Federal Register / Vol. 85, No. 242 / Wednesday, December 16, 2020 / Rules and Regulations 81391 

services are the following: Export 

packing, local drayage in the source 

country (including waiting time at the 

dock), ocean and other freight, loading, 

heavy lift, wharfage, tollage, switching, 

dumping and trimming, lighterage, 

insurance, commodity inspection 

services, and services of a freight 

forwarder. ‘‘Delivery service’’ may also 

include work and materials necessary to 

meet USAID marking requirements. 

Developing countries means those 

countries that are categorized by the 

World Bank as low or lower middle 

income economies according to their 

gross national income per capita, and 

also includes all countries to which 

USAID provides assistance. USAID will 

maintain a list of developing countries 

primarily based on the most recent 

World Bank determinations, and will 

make the list available in USAID’s 

Automated Directives System, ADS 310. 

Essential medical supplies means 

personal protective equipment, medical 

products and equipment, 

pharmaceuticals, and other medical 

countermeasures needed to address the 

COVID–19 pandemic, which are in short 

supply, as identified in the ‘‘Notice of 

Designation of Scarce Materials or 

Threatened Materials Subject to COVID– 

19 Hoarding Prevention Measures’’ 

issued by the Department of Health and 

Human Services (HHS) on March 25, 

2020, as updated. USAID may designate 

additional materials as ‘‘emergency 

medical supplies’’ if deemed necessary 

and will publish notice of these 

additional materials in the Federal 

Register. 

Free Port or Bonded Warehouse is a 

special customs area with favorable 

customs regulations (or no customs 

duties and controls for transshipment). 

Implementing instrument means a 

binding relationship established 

between USAID and an outside party or 

parties to carry out USAID programs, by 

authorizing the use of USAID funds 

and/or nonfinancial resources for the 

procurement of services or commodities 

and/or commodity related services. 

Implementing instruments include 

specific conditions that apply to each 

such procurement. Examples of such 

instruments include contracts, grants, 

cooperating agreements, and 

interagency agreements. 

Incidental services means services 

such as installation, erection, 

maintenance, or upgrading of USAIDfinanced equipment, or the training of 

personnel in the maintenance, operation 

and use of such equipment, or similar 

services provided for the authorized 

disposition of such commodities. 

Long term lease means, for purposes 

of subpart B, a single lease of more than 

180 calendar days; or repetitive or 

intermittent leases under a single award 

within a one-year period, which 

cumulatively total more than 180 

calendar days. A single lease may 

consist of lease of one or more of the 

same type of commodity within the 

same lease term. 

Motor vehicles means self-propelled 

vehicles with passenger carriage 

capacity, such as highway trucks, 

passenger cars and buses, motorcycles, 

scooters, motorized bicycles, ATVs, and 

utility vehicles. Excluded from this 

definition are ambulances, 

snowmobiles, industrial vehicles for 

materials handling and earthmoving, 

such as lift trucks, tractors, graders, 

scrapers, off-the-highway trucks (such 

as off-road dump trucks), boats, and 

other vehicles that are not designed for 

travel at normal road speeds (40 

kilometers per hour and above). 

Mission means the USAID Mission, 

office or representative in a cooperating/ 

recipient country. 

Nationality refers to the place of legal 

organization, ownership, citizenship, or 

lawful permanent residence (or 

equivalent immigration status to live 

and work on a continuing basis) of 

suppliers of commodities and services. 

Pharmaceutical means any substance 

intended for use in the diagnosis, cure, 

mitigation, treatment, or prevention of 

diseases in humans or animals; any 

substances (other than food) intended to 

affect the structure or any function of 

the body of humans or animals; and, 

any substance intended for use as a 

component in the above. The term 

includes drugs, vitamins, oral 

rehydration salts, biologicals, and some 

in-vitro diagnostic reagents/test kits; but 

does not include devices or their 

components, parts, or accessories. 

Contraceptives, including condoms, are 

not included in this definition. 

Prohibited sources means countries to 

which assistance is prohibited by the 

annual appropriations acts of Congress 

or other statutes, or those subject to 

other executive branch restrictions, such 

as applicable sanctions administered by 

the U.S. Treasury Department’s Office of 

Foreign Assets Control. USAID 

maintains a list of prohibited sources, 

available in USAID’s Automated 

Directives System, ADS 310. 

Recipients and contractors. Recipient 

has the same meaning as defined in 22 

CFR 226.02, except that it shall include 

non-U.S. individuals, entities and 

organizations, as well as subrecipients. 

Contractors mean those entities which 

enter into a contract, as the term is 

defined in 48 CFR part 2, with the U.S. 

Government, and includes 

subcontractors. 

Services means the performance of 

identifiable tasks, rather than the 

delivery of an end item of supply. 

Source means the country from which 

a commodity is shipped to the 

cooperating/recipient country or the 

cooperating/recipient country itself if 

the commodity is located therein at the 

time of the purchase, irrespective of the 

place of manufacture or production, 

unless it is a prohibited source country. 

Where, however, a commodity is 

shipped from a free port or bonded 

warehouse in the form in which 

received therein, ‘‘source’’ means the 

country from which the commodity was 

shipped to the free port or bonded 

warehouse. 

Supplier means any person or 

organization, governmental or 

otherwise, who furnishes services, 

commodities, and/or commodity related 

services, including delivery or 

incidental services, financed by USAID. 

United States means the United States 

of America, any State(s) of the United 

States, the District of Columbia, and 

areas of U.S. associated sovereignty, 

including commonwealths, territories 

and possessions. 

USAID means the United States 

Agency for International Development 

or any successor agency, including 

when applicable, each USAID Mission 

or office abroad. 

USAID Principal Geographic Code 

means a USAID code which designates 

a country, a group of countries, or an 

otherwise defined area. The USAID 

principal geographic codes for purposes 

of procurement are described in 

§ 228.03 of this part. 

Suk J. Jin, 

Deputy General Counsel, U.S. Agency for 

International Development. 

[FR Doc. 2020–27766 Filed 12–15–20; 8:45 am] 

BILLING CODE 6116–02–P 

DEPARTMENT OF TREASURY 

Internal Revenue Service 

26 CFR Part 1 

[TD 9939] 

RIN 1545–BP49 

Qualified Transportation Fringe, 

Transportation and Commuting 

Expenses Under Section 274 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Final Regulations. 

SUMMARY: This document contains final 

regulations to implement legislative 


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81392 Federal Register / Vol. 85, No. 242 / Wednesday, December 16, 2020 / Rules and Regulations 

changes to section 274 of the Internal 

Revenue Code (Code) effective for 

taxable years beginning after December 

31, 2017. Specifically, the final 

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. The final 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 final regulations 

affect taxpayers who pay or incur such 

expenses. 

DATES: 

Effective Date: These regulations are 

effective on December 16, 2020. 

Applicability Date: These regulations 

apply to taxable years beginning on or 

after December 16, 2020. 

Notwithstanding the preceding 

sentence, taxpayers may choose to apply 

§ 1.274–13(b)(14)(ii) to taxable years 

ending after December 31, 2019. 

FOR FURTHER INFORMATION CONTACT: 

Patrick Clinton of the Office of 

Associate Chief Counsel (Income Tax 

and Accounting), (202) 317–7005 (not a 

toll-free number). 

SUPPLEMENTARY INFORMATION: 

Background 

This document contains final 

regulations under section 274 of the 

Code that amend the Income Tax 

Regulations (26 CFR part 1). 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 

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 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. 

On December 24, 2018, the 

Department of the Treasury (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, in part, 

provided interim guidance for taxpayers 

to determine the amount of parking 

expenses for QTFs that is nondeductible 

under section 274(a)(4). 

On June 23, 2020, the Treasury 

Department and the IRS published a 

notice of proposed rulemaking (REG– 

119307–19) in the Federal Register (85 

FR 37599) containing proposed 

regulations under section 274 (proposed 

regulations) to implement the TCJA’s 

amendments to section 274. The 

proposed regulations would add a new 

section at § 1.274–13 to address parking 

and other QTF expenses under section 

274(a)(4), including the application of 

certain exceptions in section 274(e) to 

QTF expenses. The proposed 

regulations also would add a new 

section at § 1.274–14 to address 

transportation and commuting expenses 

under section 274(l). 

Pending the issuance of these final 

regulations, taxpayers were allowed to 

rely on the proposed regulations or the 

guidance provided in Notice 2018–99 

for parking expenses, other QTF 

expenses, and transportation and 

commuting expenses, as applicable, 

paid or incurred in taxable years 

beginning after December 31, 2017. 

The Treasury Department and the IRS 

received one request to speak at a public 

hearing that was later withdrawn. 

Therefore, no public hearing was held. 

The Treasury Department and the IRS 

received 12 written and electronic 

comments responding to the proposed 

regulations. All comments were 

considered and are available at https:// 

www.regulations.gov or upon request. 

The comments addressing the proposed 

regulations are summarized in the 

Summary of Comments and Explanation 

of Revisions section. However, 

comments recommending statutory 

revisions or addressing issues outside 

the scope of these final regulations are 

not discussed in this preamble. 

After full consideration of the 

comments received on the proposed 

regulations, this Treasury decision 

adopts the proposed regulations with 

modifications in response to certain 

comments, as described in the Summary 

of Comments and Explanation of 

Revisions section. 

Summary of Comments and 

Explanation of Revisions 

1. Qualified Transportation Fringes 

A. In General 

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. 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. 

The proposed regulations restated the 

statutory rules under section 274(a)(4), 

defined relevant terms, and provided 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 included rules 

addressing the deduction disallowance 

for expenses related to providing 

employees transportation in a commuter 

highway vehicle and transit pass QTFs. 

Finally, the proposed regulations 

applied the applicable exceptions in 

section 274(e) to all QTF expenses. 

Specifically, the proposed regulations 

provided 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 

provided 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 


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general rule or any one of three 

simplified methodologies. The proposed 

regulations provided taxpayers the 

option to apply the general rule or a 

simplified methodology for each taxable 

year and for each parking facility. The 

proposed regulations included special 

rules and definitions 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, disregarding five or 

fewer reserved parking spaces if the 

reserved spaces are 5 percent or less of 

total parking spaces, and determining 

employee use of parking on a typical 

business day. The preamble to the 

proposed regulations provided that 

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 allowed taxpayers to 

calculate the disallowance based on a 

reasonable interpretation of section 

274(a)(4). However, the proposed 

regulations required taxpayers to use the 

expense paid or incurred in providing a 

QTF and not 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. The 

proposed regulations allowed a special 

rule for aggregating parking spaces by 

geographic location to be used with the 

general rule. 

