payment
or reimbursement) for commuting between the employee’s residence and
place of employment, even if included
in compensation, are not eligible for
this exception.
Joint Committee on Taxation, General
Explanation of Public Law 115-97 (JCS1-18), at 190, December 2018. Thus, the
proposed regulations do not apply the section 274(e)(2) exception to section 274(l)
expenses.
Request for Comments
The Treasury Department and the IRS
request comments on all aspects of these
proposed regulations. Regarding QTF
parking expenses under proposed §1.27413, comments are specifically requested
on other methodologies for determining
the use of parking spaces and the related
expenses allocable to employee parking.
Comments are also requested on additional guidance needed to determine the
amount of commuter highway vehicle
and transit pass expenses for QTFs that
is nondeductible under section 274(a)(4),
including whether any specific examples
should be addressed. Regarding transportation and commuting expenses under
proposed §1.274-14, comments are specifically requested on additional guidance
needed to determine whether transportation is necessary for ensuring the safety of
the employee, and how to define an employee’s residence and place of employment. Comments are also requested on
whether any specific examples of transportation and commuting expenses should
be addressed.
Proposed Applicability Date
These regulations are proposed to apply for taxable years beginning on or after
the date these regulations are published as
final regulations in the Federal Register.
Pending the issuance of the final regulations, a taxpayer may rely on these proposed regulations for QTF expenses and
transportation and commuting expenses,
as applicable, that are paid or incurred in
taxable years beginning after December
31, 2017. Alternatively, a taxpayer may
choose to rely on the guidance in Notice
Bulletin No. 2020–28
2018-99 until these proposed regulations
are finalized.
Special Analyses
These proposed regulations are not
subject to review under section 6(b) of
Executive Order 12866 pursuant to the
Memorandum of Agreement (April 11,
2018) between the Treasury Department
and the Office of Management and Budget
regarding review of tax regulations.
In accordance with the Regulatory Flexibility Act (5 U.S.C. chapter 6), it is hereby certified that this proposed rule will
not have a significant economic impact
on a substantial number of small entities.
Although the rule may affect a substantial
number of small entities, the economic impact of the regulations is not likely to be
significant. Data are not readily available
about the number of taxpayers affected,
but the number is likely to be substantial
for both large and small entities because the
rule affects any entity that provides QTFs
or certain commuting benefits to employees. The economic impact of these regulations is not likely to be significant, however, because these proposed regulations
substantially incorporate prior guidance
and otherwise clarify the application of
the TCJA changes to section 274 related to
QTFs and certain commuting benefits. The
proposed regulations will assist taxpayers
in understanding the changes to section 274
and make it easier for taxpayers to comply
with those changes. Notwithstanding this
certification, the Treasury Department and
the IRS welcome comments on the impact
of these regulations on small entities.
Pursuant to section 7805(f), these proposed regulations have been submitted to
the Chief Counsel for Advocacy of the
Small Business Administration for comment on their impact on small business.
Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates
Reform Act of 1995 (UMRA) requires
that agencies assess anticipated costs and
benefits and take certain other actions before issuing a final rule that includes any
Federal mandate that may result in expenditures in any one year by a state, local, or
tribal government, in the aggregate, or by
the private sector, of $100 million (updat-
Bulletin No. 2020–28
ed annually for inflation). This rule does
not include any Federal mandate that may
result in expenditures by state, local, or
tribal governments, or by the private sector in excess of that threshold.
Executive Order 13132: Federalism
Executive Order 13132 (entitled “Federalism”) prohibits an agency from publishing
any rule that has federalism implications if
the rule either imposes substantial, direct
compliance costs on state and local governments, and is not required by statute, or
preempts state law, unless the agency meets
the consultation and funding requirements
of section 6 of the Executive order. This
proposed rule does not have federalism implications and does not impose substantial
direct compliance costs on state and local
governments or preempt state law within
the meaning of the Executive order.
Comments and Requests for a Public
Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any comments that are
submitted timely to the IRS as prescribed
in this preamble under the “ADDRESSES” heading. Any electronic comments
submitted, and to the extent practicable
any paper comments submitted, will be
made available at http://www.regulations.
gov or upon request.
A public hearing will be scheduled if requested in writing by any person who timely
submits electronic or written comments. Requests for a public hearing are also encouraged to be made electronically and can also
be made as prescribed in this preamble under the “ADDRESSES” heading. If a public
hearing is scheduled, notice of the date and
time for the public hearing will be published
in the Federal Register. Announcement
2020-4, 2020-17 IRB 1, provides that until
further notice, public hearings conducted
by the IRS will be held telephonically. Any
telephonic hearing will be made accessible
to people with disabilities.
Statement of Availability of IRS
Documents
IRS Revenue Procedures, Revenue
Rulings, and Notices cited in this pream-
55
ble are published in the Internal Revenue
Bulletin (or Cumulative Bulletin) and are
available from the Superintendent of Documents, U.S. Government Publishing Office, Washington, DC 20402, or by visiting the IRS web site at http://www.irs.gov.
Drafting Information
The principal author of this proposed
regulation is Patrick Clinton, Office of the
Associate Chief Counsel (Income Tax &
Accounting). Other personnel from the
Treasury Department and the IRS participated in their development.
List of Subjects in 26 CFR Part 1
Income Taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
Part 1—INCOME TAX
Paragraph 1. The authority citation for
part 1 is amended by adding sectional authorities for §§1.274-13 and 1.274-14 in
numerical order to read in part as follows:
Authority: 26 U.S.C. 7805.
*****
Section 1.274-13 also issued under 26
U.S.C. 274.
Section 1.274-14 also issued under 26
U.S.C. 274.
*****
Par. 2. Sections 1.274-13 and 1.274-14
are added to read as follows:
§1.274-13 Disallowance of deductions
for certain qualified transportation fringe
expenditures.
(a) In general. Except as provided in
this section, no deduction otherwise allowable under chapter 1 of the Internal
Revenue Code (Code) is allowed for any
expense of any qualified transportation
fringe as defined in paragraph (b)(1) of
this section.
(b) Definitions. The following definitions apply for purposes of this section:
(1) Qualified transportation fringe.
The term qualified transportation fringe
means any of the following provided by
July 6, 2020
an employer to an employee: transportation in a commuter highway vehicle if
such transportation is in connection with
travel between the employee’s residence
and place of employment (as described in
sections 132(f)(1)(A) and 132(f)(5)(B));
any transit pass (as described in sections
132(f)(1)(B) and 132(f)(5)(A)); or qualified parking (as described in sections
132(f)(1)(C) and 132(f)(5)(C)).
(2) Employee. The term employee
means a common law employee or other
statutory employee, such as an officer of
a corporation, who is currently employed
by the taxpayer. See §1.132-9 Q/A-5.
Partners, 2-percent shareholders of S corporations, sole proprietors, and independent contractors are not employees of the
taxpayer for purposes of this section.
(3) General public. The term general public includes, but is not limited to,
customers, clients, visitors, individuals
delivering goods or services to the taxpayer, students of an educational institution,
and patients of a health care facility. If a
taxpayer owns or leases space in a multitenant building, the term general public
includes employees, partners, 2-percent
shareholders of S corporations, sole proprietors, independent contractors, clients,
or customers of unrelated tenants in the
building. The term general public does
not include individuals that are employees, partners, 2-percent shareholders of S
corporations, sole proprietors, or independent contractors of the taxpayer. Also, an
exclusive list of guests is not the general
public.
(4) Parking facility. The term parking
facility includes indoor and outdoor garages and other structures, as well as parking lots and other areas, where a taxpayer
provides qualified parking (as defined in
section 132(f)(5)(C)) to one or more of its
employees. The term parking facility may
include one or more parking facilities but
does not include parking spaces on or near
property used by an employee for residential purposes.
(5) Geographic location. The term
geographic location means contiguous
tracts or parcels of land owned or leased
by the taxpayer. Two or more tracts or
parcels of land are contiguous if they
share common boundaries or would share
common boundaries but for the interposition of a road, street, railroad, stream, or
July 6, 2020
similar property. Tracts or parcels of land
which touch only at a common corner are
not contiguous.
(6) Total parking spaces. The term total parking spaces means the total number
of parking spaces, or the taxpayer’s portion thereof, in the parking facility.
(7) Reserved employee spaces. The
term reserved employee spaces means
the spaces in the parking facility, or the
taxpayer’s portion thereof, exclusively
reserved for the taxpayer’s employees.
Employee spaces in the parking facility,
or portion thereof, may be exclusively reserved for employees by a variety of methods, including, but not limited to, specific
signage (for example, “Employee Parking
Only”) or a separate facility or portion of a
facility segregated by a barrier to entry or
limited by terms of access. Inventory/unusable spaces are not included in reserved
employee spaces.