The proposed regulations also 

included three simplified 

methodologies as alternatives to 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 

number of the taxpayer’s employees, by 

the section 132(f)(2) monthly per 

employee limitation on exclusion for 

qualified parking ($270 for 2020), 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 on 

the Notice. The proposed regulations 

permitted the use of special rules for 

allocating certain mixed parking 

expenses and aggregating parking spaces 

by geographic location. The proposed 

regulations also provided definitions for 

employee, general public, parking 

facility, total parking spaces, reserved 

employee spaces, reserved nonemployee 

spaces, primary use, and total parking 

expenses, geographic location, 

inventory/unusable spaces, available 

parking spaces, peak demand period, 

and mixed parking expense. 

The third simplified methodology 

provided in the proposed regulations 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 used by 

employees during the peak demand 

period. The proposed regulations 

provided that cost per space is 

calculated by dividing total parking 

expenses (including expenses for 

inventory/unusable spaces) by total 

parking spaces (including inventory/ 

unusable spaces). The proposed 

regulations also permitted special rules 

for allocating certain mixed parking 

expenses and aggregating parking spaces 

by geographic location to be used with 

the cost per space methodology. 

Finally, the proposed regulations 

provided that the deduction 

disallowance under section 274(a)(4) 

does not apply to expenditures for QTFs 

that meet the requirements of section 

274(e)(2), (7), or (8), the three exceptions 

in section 274(e) that are relevant for 

QTFs. Pursuant to section 274(e)(2), the 

proposed regulations provided that the 

disallowance under section 274(a) does 

not apply to expenditures for QTFs to 

the extent the taxpayer properly 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 of the Code (chapter 24) relating to 

collection of Federal income tax at 

source on wages. The proposed 

regulations also provided, in accordance 

with section 274(e)(7), 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) 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. 

Finally, consistent with section 

274(e)(8), the proposed regulations 

provided 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 final regulations substantially 

adopt the proposed regulations, with 

certain modifications and clarifications, 

as discussed in this Summary of 

Comments and Explanation of 

Revisions. In applying the final 

regulations, taxpayers may continue to 

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. 

B. Definitions 

As described in this part 1.B., the 

final regulations generally include the 

definitions from the proposed 

regulations, modified and clarified in 

response to comments. 

i. Qualified Transportation Fringe 

The final regulations adopt the 

proposed regulations’ definition for the 

term ‘‘qualified transportation fringe.’’ 

The definition is based on section 

132(f)(1), except that it does not include 

qualified bicycle commuting 

reimbursements. 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. 

Because qualified bicycle commuting 

reimbursements are not QTFs, 

deductions for qualified bicycle 

commuting reimbursements are not 

disallowed under section 274(a)(4) for 

taxable years beginning after December 

31, 2017 and before January 1, 2026. 

Thus, the final regulations provide that 

the term ‘‘qualified transportation 

fringe’’ means any of the following 

provided by an employer to an 

employee: (1) Transportation in a 

commuter highway vehicle if such 

transportation is in connection with 

travel between the employee’s residence 

and place of employment (as described 

in section 132(f)(1)(A) and (f)(5)(B)), (2) 

any transit pass (as described in section 

132(f)(1)(B) and (f)(5)(A)), or (3) 

qualified parking (as described in 

section 132(f)(1)(C) and (f)(5)(C)). 

Under section 132(f)(1)(C) and 

(f)(5)(C), the term ‘‘qualified parking’’ 

includes parking provided by an 

employer to an employee on or near the 

business premises of the employer. A 


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commenter requested that the final 

regulations define ‘‘parking provided to 

an employee’’ to include only parking 

spaces that are reserved or otherwise set 

aside exclusively for employee use. The 

Treasury Department and the IRS 

decline to adopt this suggestion. Section 

1.132–9, Q/A–4(d) provides that parking 

is provided by an employer to an 

employee if the parking is on property 

that the employer owns or leases, the 

employer pays for the parking, or the 

employer reimburses the employee for 

parking expense. Thus, the definition of 

qualified parking as a QTF under 

section 132(f) is not limited to parking 

that is reserved or otherwise set aside 

exclusively for employee use. 

Another commenter suggested that 

parking with no objective value to an 

employee, such as parking in industrial, 

remote, or rural areas (that is, areas 

where the general public would not pay 

to park) is not a QTF and therefore, that 

section 274(a)(4) should not disallow 

the deduction of the expenses. The 

Treasury Department and the IRS note 

that there is nothing in section 132 or 

§ 1.132–9 that supports the proposition 

that the value of parking to an employee 

is relevant in determining whether the 

parking itself constitutes qualified 

parking and a QTF. Thus, the Treasury 

Department and the IRS do not agree 

with the commenter that qualified 

parking with no objective value to an 

employee is not a QTF. However, see 

part 1.E.iii. of this Summary of 

Comments and Explanation of Revisions 

section for a discussion of the 

applicability of the section 274(e)(8) 

exception to parking with no objective 

value to an employee. 

ii. Employee 

The proposed regulations defined the 

term ‘‘employee’’ based on definitions 

in §§ 1.132–1(b)(2)(i) and 1.132–9(b), Q/ 

A–5 and Q/A–24. The term ‘‘employee’’ 

for Federal tax purposes generally is 

understood to refer to a common-law 

employee. 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 regulations under section 

132 also include certain statutory 

employees such as officers of 

corporations in the definition of 

employee for purposes of QTFs. No 

comments were received on the 

proposed definition of ‘‘employee’’. 

Thus, the final regulations adopt this 

definition without modification. 

iii. General Public 

Commenters on Notice 2018–99 

raised concerns that, for taxpayers that 

lease space in a multi-tenant building, 

the Notice did not include employees, 

partners, 2-percent shareholders of S 

corporations (as defined in section 

1372(b)), 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 

provided that ‘‘general public’’ includes 

employees, partners, 2-percent 

shareholders of S corporations (as 

defined in section 1372(b)), 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. 

A commenter on the proposed 

regulations raised concerns that the 

definition of the term ‘‘general public’’ 

in the proposed regulations gives 

tenants of multi-tenant buildings an 

unfair advantage in comparison to 

tenants in buildings with only one 

tenant and suggested all tenants be 

treated the same. The Treasury 

Department and the IRS decline to 

adopt this suggestion because any 

alternative would likely impose an 

undue administrative burden on 

taxpayers in a multi-tenant building to 

determine the use of the parking facility 

by numerous other tenants. 

A commenter also asked why 

taxpayers that own or lease space in a 

multi-tenant building may include 

independent contractors in the 

definition of general public. The 

Treasury Department and the IRS note 

that the proposed regulations defined 

general public to include independent 

contractors of unrelated taxpayers in a 

multi-tenant building because unlike 

independent contractors of the taxpayer, 

independent contractors of unrelated 

tenants do not have a relationship with 

the taxpayer. The final regulations 

continue to provide that independent 

contractors of unrelated tenants in 

multi-tenant buildings are included in 

the general public. However, 

independent contractors of the taxpayer 

continue to be excluded from the 

general public regardless of whether the 

taxpayer owns or leases space in a 

multi-tenant building. 

A commenter requested that a car 

dealership’s parking spaces occupied by 

customers’ vehicles being repaired or 

serviced be excluded from the definition 

of inventory/unusable spaces and 

instead be included in the definition of 

spaces available to the general public 

because the parking spaces are used by 

customers and are not available for 

employee parking. The Treasury 

Department and the IRS agree with the 

commenter and have revised the 

definition of general public in the final 

regulations accordingly. Thus, the final 

regulations follow the definition of the 

term general public as provided in the 

proposed regulations with the 

clarification that parking spaces that are 

used to park vehicles owned by 

members of the general public while the 

vehicles await repair or service by the 

taxpayer also are treated as provided to 

the general public. 

iv. Parking Facility 

The final 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 on 

Notice 2018–99 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’’ in the proposed 

regulations should exclude such spaces. 

In response to these comments, the 

proposed regulations specifically 

excluded parking spaces on or near 

property used by the employee for 

residential purposes from the definition 

of parking facility. The final regulations 

adopt this definition, without 

modification. 

v. Geographic Location 

Consistent with the proposed 

regulations, the final regulations allow 

the taxpayer 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. 

The proposed regulations defined 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 


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road, street, railroad, stream, or similar 

property. Tracts or parcels of land 

which touch only at a common corner 

are not contiguous. 

A commenter suggested that the 

definition of geographic location be 

expanded to allow parking lots located 

within reasonable distance (1⁄4 mile) of 

a principal parking lot to be aggregated 

as part of a single geographic location. 

The commenter explained that 

automotive dealers often have overflow 

parking lots not designated for any 

purpose available relatively close to the 

business location in the event the 

inventory levels exceed the spaces 

available at the principal location. 

The Treasury Department and the IRS 

considered this comment and decline to 

adopt it because the term ‘‘reasonable 

distance’’ is difficult to define and, as 

the commenter explained, overflow 

parking facilities are typically utilized 

for excess inventory vehicles, instead of 

parking for the general public. The 

Treasury Department and the IRS 

believe that expanding the definition of 

geographic location to include 

noncontiguous tracts or parcels of land 

would introduce unnecessary 

complexity without providing a 

meaningful benefit to taxpayers. Thus, 

the final regulations adopt the proposed 

regulations’ definition of geographic 

location, without modification. 

vi. Total Parking Spaces 

The proposed regulations defined the 

term ‘‘total parking spaces’’ as the total 

number of parking spaces, or the 

taxpayer’s portion thereof, in the 

parking facility. No comments were 

received on this definition, and the final 

regulations adopt it without 

modification. 

vii. Reserved Employee Spaces 

A commenter on Notice 2018–99 

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, in the 

proposed regulations, provided that 

costs allocated to reserved employee 

spaces would be disallowed regardless 

of actual use of the reserved spaces. 

However, the proposed regulations also 

included a special rule in 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. The final regulations 

adopt the disallowance of costs 

allocated to reserved employee spaces 

and the special rule in step 1 of the 

primary use methodology provided in 

the proposed regulations, without 

modification. 

viii. Reserved Nonemployee Spaces 

A commenter on Notice 2018–99 

suggested that parking spaces reserved 

for drivers with disabilities be treated as 

‘‘reserved nonemployee spaces’’ and 

thus, any related expenses not be 

disallowed under section 274(a)(4). 

After considering the comment, the 

Treasury Department and the IRS 

declined to include parking spaces 

reserved for drivers with disabilities 

from the definition of reserved 

nonemployee spaces in the proposed 

regulations. The Treasury Department 

and the IRS reasoned that 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. The proposed 

regulations also did not include parking 

spaces reserved for drivers with 

disabilities in ‘‘reserved employee 

spaces’’ because they may or may not be 

exclusively reserved for employees. The 

final regulations adopt the proposed 

regulations’ definitions of reserved 

nonemployee spaces and reserved 

employee spaces, without modification. 

ix. Inventory/Unusable Spaces 

The Treasury Department and the IRS 

received questions and comments in 

response to Notice 2018–99 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 added a new definition for 

the term ‘‘inventory/unusable spaces’’ 

that includes parking spaces used 

exclusively 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. 