(8) Reserved nonemployee spaces. The
term reserved nonemployee spaces means
the spaces in the parking facility, or the
taxpayer’s portion thereof, exclusively
reserved for nonemployees. For example,
such parking spaces may include, but are
not limited to, spaces reserved exclusively for visitors, customers, partners, sole
proprietors, 2-percent shareholders of S
corporations, vendor deliveries, and passenger loading/unloading. Nonemployee
spaces in the parking facility, or portion
thereof, may be exclusively reserved for
nonemployees by a variety of methods,
including, but not limited to, specific signage (for example, “Customer Parking
Only”) or a separate facility, or portion of
a facility, segregated by a barrier to entry
or limited by terms of access. Inventory/
unusable spaces are not included in reserved nonemployee spaces.
(9) Inventory/unusable spaces. The
term inventory/unusable spaces means the
spaces in the parking facility, or the taxpayer’s portion thereof, exclusively used
or reserved for inventoried vehicles, qualified nonpersonal use vehicles described in
§1.274-5(k), or other fleet vehicles used in
the taxpayer’s business, or that are otherwise not usable for parking by employees.
Examples of such parking spaces include,
but are not limited to, parking spaces for
vehicles that are intended to be sold or
leased at a car dealership or car rental
agency, parking spaces for vehicles owned
56
by an electric utility used exclusively to
maintain electric power lines, or parking
spaces occupied by trash dumpsters (or
similar property).
(10) Available parking spaces. The
term available parking spaces means the
total parking spaces, less reserved employee spaces and less inventory/unusable
spaces, that are available to employees
and the general public.
(11) Primary use. The term primary
use means greater than 50 percent of actual or estimated usage of the available
parking spaces in the parking facility.
(12) Total parking expenses. The term
total parking expenses means all expenses of the taxpayer related to total parking
spaces in a parking facility including, but
not limited to, repairs, maintenance, utility costs, insurance, property taxes, interest, snow and ice removal, leaf removal,
trash removal, cleaning, landscape costs,
parking lot attendant expenses, security,
and rent or lease payments or a portion
of a rent or lease payment (if not broken
out separately). A deduction for an allowance for depreciation on a parking facility
owned by a taxpayer and used for parking
by the taxpayer’s employees is an allowance for the exhaustion, wear and tear, and
obsolescence of property, and not included in total parking expenses for purposes
of this section. Expenses paid or incurred
for nonparking facility property, including
items related to property next to the parking facility, such as landscaping or lighting, also are not included in total parking
expenses.
(13) Mixed parking expense. The term
mixed parking expense means a single expense amount paid or incurred by a taxpayer that includes both parking facility
and nonparking facility expenses for a
property that a taxpayer owns or leases.
(14) Peak demand period. The term
peak demand period refers to the period
of time on a typical business day when
the greatest number of the taxpayer’s employees are utilizing parking spaces in the
taxpayer’s parking facility. If a taxpayer’s
employees work in shifts, the peak demand period would take into account the
shift during which the largest number of
employees park in the taxpayer’s parking
facility. However, a brief transition period
during which two shifts overlap in their
use of parking spaces, as one shift of em-
Bulletin No. 2020–28
ployees is getting ready to leave and the
next shift is reporting to work, may be
disregarded. Taxpayers may use any reasonable methodology to determine the
total number of spaces used by employees during the peak demand period on a
typical business day. A reasonable methodology may include periodic inspections
or employee surveys.
(c) Special rules for calculating disallowance of deductions for qualified transportation fringe parking expenses; taxpayer owned or leased parking facilities.
Either or both of the following special
rules may be used for determining total
parking expenses and total parking spaces
in calculating the disallowance of deductions for qualified transportation fringe
parking expenses under the methodologies in paragraph (d)(2)(ii)(B) and (C) of
this section. The special rule in paragraph
(c)(2) of this section may be used for determining total parking spaces in calculating the disallowance of deductions for
qualified transportation fringe parking
expenses under the methodology in paragraph (d)(2)(i) of this section.
(1) Calculation of mixed parking expenses. For purposes of determining total parking expenses, a taxpayer may use
any reasonable methodology to allocate
the applicable portion of mixed parking
expenses to a parking facility. A taxpayer may choose to allocate 5 percent of the
following mixed parking expenses to a
parking facility: lease or rental agreement
expenses, property taxes, interest expense,
and expenses for utilities and insurance.