A commenter on the proposed 

regulations suggested that inventory 

spaces should be included in the 

definition of spaces available to the 

general public in cases where inventory 

spaces may at times be used by 

customers and are not available for 

employee parking. The Treasury 

Department and the IRS note that spaces 

used by customers should not be 

included in inventory/unusable spaces. 

Therefore, the final regulations adopt 

the definition of ‘‘inventory/unusable 

spaces’’ included in the proposed 

regulations, with the clarification that 

inventory/unusable spaces are 

otherwise not usable for parking by the 

general public. 

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 final regulations. 

The final regulations exclude inventory/ 

unusable spaces because those spaces 

are not available to employees or the 

general public but are instead used 

exclusively 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. 

A commenter on the proposed 

regulations requested that a safe harbor 

be added to the final regulations to 

determine the number of inventory 

spaces at a car dealership because of 

extreme fluctuations of inventory over a 

car dealer’s tax year. The commenter 

suggested that the safe harbor should be 

based on an annualization of the 

number of spaces occupied by inventory 

vehicles at the end of the month during 

the tax year with lowest inventory, or 

alternatively, based on the average 

number of spaces occupied by inventory 

vehicles at the end of each month. The 

commenter further suggested that 

inventory per month should be 

determined based on inventory levels a 

car dealer reports to the vehicle 

manufacturer on monthly financial 

reporting. 

The Treasury Department and the IRS 

note that the proposed regulations did 

not specifically describe how taxpayers 

should determine the number of 

inventory/unusable spaces in the 

parking facility. Thus, the Treasury 

Department and the IRS have added a 

rule in these final regulations providing 

that taxpayers may use any reasonable 

methodology to determine the number 


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of inventory/unusable spaces in the 

parking facility. In addition, in response 

to the commenter’s alternative 

suggestion, the final regulations provide 

that a reasonable methodology may 

include using the average of monthly 

inventory counts. 

x. Available Parking Spaces 

The proposed regulations included a 

definition of ‘‘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. No 

comments were received on this 

definition, and the final regulations 

adopt it without modification. 

xi. Primary Use 

The proposed regulations provided 

that for purposes of the primary use test 

of the primary use methodology, 

‘‘primary use’’ means greater than 50 

percent of actual or estimated usage of 

the parking spaces in the parking 

facility by the general public. A 

commenter on the proposed regulations 

suggested that the final regulations 

provide that primary use should mean 

30 percent or greater for healthcare 

facilities, including skilled nursing and 

assisted living healthcare facilities, 

because the employees at these types of 

healthcare businesses provide essential 

and life-saving care services to the 

public, especially during the ongoing 

Coronavirus Disease (COVID–19) 

pandemic. 

After considering this comment, the 

Treasury Department and the IRS have 

decided to retain the primary use test as 

described in the proposed regulations. 

The Treasury Department and the IRS 

continue to believe that this primary use 

test is a reasonable interpretation of the 

exception in section 274(e)(7) for 

parking made available to the general 

public. Further, this interpretation is 

consistent with recent final regulations 

addressing the application of the section 

274(e)(7) exception to the limitation on 

the deduction for meals and 

entertainment expenses, which apply 

the section 274(e)(7) exception to food 

and beverages ‘‘primarily consumed’’ by 

the general public, meaning greater than 

50 percent of actual or reasonably 

estimated consumption. See TD 9925, 

85 FR 64026 (October 9, 2020). 

The Treasury Department and the IRS 

understand that the primary use of a 

parking facility could be affected by a 

federally declared disaster such as the 

COVID–19 pandemic. Thus, as 

discussed in part 1.B.xiv. of this 

Summary of Comments and Explanation 

of Revisions section, the final 

regulations modify the definition of 

‘‘peak demand period’’ to provide 

flexibility for taxpayers affected by a 

federally declared disaster to determine 

the primary use of parking spaces used 

by employees during the peak demand 

period. 

xii. Total Parking Expenses 

Commenters on Notice 2018–99 

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.’’ Commenters reasoned that 

including the expenses may encourage 

unsafe parking conditions and neglect of 

care in maintaining the parking 

facilities. Commenters on the Notice 

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 on the 

Notice 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 determined that the proposed 

regulations should include the 

definition of the term ‘‘total parking 

expenses’’ from Notice 2018–99, and the 

final regulations adopt this definition 

without modification. 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, 

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 on Notice 

2018–99 expressed concerns and asked 

questions about how to 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 included in the 

proposed regulations a definition for the 

term ‘‘mixed parking expense’’ and a 

special rule for allocating certain mixed 

parking expenses. The proposed 

regulations defined ‘‘mixed parking 

expense’’ 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 proposed 

regulations provided that mixed parking 

expenses may be allocated using any 

reasonable methodology but provided a 

special rule for allocating certain mixed 

costs that taxpayers could chose to 

apply in conjunction with certain of the 

methodologies for determining 

disallowed parking expenses. 

The final regulations adopt the 

definition of ‘‘mixed parking expenses’’ 

included in the proposed regulations, as 

well as the rule allowing the use of any 

reasonable methodology to allocate 

mixed parking expenses. However, the 

final regulations make certain 

modifications to the allowance of the 

special rule in the proposed regulations 

for allocating certain mixed parking 

expenses. The special rule for allocating 

certain mixed parking expenses to a 

parking facility and the modifications 

made in the final regulations is 

explained in part 1.C of this Summary 

of Comments and Explanation of 

Revisions section. 

A commenter on the proposed 

regulations suggested using property tax 

assessments and/or acreage to determine 

the amount of mixed parking expenses 

allocable to a parking facility. The 

Treasury Department and the IRS note 

that taxpayers may use any reasonable 

methodology to allocate mixed parking 

expenses. However, the Treasury 

Department and the IRS decline to 

adopt a specific methodology as 

reasonable for this purpose. The 

Treasury Department and the IRS 

further note that the methodology must 

be reasonable for the expense being 

allocated. Thus, one methodology for 

multiple expenses may be used only if 

the methodology is reasonable for all 

such expenses. 

xiv. Peak Demand Period 

In the 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 


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peak demand period for employee 

parking on a typical business day. The 

proposed regulations provided that for 

purposes of § 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. 

A commenter on the proposed 

regulations explained that it is overly 

burdensome for taxpayers at healthcare 

facilities to determine how many 

employees are at each location 24 hours 

a day, 7 days a week and instead 

suggested using an average based on the 

primary location of each employee and 

the amount of time each employee 

typically works each week. The 

Treasury Department and the IRS 

considered the comment and have 

determined that the proposed rules 

regarding ‘‘peak demand period’’ should 

be adopted in the final regulations, 

subject to an optional rule for parking 

facilities located in a federally declared 

disaster area as discussed later in this 

part 1.B.xiv. of this Summary of 

Comments and Explanation of Revisions 

section. However, the Treasury 

Department and the IRS note that the 

definition of peak demand period 

allows for flexibility based on taxpayer 

facts and circumstances by allowing 

taxpayers to choose a typical business 

day during the taxable year and to use 

any reasonable methodology to 

determine the total number of spaces 

used by employees. For example, a 

taxpayer may determine the total 

number of spaces used by employees 

based on periodic inspections or 

employee surveys. 

The ongoing 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. In the preamble 

to the proposed regulations, the 

Treasury Department and the IRS 

requested comments on what additional 

rules, if any, are needed to address 

significant variations in employee 

parking during the taxable year due to 

the COVID–19 pandemic. One 

commenter suggested that the final 

regulations allow for a COVID–19 

exception for employees not working at 

the workplace location and thus not 

using employee parking during the 

period of the COVID–19 pandemic. 

Specifically, the commenter requested 

that taxpayers be permitted to calculate 

their disallowance under one of the 

simplified methodologies in § 1.274– 

13(d)(2), and then reduce their 

disallowance by a certain amount based 

on the taxpayer’s ‘‘COVID relief period’’ 

and the reduction in their workforce 

during that period. 

Although the commenter’s example 

would not be permitted under any of the 

simplified methodologies in the 

proposed or final regulations because 

taxpayers must use one methodology for 

the entire year, taxpayers may achieve a 

similar result using any reasonable 

method under the general rule. 

Taxpayers also may achieve a similar 

result by using a monthly computation 

method such as the qualified parking 

limit methodology or the cost per space 

methodology. A taxpayer using the cost 

per space methodology generally 

computes the cost per space and 

multiplies it by the number of spaces 

used by employees during the peak 

demand period. Although the proposed 

regulations did not specify whether the 

cost per space must be based on one 

peak demand period in the taxable year, 

these final regulations clarify that the 

cost per space calculation may be 

performed on a monthly basis. 

A taxpayer using the primary use 

methodology would be allowed a full 

deduction for parking expenses (except 

for expenses related to reserved 

employee spaces) if the primary use of 

the parking facility during the peak 

demand period is for the general public. 

The proposed regulations defined ‘‘peak 

demand period’’ as 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. As 

discussed previously in this part 

1.B.xiv. of this Summary of Comments 

and Explanation of Revisions section, 

the final regulations retain this general 

definition. However, to provide relief to 

taxpayers affected by the COVID–19 

pandemic or other federally declared 

disasters, the final regulations add an 

optional rule in the definition of ‘‘peak 

demand period’’ for taxpayers who own 

or lease a parking facility that is located 

in a federally declared disaster area, as 

defined in section 165(i)(5). A taxpayer 

that uses this rule may identify a typical 

business day for the taxable year in 

which the disaster occurred by reference 

to a typical business day in that taxable 

year prior to the date that the taxpayer’s 

operations were impacted by the 

federally declared disaster. For example, 

a restaurant that transitioned from a 

dine-in restaurant to take-out service 

due to the COVID–19 pandemic could 

determine its parking disallowance 

under the primary use test based on the 

usage of parking on a typical business 

day prior to its transition to take-out 

service. Alternatively, under this rule, a 

taxpayer may choose to identify a 

typical business day for the month(s) of 

the taxable year in which the disaster 

occurred by reference to a typical 

business day in the same month(s) of 

the taxable year immediately preceding 

the taxable year in which the disaster 

first occurred. For purposes of this rule, 

the taxable year in which the disaster 

occurred is determined without regard 

to whether the taxpayer makes an 

election under section 165(i). In order to 

allow taxpayers affected by the COVID– 

19 pandemic to benefit from this rule, 

the final regulations allow a taxpayer to 

apply this rule to taxable years ending 

after December 31, 2019. This rule is 

intended to provide relief to both 

calendar and fiscal year taxpayers, as 

well as taxpayers with a seasonal 

business, that are affected by a federally 

declared disaster. 