(2) Aggregation of spaces by geographic location. If a taxpayer owns or
leases more than one parking facility in
a single geographic location, the taxpayer may aggregate the number of spaces
in those parking facilities for purposes of
calculating the disallowance of deductions
for certain qualified transportation fringe
expenses. For example, parking spaces at
an office park or an industrial complex in
the geographic location may be aggregated. However, a taxpayer may not aggregate parking spaces in parking facilities
that are in different geographic locations.
(d) Calculation of disallowance of
deductions for qualified transportation
fringe expenses—(1) Taxpayer pays a
third party for parking qualified transportation fringe. If a taxpayer pays a third
Bulletin No. 2020–28
party an amount for its employees’ parking qualified transportation fringe, the
section 274(a)(4) disallowance generally
is calculated as the taxpayer’s total annual
cost of employee parking qualified transportation fringes paid to the third party.
(2) Taxpayer provides parking qualified transportation fringe at a parking facility it owns or leases. If a taxpayer owns
or leases all or a portion of one or more
parking facilities where its employees
park, the section 274(a)(4) disallowance
may be calculated using the general rule in
paragraph (d)(2)(i) of this section or any
of the simplified methodologies in paragraph (d)(2)(ii) of this section. A taxpayer
may choose to use the general rule or any
of the following methodologies for each
taxable year and for each parking facility.
(i) General rule. A taxpayer that uses
the general rule in this paragraph (d)(2)
(i) must calculate the disallowance of deductions for qualified transportation fringe
parking expenses for each employee receiving the qualified transportation fringe
based on a reasonable interpretation of
section 274(a)(4). A taxpayer that uses
the general rule in this paragraph (d)(2)(i)
may not use the special rule in paragraph
(c)(1) of this section but may use the special rule in paragraph (c)(2) of this section. An interpretation of section 274(a)
(4) is not reasonable unless the taxpayer
applies the following rules when calculating the disallowance under this paragraph
(d)(2)(i).
(A) A taxpayer must not use value to
determine expense. A taxpayer may not
use the value of employee parking to determine expenses allocable to employee
parking that is either owned or leased by
the taxpayer because section 274(a)(4)
disallows a deduction for the expense of
providing a qualified transportation fringe,
regardless of its value.
(B) A taxpayer must not deduct expenses related to reserved employee spaces.
A taxpayer must determine the allocable
portion of total parking expenses that relate to any reserved employee spaces. No
deduction is allowed for the parking expenses that relate to reserved employee
spaces.
(C) A taxpayer must not improperly
apply the exception for qualified parking
made available to the public. A taxpayer
must not improperly apply the exception
57
in section 274(e)(7) or paragraph (e)(2)(ii)
of this section to parking facilities, for example, by treating a parking facility regularly used by employees as available to the
general public merely because the general
public has access to the parking facility.
(ii) Additional simplified methodologies. Instead of using the general rule in
paragraph (d)(2)(i) of this section for a
taxpayer owned or leased parking facility,
a taxpayer may use a simplified methodology under paragraph (d)(2)(ii)(A), (B), or
(C) of this section.
(A) Qualified parking limit methodology. A taxpayer that uses the qualified
parking limit methodology in this paragraph (d)(2)(ii)(A) must calculate the
disallowance of deductions for qualified
transportation fringe parking expenses
by multiplying the total number of spaces
used by employees during the peak demand period, or the total number of taxpayer’s employees, by the section 132(f)
(2) monthly per employee limitation on
exclusion (adjusted for inflation), for each
month in the taxable year. The result is the
amount of the taxpayer’s expenses that are
disallowed under section 274(a)(4). This
methodology may be used only if the taxpayer includes the value of the qualified
transportation fringe in excess of the sum
of the amount, if any, paid by the employee for the qualified transportation fringe
and the applicable statutory monthly limit
in section 132(f)(2) on the taxpayer’s Federal income tax return as originally filed
as compensation paid to the employee and
as wages to the employee for purposes of
withholding under chapter 24 of the Code
(relating to collection of Federal income
tax at source on wages). In addition, the
exception to the disallowance for amounts
treated as employee compensation provided for in section 274(e)(2) and in paragraph (e)(2)(i) of this section cannot be
applied to reduce a section 274(a)(4) disallowance calculated using this method. A
taxpayer using this methodology may not
use either of the special rules in paragraph
(c) of this section.
(B) Primary use methodology. A taxpayer that uses the primary use methodology in this paragraph (d)(2)(ii)(B) must
use the following four-step methodology
to calculate the disallowance of deductions for qualified transportation fringe
parking expenses for each parking facility.
July 6, 2020
A taxpayer may use either or both of the
special rules in paragraph (c) of this section for determining total parking expenses and total parking spaces.
(1) Step 1 - Calculate the disallowance
for reserved employee spaces. A taxpayer
must identify the total parking spaces in
the parking facility, or the taxpayer’s portion thereof, exclusively reserved for the
taxpayer’s employees. The taxpayer must
then determine the percentage of reserved
employee spaces in relation to total parking spaces and multiply that percentage
by the taxpayer’s total parking expenses
for the parking facility. The product is the
amount of the deduction for total parking
expenses that is disallowed under section
274(a)(4) for reserved employee spaces.
There is no disallowance for reserved
employee spaces if the primary use (as
defined in paragraphs (b)(11) and (d)(2)
(ii)(B)(2) of this section) of the available
parking spaces is to provide parking to the
general public, and there are five or fewer
reserved employee spaces in the parking
facility and the reserved employee spaces
are 5 percent or less of the total parking
spaces.
(2) Step 2 - Determine the primary use
of available parking spaces. A taxpayer
must identify the available parking spaces in the parking facility and determine
whether their primary use is to provide
parking to the general public. If the primary use of the available parking spaces in the parking facility is to provide
parking to the general public, then total
parking expenses allocable to available
parking spaces at the parking facility are
excepted from the section 274(a)(4) disallowance by the general public exception
under section 274(e)(7) and paragraph
(e)(2)(ii) of this section. Primary use of
available parking spaces is based on the
number of available parking spaces used
by employees during the peak demand period. Nonreserved parking spaces that are
available to the general public but empty
during normal business hours on a typical
business day are treated as provided to the
general public.
(3) Step 3 - Calculate the allowance for
reserved nonemployee spaces. If the primary use of a taxpayer’s available parking spaces is not to provide parking to the
general public, the taxpayer must identify
the number of available parking spaces
July 6, 2020
in the parking facility, or the taxpayer’s
portion thereof, exclusively reserved for
nonemployees. A taxpayer that has no reserved nonemployee spaces may proceed
to Step 4 in paragraph (d)(2)(ii)(B)(4) of
this section. If the taxpayer has reserved
nonemployee spaces, it may determine
the percentage of reserved nonemployee
spaces in relation to remaining total parking spaces and multiply that percentage
by the taxpayer’s remaining total parking
expenses. The product is the amount of
the deduction for remaining total parking
expenses that is not disallowed because
the spaces are not available for employee
parking.
(4) Step 4 - Determine remaining use
of available parking spaces and allocable
expenses. If a taxpayer completes Steps 1
- 3 in paragraph (d)(2)(ii)(B) of this section and has any remaining total parking
expenses not specifically categorized as
deductible or nondeductible, the taxpayer
must reasonably allocate such expenses
by determining the total number of available parking spaces used by employees
during the peak demand period.
(C) Cost per space methodology. A taxpayer using the cost per space methodology in this paragraph (d)(2)(ii)(C) must calculate the disallowance of deductions for
qualified transportation fringe parking expenses by multiplying the cost per space
by the total number of available parking
spaces used by employees during the peak
demand period. The product is the amount
of the deduction for total parking expenses that is disallowed under section 274(a)
(4). A taxpayer may calculate cost per
space by dividing total parking expenses
by total parking spaces. A taxpayer using
this methodology may use either or both
of the special rules in paragraph (c) of this
section for determining total parking expenses and total parking spaces.
(3) Expenses for transportation in a
commuter highway vehicle or transit pass.
If a taxpayer pays a third party an amount
for its employees’ commuter highway vehicle or a transit pass qualified transportation fringe, the section 274(a)(4) disallowance generally is equal to the taxpayer’s
total annual cost of employee commuter
highway vehicle or a transit pass qualified transportation fringes paid to the third
party. If a taxpayer provides transportation
in a commuter highway vehicle or transit
58
pass qualified transportation fringes in
kind directly to its employees, the taxpayer must calculate the disallowance of
deductions for expenses for such fringes
based on a reasonable interpretation of
section 274(a)(4). However, a taxpayer may not use the value of the qualified
commuter highway vehicle or transit pass
fringe to the employee to determine expenses allocable to such fringe because
s
This text is long and has been trimmed here. Open the source document for the complete record.
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.