C. Optional Rules for QTF Parking 

Expenses 

The proposed regulations included a 

special rule for allocating certain mixed 

parking expenses to reduce 

administrative burdens for taxpayers 

and simplify calculations in complying 

with section 274(a)(4). Specifically, the 

proposed regulations provided 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. However, the proposed 

regulations provided that the special 

rule for allocating certain mixed parking 

expenses may only be used in applying 

the primary use methodology and cost 

per space methodology and may not be 

used in applying the general rule or the 

qualified parking limit methodology. 

The proposed regulations did not 

require taxpayers to use the special rule 

for allocating certain mixed parking 

expenses and provided that taxpayers 

may instead use any reasonable 

methodology for mixed parking 

expenses. 

A commenter on the proposed 

regulations requested that the final 

regulations allow taxpayers to use this 

special rule for applicable mixed 

parking expenses when using the 

general rule to calculate the 


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disallowance of deductions for QTFs 

based on a reasonable interpretation of 

section 274(a)(4). In response to the 

commenter’s request, these final 

regulations have extended the 5 percent 

optional rule for allocating certain 

mixed parking expenses to the general 

rule as a further attempt to reduce 

administrative burdens for taxpayers 

and to simplify calculations in 

complying with section 274(a)(4). The 

optional rule for allocating certain 

mixed parking expenses in these final 

regulations may therefore be used in 

applying the general rule, the primary 

use methodology, and the cost per space 

methodology. In addition, this optional 

rule may be used by taxpayers using the 

qualified parking methodology, but 

solely for the purpose of determining 

total parking expenses. As revised, this 

optional rule may be used to determine 

total parking expenses under any of the 

parking methodologies permitted in the 

proposed and final regulations. Thus, 

the final regulations relocate this rule 

from § 1.274–13(c) to the definition of 

total parking expenses in § 1.274– 

13(b)(12). 

A commenter suggested that the 5 

percent special rule for allocating mixed 

parking expenses be expanded to 

include any parking expense that is not 

allocated by a service provider to a 

parking facility or is not accounted for 

separately on the taxpayer’s books, 

including expenses for maintenance, 

snow and ice removal, landscape costs, 

security, cleaning. The Treasury 

Department and the IRS continue to 

believe that this optional rule should 

apply only to mixed parking expenses 

related to payments under a lease or 

rental agreement, and payments for 

utilities, insurance, interest and 

property taxes, and therefore, decline to 

adopt this comment. However, the final 

regulations clarify that a taxpayer who 

chooses to apply the 5 percent optional 

rule is not required to apply the rule to 

allocate all eligible mixed parking 

expenses. Thus, a taxpayer may choose 

to apply the 5 percent optional rule to 

allocate one or more of the eligible 

mixed parking expenses, while using a 

reasonable methodology to allocate 

remaining eligible mixed parking 

expenses. Certain types of expenses, 

such as parking facility maintenance, 

snow and ice removal, landscape costs, 

security, and parking facility cleaning 

are more likely to be separately billed 

and/or primarily allocable to the 

parking facility. Taxpayers may, 

however, continue to use any reasonable 

methodology to allocate these mixed 

parking expenses. 

Consistent with the proposed 

regulations, the final regulations permit 

taxpayers using certain methodologies 

to aggregate the number of parking 

spaces in a single geographic location if 

they so choose. The final regulations 

adopt the proposed definition of the 

term ‘‘geographic location,’’ which is 

based on tracts or parcels of land that 

are contiguous. The optional rule for 

aggregation of parking spaces in a single 

geographic location may be used in 

applying the general rule, primary use 

methodology, and cost per space 

methodology, but may not be used with 

the qualified parking limit methodology. 

The final regulations clarify that a 

taxpayer that chooses to apply this 

optional aggregation rule must treat the 

aggregated parking spaces as one 

parking facility for purposes of 

determining total parking expenses. 

D. Calculation of Disallowance of QTF 

Parking Expenses 

Like the proposed regulations, the 

final regulations 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. The Treasury Department and 

the IRS determined that amounts paid to 

a third party for qualified parking 

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 final regulations 

continue to provide that a 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. The 

general rule and three simplified 

methodologies are substantially the 

same as those provided in the proposed 

regulations, with the following 

modifications based on comments 

received. 

i. General Rule 

Consistent with the proposed 

regulations, under the general rule 

provided in the final regulations 

taxpayers may calculate the 

disallowance 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). 

In response to the proposed 

regulations, a commenter recommended 

that taxpayers be permitted to elect to 

use historic information to calculate the 

current year disallowance to reduce the 

compliance burden of annually 

calculating the disallowance under 

section 274(a)(4). For example, the 

commenter suggested that the average 

disallowed amount for the prior two 

years may be used as the disallowance 

for the next five years or, alternatively, 

if the primary use of the available 

parking spaces is to provide parking to 

the general public for two out of three 

years, then the taxpayer may treat the 

primary use of the available parking 

spaces as providing parking to the 

general public for the next five years. 

The Treasury Department and the IRS 

considered this comment and do not 

believe that section 274(a)(4) permits 

taxpayers to compute the amount of a 

permanently disallowed deduction for a 

taxable year based on the amount of the 

disallowance in one or more different 

taxable years. 

ii. Qualified Parking Limit Methodology 

Consistent with the proposed 

regulations, the final regulations 

provide 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. Taxpayers using the qualified 

parking limit methodology 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, 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. 

A commenter recommended the 

adoption of an alternative monthly rate 

of $25 per parking space, instead of the 

maximum monthly dollar amount under 

section 132(f)(2), to estimate a 

taxpayer’s monthly total cost per 

parking space for parking facilities 

located outside the city limits of the 20 

most populous cities in the United 

States. The commenter explained that 

this will encourage the use of the 

qualified parking limit methodology by 

manufacturers and employers with 

parking spaces in less populous areas. 

The Treasury Department and the IRS 

decline to adopt this comment because 


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the commenter provided no evidence 

that the monthly rate of $25 per parking 

space is the appropriate cost for all 

parking spaces located outside the city 

limits of the 20 most populous cities in 

the United States. 

Section 274(e)(2) provides 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. Under 

§ 1.274–13(e)(2)(i) of the proposed 

regulations, a taxpayer using this 

qualified parking limit methodology 

who has monthly expenses per parking 

space exceeding the section 132(f)(2) 

monthly per employee limitation on the 

exclusion could 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, the 

proposed regulations provided that the 

qualified parking limit methodology 

could 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). The final regulations adopt this 

rule from the proposed regulations 

without change. 

iii. Primary Use Methodology 

The Treasury Department and the IRS 

received numerous comments on Notice 

2018–99 related to the four-step method 

provided in the Notice. The proposed 

regulations adopted the four-step 

method provided in the Notice, with 

revisions in response to comments, and 

renamed it the ‘‘primary use 

methodology.’’ No comments were 

received on the primary use 

methodology included in the proposed 

regulations, and the final regulations 

adopt the primary use methodology 

without modification. 

iv. Cost Per Space Methodology 

The proposed regulations also 

provided a cost per space methodology, 

which allows taxpayers to calculate the 

disallowance by multiplying the cost 

per space by the number of available 

parking spaces used by employees. 

Taxpayers must identify the number of 

total 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 

total parking spaces (including 

inventory/unusable spaces). 

In response to the proposed 

regulations, a commenter pointed out 

that a taxpayer using the cost per space 

methodology calculates the 

disallowance of deductions for QTF 

parking expenses by multiplying the 

cost per space by the total number of 

‘‘available parking spaces’’ used by 

employees during the peak demand 

period rather than the ‘‘total parking 

spaces’’ used by employees. The 

commenter suggested that ‘‘total parking 

spaces’’ should be used instead of 

‘‘available parking spaces’’ because 

reserved spaces are excluded from the 

definition of ‘‘available parking spaces.’’ 

The Treasury Department and the IRS 

agree with this suggestion and modify 

the cost per space methodology 

provided in the proposed regulations by 

specifying that ‘‘total parking spaces’’ is 

used to calculate the disallowance 

under the final regulations. In addition, 

as discussed in part 1.B.xiv. of this 

Summary of Comments and Explanation 

of Revisions section, the final 

regulations clarify that the cost per 

space calculation may be performed on 

a monthly basis. 

v. Expenses for Transportation in a 

Commuter Highway Vehicle and Transit 

Pass QTFs 

Consistent with the proposed 

regulations, the final 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). The general rules 

are unchanged from those in the 

proposed regulations. 

E. Specific Exceptions to Section 274(a) 

for QTF Expenses 

Section 274(e) provides that the 

deduction disallowance under section 

274(a) does not apply to any expense 

described in section 274(e). Consistent 

with the proposed regulations, the final 

regulations provide that the deduction 

disallowance does not apply to 

expenditures for QTFs that meet the 

requirements of section 274(e)(2), (7), or 

(8), which are the three exceptions in 

section 274(e) that are relevant for 

QTFs. 

A commenter suggested that the IRS 

implement a moratorium on 

enforcement of the deduction 

disallowance for the expense of QTFs 

during the ongoing COVID–19 

pandemic. In addition, a commenter 

requested that healthcare facilities, 

including skilled nursing and assisted 

living healthcare facilities, be excepted 

from the section 274(a)(4) disallowance 

because the employees at these types of 

healthcare businesses provide essential 

and life-saving care services to the 

public. 

The Treasury Department and the IRS 

note that exceptions for QTFs during the 

COVID–19 pandemic or for healthcare 

facility 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 

that the Treasury Department and the 

IRS may allow. However, as discussed 

in part 1.B.xiv. of this Summary of 

Comments and Explanation of Revisions 

section, the Treasury Department and 

the IRS are modifying the definition of 

‘‘peak demand period’’ to provide 

additional flexibility for taxpayers 

affected by the COVID–19 pandemic or 

other federally declared disaster in 

applying the methodologies for 

determining the section 274(a)(4) 

disallowance for parking facilities. 

i. Certain QTF Expenses Treated as 

Compensation Under Section 274(e)(2) 

Section 274(e)(2) provides an 

exception to section 274(a) for 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. Pursuant to section 

274(e)(2), the proposed regulations 

provided that the disallowance under 

section 274(a) does not apply to 

expenditures for QTFs to the extent the 

taxpayer properly 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. Because section 132(a)(5) 

excludes the value of QTFs from an 

employee’s gross income up to the 

limitations on exclusion provided by 

section 132(f)(2), the proposed 

regulations provided 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 proposed regulations 

further provided that section 274(e)(2) 

applies to expenses paid or incurred for 

QTFs, the value of which exceeds the 

sum of the amount, if any, paid by the 

employee for the fringe benefits and any 

amount excluded from gross income 


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under section 132(a)(5), if treated as 

compensation on the taxpayer’s Federal 

income tax return as originally filed and 

as wages to the employee for purposes 

of withholding under chapter 24. 

Section 1.61–21(b)(1) provides rules 

for the valuation of fringe benefits and 

requires that an employee must include 

in gross income the amount by which 

the fair market value of the fringe 

benefit exceeds the sum of the amount 

paid for the benefit by or on behalf of 

the recipient and the amount, if any, 

specifically excluded from gross income 

under the Code. Thus, in the case of 

reimbursements by a recipient, the 

amount of the reimbursement is taken 

into account in determining the amount 

properly includible in the recipient’s 

income and does not affect the 

taxpayer’s ability to use the exception in 

section 274(e)(2). 

To prevent taxpayers from 

inappropriately claiming a full 

deduction under section 274(e)(2) by 

including a value that is less than the 

amount required to be included under 

§ 1.61–21, the proposed regulations 

provided that the exception in section 

274(e)(2) does not apply to expenses for 

QTFs for which the taxpayer calculates 

a value that is less than the amount 

required to be included in gross income 

under § 1.61–21. 

Commenters on the proposed 

regulations under section 274 limiting 

deductions for meals and entertainment 

expenses (proposed §§ 1.274–11 and 

1.274–12 (REG–100814–19)) asserted 

that a rule disallowing the application 

of section 274(e)(2) to expenses for 

which an improper amount is included 

in compensation and wages or in gross 

income, as applicable, is unduly harsh 

given the difficulty in determining the 

value of a fringe benefit under § 1.61–21 

and the possibility of good faith errors. 

See TD 9925, 85 FR 64026, 64031 

(October 9, 2020). In addition, a 

commenter noted that the ‘‘to the extent 

that’’ language in section 274(e)(2)(A) 

does not support applying an ‘‘all or 

nothing’’ rule against the taxpayer. 

The Treasury Department and the IRS 

agree that the ‘‘all or nothing’’ rule in 

proposed §§ 1.274–13 and 1.274–14 may 

lead to unduly harsh results. Therefore, 

in response to these comments, the 

Treasury Department and the IRS have 

revised the rules in proposed § 1.274– 

13(e)(2)(i) to allow a taxpayer to apply 

section 274(e)(2) even if the taxpayer 

includes less than the proper amount in 

compensation and wages as required 

under § 1.61–21. In such a case, 

however, the amount of a taxpayer’s 

deduction is limited to the amount 

included in compensation and wages, 

taking into account the amount, if any, 

reimbursed to the taxpayer by the 

employee (referred to as the ‘‘dollar-fordollar’’ methodology in this preamble). 

This is consistent with the rule 

provided in section 274(e)(2)(B) for 

QTFs provided to specified individuals. 

The final regulations also provide that 

if the value of a QTF exceeds the 

monthly per employee limitations on 

exclusion provided by section 132(f)(2) 

($270 per employee for 2020), so that 

only a portion of the value is included 

in the employees’ wages, the taxpayer 

may apply section 274(e)(2). However, 

in this case, the taxpayer must use the 

dollar-for-dollar methodology. 

ii. Expenses for Transportation in a 

Commuter Highway Vehicle, Transit 

Pass, or Parking Made Available to the 

Public 

Section 274(e)(7) provides an 

exception to section 274(a) for expenses 

for goods, services, and facilities made 

available by the taxpayer to the general 

public. Pursuant to section 274(e)(7), the 

proposed regulations provided 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) 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. No 

comments were received on this 

provision, and the final regulations 

adopt it without modification. As 

described further in part 1.B.iii. of this 

Summary of Comments and Explanation 

of Revisions section, ‘‘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 (as 

defined in section 1372(b)), 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 (as 

defined in section 1372(b)), 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 

Section 274(e)(8) provides an 

exception to section 274(a) for expenses 

for goods or services (including the use 

of facilities) which are sold by the 

taxpayer in a bona fide transaction for 

an adequate and full consideration in 

money or money’s worth. Pursuant to 

section 274(e)(8), the proposed 

regulations provided 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 provided that 

for purposes of this section, the term 

‘‘customer’’ includes an employee of the 

taxpayer who purchases the 

transportation 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. The final regulations 

adopt these provisions. 

A commenter requested guidance in 

the final regulations for a situation in 

which employees are charged for 

parking at a parking facility. If a 

taxpayer charges its employees for 

parking at its parking facilities in a bona 

fide transaction for adequate and full 

consideration in money or money’s 

worth, the employees are the taxpayer’s 

customers for this purpose and the 

exception in section 274(e)(8) and 

§ 1.274–13(e)(2)(iii) would apply. On 

the other hand, if an employee pays less 

than adequate and full consideration, 

this exception would not apply because 

the parking was not sold to the 

employee for full consideration. In this 

case, however, the taxpayer may apply 

the exception in section 274(e)(2) and 

§ 1.274–13(e)(2)(i) to the extent of the 

reimbursement. 

Another commenter suggested that 

the deduction disallowance for the 

expense of any QTF should not apply to 

expenses for parking that has no 

objective value to the taxpayer’s 

employees, such as parking in 

industrial, remote, or rural areas (that is, 

areas where the general public would 

not pay to park). In response to this 

comment, the Treasury Department and 

the IRS have determined that the 

exception in section 274(e)(8) and the 

final regulations at § 1.274–13(e)(2)(iii) 

should apply if in a bona fide 

transaction, the adequate and full 

consideration for qualified parking is 

zero. The final regulations provide that 

to apply the exception in such a case, 

the taxpayer bears the burden of proving 

that the fair market value of the 

qualified parking is zero. However, a 

taxpayer will be treated as satisfying 

this burden if the qualified parking is 

provided in a rural, industrial, or remote 

area in which no commercial parking is 

available and an individual other than 


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an employee ordinarily would not pay 

to park. The final regulations also 

provide an example illustrating the 

application of this rule. 

2. Transportation and Commuting 

Expenses 

Section 274(l)(1), as added by the 

TCJA, 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. The provision applies to 

expenses paid or incurred after 

December 31, 2017. Section 274(l)(2) 

provides that the disallowance of a 

deduction for commuting and 

transportation expenses under section 

274(l) is suspended for any qualified 

bicycle 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, 

which, also for such period, are not 

excluded from an employee’s income 

under section 132(f)(8), are not 

disallowed under section 274(l). 

Section 1.274–14 addresses the 

disallowance of deductions under 

section 274(l). Section 1.274–14 of the 

proposed regulations provided that 

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. 

A commenter suggested that the final 

regulations clarify that section 274(l) 

applies to commuting expenses only 

and does not apply to business travel. 

The commenter further requested that 

the concept of transportation originating 

at a hub near the employee’s residence 

or place of employment be removed 

from the proposed regulations because it 

may disallow business travel between 

two places of employment. In addition, 

the commenter noted that it is incorrect 

to describe a commute as originating at 

a transportation hub because an 

individual’s commute will always begin 

at the residence, even if the individual 

first travels from the residence to the 

transportation hub. Thus, the 

commenter suggested that instead of the 

hub reference, the final regulations 

provide that the application of section 

274(l) to travel between a residence and 

place of employment is not affected by 

the use of different modes of 

transportation on the trip. 

The Treasury Department and the IRS 

agree with these suggestions. The final 

regulations do not include a reference to 

a transportation hub and instead explain 

that travel between the employee’s 

residence and place of employment is 

not affected by the use of different 

modes of transportation, or by whether 

the employer pays for all modes of 

transportation during the commute. The 

final regulations also state that the 

disallowance under section 274(l) does 

not apply to business expenses under 

section 162(a)(2) paid or incurred while 

traveling away from home. 

A commenter suggested that only the 

marginal cost of commuting should be 

disallowed, similar to spouse and 

dependent travel in section 274(m)(3). 

The Treasury Department and the IRS 

decline to adopt this suggestion because 

the language of section 274(l) broadly 

refers to ‘‘any expense’’ incurred for the 

provision of commuting to an employee. 

Further, the Treasury Department and 

the IRS are not aware of any evidence 

that Congress intended to disallow only 

the marginal cost of commuting. 

A commenter requested that the final 

regulations include a definition of 

‘‘employee’’ for purposes of section 

274(l). In response to this comment, the 

Treasury Department and the IRS 

include a definition of employee in the 

final regulations. Under the final 

regulations, the term ‘‘employee’’ means 

an employee of the taxpayer as defined 

in section 3121(d)(1) and (2) (that is, 

officers of a corporate taxpayer and 

employees of the taxpayer under the 

common law rules). 

The proposed regulations provided 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. 

A commenter requested that the final 

regulations limit the definition of 

‘‘residence’’ to the residence to or from 

which the employee regularly 

commutes, which generally is the 

employee’s principal residence. The 

Treasury Department and the IRS 

decline to adopt this comment because 

nothing in the language of section 274(l) 

indicates that commuting is limited to 

transportation from a principal 

residence. An employee could, for 

example, regularly commute from a 

vacation home to the workplace. Thus, 

the final regulations continue to define 

‘‘residence’’ by referencing the 

definition of the term ‘‘residence’’ in 

§ 1.121–1(b)(1), and specifically provide 

that this definition may include a 

residence that is not a principal 

residence. 

The proposed regulations also defined 

the term ‘‘safety of the employee,’’ 

referencing the description of a bona 

fide business-oriented security concern 

in § 1.132–5(m). Several commenters 

suggested that the proposed rules for 

determining when transportation 

provided by an employer is necessary 

for the safety of the employee were too 

narrow and should be expanded to 

apply beyond a bona fide businessoriented security concern in § 1.132– 

5(m). These commenters generally 

suggested that the final regulations 

should instead define ‘‘safety of the 

employee’’ by reference to § 1.61– 

21(k)(5). Section 1.61–21(k)(5) provides 

that unsafe conditions exist if a 

reasonable person would, under the 

facts and circumstances, consider it 

unsafe for the employee to walk to or 

from home, or to walk to or use public 

transportation at the time of day the 

employee must commute. One of the 

factors indicating whether it is unsafe is 

the history of crime in the geographic 

area surrounding the employee’s 

workplace or residence at the time of 

day the employee must commute. 

The Treasury Department and the IRS 

agree with this suggestion. Accordingly, 

the final regulations clarify that a 

transportation or commuting expense is 

necessary for ensuring the safety of the 

employee if unsafe conditions, as 

described in § 1.61–21(k)(5), exist for 

the employee. 

To further clarify the exception, a 

commenter also suggested that examples 

be included illustrating situations in 

which transportation provided by an 

employer is necessary for the safety of 

the employee. The Treasury Department 

and the IRS believe that further 

clarification is unnecessary in light of 

the final regulations’ reference to unsafe 

conditions as described in § 1.61– 

21(k)(5). 

A commenter suggested that 

temporary or occasional places of 

employment should not be considered 

an employee’s place of employment for 

purpose of section 274(l). The 

commenter pointed to prior guidance 

issued by the IRS as well as to case law 

that provides that travel to a temporary 

place of employment is not treated as 


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commuting. The Treasury Department 

and the IRS agree with this comment 

and have modified the final regulations 

to explain that temporary or occasional 

places of employment are not an 

employee’s place of employment under 

section 274(l). However, the final 

regulations provide that an employee 

must have at least one regular or 

principal place of business. 

The Treasury Department and the IRS 

have determined that the exceptions in 

section 274(e) do not apply to 

deductions disallowed by section 274(l), 

because the statutory language in 

section 274 applies the exceptions in 

274(e) only to expenses that are 

otherwise disallowed or limited by 

section 274(a), (k), and (n). A 

commenter pointed out that although 

the exceptions in section 274(e) are 

applicable only to expenses disallowed 

or limited by section 274(a), (k), and (n), 

the Treasury Department and the IRS 

have previously extended the 

exceptions in 274(e)(2) to expenses 

otherwise disallowed by other 

subsections of section 274. Specifically, 

the commenter noted that the exception 

in section 274(e)(2) was extended to the 

spouse travel disallowance in 

§ 274(m)(3), pursuant to § 1.274– 

2(f)(2)(iii). 

The Treasury Department and the IRS 

considered this comment but do not 

believe that the exception in section 

274(e)(2) should be extended to 

commuting expenses disallowed by 

section 274(l). The Joint Committee on 

Taxation’s ‘‘Bluebook’’ describing 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 transportation which 

are not qualified transportation fringes (or 

any payment or reimbursement) for 

commuting between the employee’s 

residence and place or employment, even if 

included in compensation, are not eligible for 

this exception. 

Joint Committee on Taxation, General 

Explanation of Public Law 115–97 (JCS– 

1–18), at 190 (December 20, 2018). 

Thus, the final regulations do not apply 

the section 274(e) exceptions, including 

section 274(e)(2), to commuting 

expenses disallowed by section 274(l). 

Applicability Date 

These regulations apply to taxable 

years beginning on or after December 

16, 2020. Notwithstanding the 

preceding sentence, taxpayers may 

choose to apply § 1.274–13(b)(14)(ii) of 

these final regulations to taxable years 

ending after December 31, 2019. 

Taxpayers may continue to rely on 

proposed §§ 1.274–13 through 1.274–14, 

which were issued in a notice of 

proposed rulemaking (REG–119307–19) 

and published on June 23, 2020, in the 

Federal Register (85 FR 37599) or the 

guidance provided in Notice 2018–99 

for parking expenses, other QTF 

expenses, and transportation and 

commuting expenses, as applicable, 

paid or incurred in taxable years 

beginning after December 31, 2017 and 

before December 16, 2020. 

Special Analyses 

These final 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. 

Pursuant to the Regulatory Flexibility 

Act (5 U.S.C. chapter 6), it is hereby 

certified that this final 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 may 

affect entities that incur QTF or 

commuting expenses. The economic 

impact of these regulations is not likely 

to be significant, however, because these 

final regulations substantially 

incorporate prior guidance and 

otherwise clarify the application of the 

TCJA changes to section 274 related to 

QTF and commuting expenses. These 

final regulations will assist taxpayers in 

understanding the changes to section 

274 and make it easier for taxpayers to 

comply with those changes. 

Accordingly, the Secretary of the 

Treasury’s delegate certifies that the rule 

will not have a significant economic 

impact on a substantial number of small 

entities. 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 final 

regulations have been submitted to the 

Chief Counsel for the Office of 

Advocacy of the Small Business 

Administration for comment on their 

impact on small business. No comments 

on the proposed regulations were 

received from the Chief Counsel for the 

Office of Advocacy of the Small 

Business Administration. 

Effect on Other Documents 

The following publications are 

obsolete as of December 16, 2020. 

Notice 2018–99 (2018–52 I.R.B. 1067). 

Statement of Availability of IRS 

Documents 

Notices cited in this preamble 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 website at 

http://www.irs.gov. 

Drafting Information 

The principal author of this final 

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. 

Adoption of Amendments to the 

Regulations 

Accordingly, 26 CFR part 1 is 

amended as follows: 

PART 1—INCOME TAX 

■ Paragraph 1. The authority citation 

for part 1 is amended by adding entries 

in 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. Section 1.274–13 is 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 

an employer to an employee: 


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(i) 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)); 

(ii) Any transit pass (as described in 

sections 132(f)(1)(B) and 132(f)(5)(A)); or 

(iii) 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 (as 

defined in section 1372(b)), sole 

proprietors, and independent 

contractors are not employees of the 

taxpayer for purposes of this section. 

See § 1.132–9 Q/A–24. 

(3) General public. (i) In general. 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. The term general 

public does not include individuals that 

are employees, partners, 2-percent 

shareholders of S corporations (as 

defined in section 1372(b)), sole 

proprietors, or independent contractors 

of the taxpayer. Also, an exclusive list 

of guests of a taxpayer is not the general 

public. Parking spaces that are available 

to the general public but empty are 

treated as provided to the general 

public. Parking spaces that are used to 

park vehicles owned by the general 

public while the vehicles await repair or 

service by the taxpayer are also treated 

as provided to the general public. 

(ii) Multi-tenant building. If a taxpayer 

owns or leases space in a multi-tenant 

building, the term general public 

includes employees, partners, 2-percent 

shareholders of S corporations (as 

defined in section 1372(b)), sole 

proprietors, independent contractors, 

clients, or customers of unrelated 

tenants in the building. 

(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 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. 

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 (as 

defined in section 1372(b)), 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 or the general public. 

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 by an electric utility 

used exclusively to maintain electric 

power lines, or parking spaces occupied 

by trash dumpsters (or similar property). 

Taxpayers may use any reasonable 

methodology to determine the number 

of inventory/unusable spaces in the 

parking facility. A reasonable 

methodology may include using the 

average of monthly inventory counts. 

(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—(i) In 

general. 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 taxpayer may use any reasonable 

methodology to allocate mixed parking 

expenses to a parking facility. 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. 

(ii) Optional rule for allocating certain 

mixed parking expenses. A taxpayer 

may choose to allocate 5 percent of any 

the following mixed parking expenses to 

a parking facility: Lease or rental 

agreement expenses, property taxes, 

interest expense, and expenses for 

utilities and insurance. 

(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—(i) In 

general. The term peak demand period 

refers to the period of time on a typical 

business day during the taxable year 

when the greatest number of the 

taxpayer’s employees are utilizing 


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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 spaces used by 

employees during the peak demand 

period on a typical business day. A 

reasonable methodology may include 

periodic inspections or employee 

surveys. 

(ii) Optional rule for federally 

declared disasters. If a taxpayer owns or 

leases a parking facility that is located 

in a federally declared disaster area, as 

defined in section 165(i)(5), the taxpayer 

may choose to identify a typical 

business day for the taxable year in 

which the disaster occurred by reference 

to a typical business day in that taxable 

year prior to the date that the taxpayer’s 

operations were impacted by the 

federally declared disaster. 

Alternatively, a taxpayer may choose to 

identify a typical business day during 

the month(s) of the taxable year in 

which the disaster occurred by reference 

to a typical business day during the 

same month(s) of the taxable year 

immediately preceding the taxable year 

in which the disaster first occurred. For 

purposes of applying the optional rule 

for federally declared disasters, the 

taxable year in which the disaster 

occurs is determined without regard to 

whether an election under section 165(i) 

is made with respect to the disaster. 

(c) Optional aggregation rule for 

calculating total parking spaces; 

taxpayer owned or leased parking 

facilities. For purposes of determining 

total parking spaces in calculating the 

disallowance of deductions for qualified 

transportation fringe parking expenses 

under the general rule in paragraph 

(d)(2)(i) of this section, the primary use 

methodology in paragraph (d)(2)(ii)(B) 

of this section, or the cost per space 

methodology in paragraph (d)(2)(ii)(C) 

of this section, a taxpayer that owns or 

leases more than one parking facility in 

a single geographic location may 

aggregate the number of spaces in those 

parking facilities. 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. A taxpayer that chooses to 

aggregate its parking spaces under this 

paragraph (c) must determine its total 

parking expenses, including the 

allocation of mixed parking expenses, as 

if the aggregated parking spaces 

constitute one parking facility. 

(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 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 use the aggregation rule in 

paragraph (c) of this section for 

determining total parking spaces. 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 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). In applying this 

methodology, a taxpayer calculates the 

disallowed amount as required under 

this paragraph (d)(2)(ii)(A), regardless of 

the actual amount of the taxpayer’s total 

parking expenses. 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) as compensation paid to the 

employee under chapter 1 of the Code 

(chapter 1) and as wages to the 

employee for purposes of withholding 

under chapter 24 of the Code (chapter 

24), 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 the 

aggregation rule in paragraph (c) of this 

section. 

(B) Primary use methodology. A 

taxpayer that uses the primary use 

methodology in this paragraph 


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(d)(2)(ii)(B) must use the following fourstep methodology to calculate the 

disallowance of deductions for qualified 

transportation fringe parking expenses 

for each parking facility for which the 

taxpayer uses the primary use 

methodology. A taxpayer using this 

methodology may use the aggregation 

rule in paragraph (c) of this section for 

determining 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 following 

conditions are met: 

(i) 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; 

(ii) There are five or fewer reserved 

employee spaces in the parking facility; 

and 

(iii) 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. 

(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 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 

number of total 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. This 

calculation may be performed on a 

monthly basis. A taxpayer using this 

methodology may use the aggregation 

rule in paragraph (c) of this section for 

determining 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 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 section 274(a)(4) disallows a 

deduction for the expense of providing 

a qualified transportation fringe, 

regardless of its value to the employee. 

(e) Specific exceptions to 

disallowance of deduction for qualified 

transportation fringe expenses—(1) In 

general. The provisions of section 

274(a)(4) and paragraph (a) of this 

section (imposing limitations on 

deductions for qualified transportation 

fringe expenses) are not applicable in 

the case of expenditures set forth in 

paragraph (e)(2) of this section. Such 

expenditures are deductible to the 

extent allowable under chapter 1 of the 

Code. This paragraph (e) cannot be 

construed to affect whether a deduction 

under section 162 or 212 is allowed or 

allowable. The fact that an expenditure 

is not covered by a specific exception 

provided for in this paragraph (e) is not 

determinative of whether a deduction 

for the expenditure is disallowed under 

section 274(a)(4) and paragraph (a) of 

this section. 

(2) Exceptions to disallowance. The 

expenditures referred to in paragraph 

(e)(1) of this section are set forth in 

paragraphs (e)(2)(i) through (iii) of this 

section. 

(i) Certain qualified transportation 

fringe expenses treated as 

compensation—(A) Expenses includible 

in income of persons who are employees 

and are not specified individuals. In 

accordance with section 274(e)(2)(A), 

and except as provided in paragraph 

(e)(2)(i)(C) of this section, an expense 

paid or incurred by a taxpayer for a 

qualified transportation fringe, if an 

employee who is not a specified 

individual is the recipient of the 

qualified transportation fringe, is not 

subject to the disallowance of 

deductions provided for in paragraph (a) 

of this section to the extent that the 

taxpayer— 

(1) Properly treats the expense 

relating to the recipient of the qualified 

transportation fringe as compensation to 

an employee under chapter 1 and as 

wages to the employee for purposes of 

chapter 24; and 

(2) Treats the proper amount as 

compensation to the employee under 

§ 1.61–21. 

(B) Specified Individuals. In 

accordance with section 274(e)(2)(B), in 

the case of a specified individual (as 

defined in section 274(e)(2)(B)(ii)), the 

disallowance of deductions provided for 

in paragraph (a) of this section does not 

apply to an expense for a qualified 

transportation fringe of the specified 

individual to the extent that the amount 

of the expense does not exceed the sum 

of— 


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(1) The amount treated as 

compensation to the specified 

individual under chapter 1 and as wages 

to the specified individual for purposes 

of chapter 24; and 

(2) Any amount the specified 

individual reimburses the taxpayer. 

(C) Expenses for which an amount is 

excluded from income or is less than the 

proper amount. Notwithstanding 

paragraph (e)(2)(i)(A) of this section, in 

the case of an expense paid or incurred 

by a taxpayer for a qualified 

transportation fringe for which an 

amount is wholly or partially excluded 

from a recipient’s income under subtitle 

A of the Code (other than because the 

amount is reimbursed by the recipient), 

or for which an amount included in 

compensation and wages to an 

employee is less than the amount 

required to be included under § 1.61–21, 

the disallowance of deductions 

provided for in paragraph (a) of this 

section does not apply to the extent that 

the amount of the expense does not 

exceed the sum of— 

(1) The amount treated as 

compensation to the recipient under 

chapter 1 and as wages to the recipient 

for purposes of chapter 24; and 

(2) Any amount the recipient 

reimburses the taxpayer. 

(ii) Expenses for transportation in a 

commuter highway vehicle, transit pass, 

or parking made available to the public. 

Under section 274(e)(7) and this 

paragraph (e)(2)(ii), any expense paid or 

incurred by a taxpayer for transportation 

in a commuter highway vehicle, a 

transit pass, or parking that otherwise 

qualifies as a qualified transportation 

fringe is not subject to the disallowance 

of deductions provided for in paragraph 

(a) of this section to the extent that such 

transportation, transit pass, or parking is 

made available to the general public. 

With respect to parking, this exception 

applies to the entire amount of the 

taxpayer’s parking expense, less any 

expenses specifically attributable to 

employees (for example, expenses 

allocable to reserved employee spaces), 

if the primary use of the parking is by 

the general public. If the primary use of 

the parking is not by the general public, 

this exception applies only to the costs 

attributable to the parking used by the 

general public. 

(iii) Expenses for transportation in a 

commuter highway vehicle, transit pass, 

or parking sold to customers. Under 

section 274(e)(8) and this paragraph 

(e)(2)(iii), any expense paid or incurred 

by a taxpayer for transportation in a 

commuter highway vehicle, a transit 

pass, or parking that otherwise qualifies 

as a qualified transportation fringe to 

the extent such transportation, transit 

pass, or parking 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 

disallowance of deductions provided for 

in paragraph (a) of this section. For 

purposes of this paragraph (e)(2)(iii), the 

term customer includes an employee of 

the taxpayer who purchases 

transportation in a commuter highway 

vehicle, a transit pass, or parking in a 

bona fide transaction for an adequate 

and full consideration in money or 

money’s worth. If in a bona fide 

transaction, the adequate and full 

consideration for qualified parking is 

zero, the exception in this paragraph 

(e)(2)(iii) applies even though the 

taxpayer does not actually sell the 

parking to its employees. To apply the 

exception in this case, the taxpayer 

bears the burden of proving that the fair 

market value of the qualified parking is 

zero. However, solely for purposes of 

this paragraph (e)(2)(iii), a taxpayer will 

be treated as satisfying this burden if the 

qualified parking is provided in a rural, 

industrial, or remote area in which no 

commercial parking is available and an 

individual other than an employee 

ordinarily would not pay to park in the 

parking facility. 

(f) Examples. The following examples 

illustrate the provisions of this section 

related to parking expenses for qualified 

transportation fringes. For each 

example, unless otherwise stated, 

assume the parking expenses are 

otherwise deductible expenses paid or 

incurred during the 2020 taxable year; 

all or some portion of the expenses 

relate to a qualified transportation fringe 

under section 132(f); the section 

132(f)(2) monthly per employee 

limitation on an employee’s exclusion is 

$270; the fair market value of the 

qualified parking is not $0; all taxpayers 

are calendar-year taxpayers; and the 

length of the 2020 taxable year is 12 

months. 

(1) Example 1. Taxpayer A pays B, a 

third party who owns a parking garage 

adjacent to A’s place of business, $100 

per month per parking space for each of 

A’s 10 employees to park in B’s garage, 

or $12,000 for parking in 2020 (($100 × 

10) × 12 = $12,000). The $100 per month 

paid for each of A’s 10 employees for 

parking is excludible from the 

employees’ gross income under section 

132(a)(5), and none of the exceptions in 

section 274(e) or paragraph (e) of this 

section are applicable. Thus, the entire 

$12,000 is subject to the section 

274(a)(4) disallowance under 

paragraphs (a) and (d)(1) of this section. 

(2) Example 2. (i) Assume the same 

facts as in paragraph (f)(1) of this section 

(Example 1), except A pays B $300 per 

month for each parking space, or 

$36,000 for parking for 2020 (($300 × 

10) × 12 = $36,000). Of the $300 per 

month paid for parking for each of 10 

employees, $270 is excludible under 

section 132(a)(5) for 2020 and none of 

the exceptions in section 274(e) or 

paragraph (e) of this section are 

applicable to this amount. A properly 

treats the excess amount of $30 

($300¥$270) per employee per month 

as compensation and wages. Thus, 

$32,400 (($270 × 10) × 12 = $32,400) is 

subject to the section 274(a)(4) 

disallowance under paragraphs (a) and 

(d)(1) of this section. 

(ii) The excess amount of $30 per 

employee per month is not excludible 

under section 132(a)(5). As a result, the 

exceptions in section 274(e)(2) and 

paragraph (e)(2)(i) of this section are 

applicable to this amount. Thus, $3,600 

($36,000¥$32,400 = $3,600) is not 

subject to the section 274(a)(4) 

disallowance and remains deductible. 

(3) Example 3. (i) Taxpayer C leases 

from a third party a parking facility that 

includes 200 parking spaces at a rate of 

$500 per space, per month in 2020. C’s 

annual lease payment for the parking 

spaces is $1,200,000 ((200 × $500) × 12 

= $1,200,000). The number of available 

parking spaces used by C’s employees 

during the peak demand period is 200. 

(ii) C uses the qualified parking limit 

methodology described in paragraph 

(d)(2)(ii)(A) of this section to determine 

the disallowance under section 

274(a)(4). Under this methodology, the 

section 274(a)(4) disallowance is 

calculated by multiplying the number of 

available parking spaces used by 

employees during the peak demand 

period, 200, the section 132(f)(2) 

monthly per employee limitation on 

exclusion, $270, and 12, the number of 

months in the applicable taxable year. 

The amount subject to the section 

274(a)(4) disallowance is $648,000 (200 

× $270 × 12 = $648,000). This amount 

is excludible from C’s employees’ gross 

incomes under section 132(a)(5) and 

none of the exceptions in section 274(e) 

or paragraph (e) of this section are 

applicable to this amount. The excess 

$552,000 ($1,200,000¥$648,000) for 

which C is not disallowed a deduction 

under 274(a)(4) is included in C’s 

employees’ gross incomes because it 

exceeds the section 132(f)(2) monthly 

per employee limitation on exclusion. 

(4) Example 4. (i) Facts. Taxpayer D, 

a big box retailer, owns a surface 

parking facility adjacent to its store. D 

incurs $10,000 of total parking expenses 

for its store in the 2020 taxable year. D’s 

parking facility has 510 spaces that are 

used by its customers, employees, and 

its fleet vehicles. None of D’s parking 


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spaces are reserved. The number of 

available parking spaces used by D’s 

employees during the peak demand 

period is 50. Approximately 30 

nonreserved parking spaces are empty 

during D’s peak demand period. D’s 

fleet vehicles occupy 10 parking spaces. 

(ii) Methodology. D uses the primary 

use methodology in paragraph 

(d)(2)(ii)(B) of this section to determine 

the amount of parking expenses that are 

disallowed under section 274(a)(4). 

(iii) Step 1. Because none of D’s 

parking spaces are exclusively reserved 

for employees, there is no amount to be 

specifically allocated to reserved 

employee spaces under paragraph 

(d)(2)(ii)(B)(1) of this section. 

(iv) Step 2. D’s number of available 

parking spaces is the total parking 

spaces reduced by the number of 

reserved employee spaces and 

inventory/unusable spaces or 500 

(510¥0¥10 = 500). The number of 

available parking spaces used by D’s 

employees during the peak demand 

period is 50. Of the 500 available 

parking spaces, 450 are used to provide 

parking to the general public, including 

the 30 empty nonreserved parking 

spaces that are treated as provided to 

the general public. The primary use of 

D’s available parking spaces is to 

provide parking to the general public 

because 90% (450/500 = 90%) of the 

available parking spaces are used by the 

general public under paragraph 

(d)(2)(ii)(B)(2) of this section. Because 

the primary use of the available parking 

spaces is to provide parking to the 

general public, the exception in section 

274(e)(7) and paragraph (e)(2)(ii) of this 

section applies and none of the $10,000 

of total parking expenses is subject to 

the section 274(a)(4) disallowance. 

(5) Example 5. (i) Facts. Taxpayer E, 

a manufacturer, owns a surface parking 

facility adjacent to its plant. E incurs 

$10,000 of total parking expenses in 

2020. E’s parking facility has 500 spaces 

that are used by its visitors and 

employees. E reserves 25 of these spaces 

for nonemployee visitors. The number 

of available parking spaces used by E’s 

employees during the peak demand 

period is 400. 

(ii) Methodology. E uses the primary 

use methodology in paragraph 

(d)(2)(ii)(B) of this section to determine 

the amount of parking expenses that are 

disallowed under section 274(a)(4). 

(iii) Step 1. Because none of E’s 

parking spaces are exclusively reserved 

for employees, there is no amount to be 

specifically allocated to reserved 

employee spaces under paragraph 

(d)(2)(ii)(B)(1) of this section. 

(iv) Step 2. The primary use of E’s 

parking facility is not to provide parking 

to the general public because 80% (400/ 

500 = 80%) of the available parking 

spaces are used by its employees. Thus, 

expenses allocable to those spaces are 

not excepted from the section 274(a) 

disallowance by section 274(e)(7) and 

paragraph (e)(2)(ii) of this section under 

the primary use test in paragraph 

(d)(2)(ii)(B)(2) of this section. 

(v) Step 3. Because 5% (25/500 = 5%) 

of E’s available parking spaces are 

reserved nonemployee spaces, up to 

$9,500 ($10,000 × 95% = $9,500) of E’s 

total parking expenses are subject to the 

section 274(a)(4) disallowance under 

this step as provided in paragraph 

(d)(2)(ii)(B)(3) of this section. The 

remaining $500 ($10,000 × 5% = $500) 

of expenses allocable to reserved 

nonemployee spaces is excepted from 

the section 274(a) disallowance and 

continues to be deductible. 

(vi) Step 4. E must reasonably 

determine the employee use of the 

remaining parking spaces by using the 

number of available parking spaces used 

by E’s employees during the peak 

demand period and determine the 

expenses allocable to employee parking 

spaces under paragraph (d)(2)(ii)(B)(4) 

of this section. 

(6) Example 6. (i) Facts. Taxpayer F, 

a manufacturer, owns a surface parking 

facility adjacent to its plant. F incurs 

$10,000 of total parking expenses in 

2020. F’s parking facility has 500 spaces 

that are used by its visitors and 

employees. F reserves 50 spaces for 

management. All other employees park 

in nonreserved spaces in F’s parking 

facility; the number of available parking 

spaces used by F’s employees during the 

peak demand period is 400. 

Additionally, F reserves 10 spaces for 

nonemployee visitors. 

(ii) Methodology. F uses the primary 

use methodology in paragraph 

(d)(2)(ii)(B) of this section to determine 

the amount of parking expenses that are 

disallowed under section 274(a)(4). 

(iii) Step 1. Because F reserved 50 

spaces for management, $1,000 ((50/ 

500) × $10,000 = $1,000) is the amount 

of total parking expenses that is 

nondeductible for reserved employee 

spaces under section 274(a)(4) and 

paragraphs (a) and (d)(2)(ii)(B)(1) of this 

section. None of the exceptions in 

section 274(e) or paragraph (e) of this 

section are applicable to this amount. 

(iv) Step 2. The primary use of the 

remainder of F’s parking facility is not 

to provide parking to the general public 

because 89% (400/450 = 89%) of the 

available parking spaces in the facility 

are used by its employees. Thus, 

expenses allocable to these spaces are 

not excepted from the section 274(a)(4) 

disallowance by section 274(e)(7) and 

paragraph (e)(2)(ii) of this section under 

the primary use test in paragraph 

(d)(2)(ii)(B)(2) of this section. 

(v) Step 3. Because 2% (10/450 = 

2.22%) of F’s available parking spaces 

are reserved nonemployee spaces, the 

$180 allocable to those spaces 

(($10,000¥$1,000) × 2%) is not subject 

to the section 274(a)(4) disallowance 

and continues to be deductible under 

paragraph (d)(2)(ii)(B)(3) of this section. 

(vi) Step 4. F must reasonably 

determine the employee use of the 

remaining parking spaces by using the 

number of available parking spaces used 

by F’s employees during the peak 

demand period and determine the 

expenses allocable to employee parking 

spaces under paragraph (d)(2)(ii)(B)(4) 

of this section. 

(7) Example 7. (i) Facts. Taxpayer G, 

a financial services institution, owns a 

multi-level parking garage adjacent to its 

office building. G incurs $10,000 of total 

parking expenses in 2020. G’s parking 

garage has 1,000 spaces that are used by 

its visitors and employees. However, 

one floor of the parking garage is 

segregated by an electronic barrier that 

can only be accessed with a card 

provided by G to its employees. The 

segregated parking floor contains 100 

spaces. The other floors of the parking 

garage are not used by employees for 

parking during the peak demand period. 

(ii) Methodology. G uses the primary 

use methodology in paragraph 

(d)(2)(ii)(B) of this section to determine 

the amount of parking expenses that are 

disallowed under section 274(a)(4). 

(iii) Step 1. Because G has 100 

reserved spaces for employees, $1,000 

((100/1,000) × $10,000 = $1,000) is the 

amount of total parking expenses that is 

nondeductible for reserved employee 

spaces under section 274(a)(4) and 

paragraph (d)(2)(ii)(B)(1) of this section. 

None of the exceptions in section 274(e) 

or paragraph (e) of this section are 

applicable to this amount. 

(iv) Step 2. The primary use of the 

available parking spaces in G’s parking 

facility is to provide parking to the 

general public because 100% (900/900 = 

100%) of the available parking spaces 

are used by the public. Thus, expenses 

allocable to those spaces, $9,000, are 

excepted from the section 274(a)(4) 

disallowance by section 274(e)(7) and 

paragraph (e)(2)(ii) of this section under 

the primary use test in paragraph 

(d)(2)(ii)(B)(2). 

(8) Example 8. (i) Facts. Taxpayer H, 

an accounting firm, leases a parking 

facility adjacent to its office building. H 

incurs $10,000 of total parking expenses 

related to the lease payments in 2020. 

H’s leased parking facility has 100 

spaces that are used by its clients and 


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81408 Federal Register / Vol. 85, No. 242 / Wednesday, December 16, 2020 / Rules and Regulations 

employees. None of the parking spaces 

are reserved. The number of available 

parking spaces used by H’s employees 

during the peak demand period is 60. 

(ii) Methodology. H uses the primary 

use methodology in paragraph 

(d)(2)(ii)(B) of this section to determine 

the amount of parking expenses that are 

disallowed under section 274(a)(4). 

(iii) Step 1. Because none of H’s 

leased parking spaces are exclusively 

reserved for employees, there is no 

amount to be specifically allocated to 

reserved employee spaces under 

paragraph (d)(2)(ii)(B)(1) of this section. 

(iv) Step 2. The primary use of H’s 

leased parking facility under paragraph 

(d)(2)(ii)(B)(2) of this section is not to 

provide parking to the general public 

because 60% (60/100 = 60%) of the lot 

is used by its employees. Thus, H may 

not utilize the general public exception 

from the section 274(a)(4) disallowance 

provided by section 274(e)(7) and 

paragraph (e)(2)(ii) of this section. 

(v) Step 3. Because none of H’s 

parking spaces are exclusively reserved 

for nonemployees, there is no amount to 

be specifically allocated to reserved 

nonemployee spaces under paragraph 

(d)(2)(ii)(B)(3) of this section. 

(vi) Step 4. H must reasonably 

determine the use of the parking spaces 

and the related expenses allocable to 

employee parking. Because the number 

of available parking spaces used by H’s 

employees during the peak demand 

period is 60, H reasonably determines 

that 60% (60/100 = 60%) of H’s total 

parking expenses or $6,000 ($10,000 × 

60% = $6,000) is subject to the section 

274(a)(4) disallowance under paragraph 

(d)(2)(ii)(B)(4) of this section. 

(9) Example 9. (i) Facts. Taxpayer I, a 

large manufacturer, owns multiple 

parking facilities adjacent to its 

manufacturing plant, warehouse, and 

office building at its complex in the city 

of X. All of I’s tracts or parcels of land 

at its complex in city X are located in 

a single geographic location. I owns 

parking facilities in other cities. I incurs 

$50,000 of total parking expenses 

related to the parking facilities at its 

complex in city X in 2020. I’s parking 

facilities at its complex in city X have 

10,000 total parking spaces that are used 

by its visitors and employees of which 

500 are reserved for management. All 

other spaces at parking facilities in I’s 

complex in city X are nonreserved. The 

number of nonreserved spaces used by 

I’s employees other than management 

during the peak demand period at I’s 

parking facilities in city X is 8,000. 

(ii) Methodology. I uses the primary 

use methodology in paragraph 

(d)(2)(ii)(B) of this section to determine 

the amount of parking expenses that are 

disallowed under section 274(a)(4). I 

chooses to apply the aggregation rule in 

paragraph (c) of this section to aggregate 

all parking facilities in the geographic 

location that comprises its complex in 

city X. However, I may not aggregate 

parking facilities in other cities with its 

parking facilities in city X because they 

are in different geographic locations. 

(iii) Step 1. Because 500 spaces are 

reserved for management, $2,500 ((500/ 

10,000) × $50,000 = $2,500) is the 

amount of total parking expenses that is 

nondeductible for reserved employee 

spaces for I’s parking facilities in city X 

under section 274(a)(4) and paragraphs 

(a) and (d)(2)(ii)(B)(1) of this section. 

(iv) Step 2. The primary use of the 

remainder of I’s parking facility is not to 

provide parking to the general public 

because 84% (8,000/9,500 = 84%) of the 

available parking spaces in the facility 

are used by its employees. Thus, 

expenses allocable to these spaces are 

not excepted from the section 274(a)(4) 

disallowance by section 274(e)(7) or 

paragraph (e)(2)(ii) of this section under 

the primary use test in paragraph 

(d)(2)(ii)(B)(2) of this section. 

(v) Step 3. Because none of I’s parking 

spaces in its parking facilities in city X 

are exclusively reserved for 

nonemployees, there is no amount to be 

specifically allocated to reserved 

nonemployee spaces under paragraph 

(d)(2)(ii)(B)(3) of this section. 

(vi) Step 4. I must reasonably 

determine the use of the remaining 

parking spaces and the related expenses 

allocable to employee parking for its 

parking facilities in city X. Because the 

number of available parking spaces used 

by I’s employees during the peak 

demand period in city X during an 

average workday is 8,000, I reasonably 

determines that 84.2% (8,000/9,500 = 

84.2%) of I’s remaining parking expense 

or $39,900 (($50,000¥$2,500) × 84% = 

$39,900) is subject to the section 

274(a)(4) disallowance under paragraph 

(d)(2)(ii)(B)(4) of this section. 

(10) Example 10. (i) Taxpayer J, a 

manufacturer, owns a parking facility 

and incurs the following mixed parking 

expenses (along with other parking 

expenses): Property taxes, utilities, 

insurance, security expenses, and snow 

removal expenses. In accordance with 

paragraph (b)(12)(i) and (ii) of this 

section, J determines its total parking 

expenses by allocating 5% of its 

property tax, utilities, and insurance 

expenses to its parking facility. J uses a 

reasonable methodology to allocate to 

its parking facility an applicable portion 

of its security and snow removal 

expenses. J determines that it incurred 

$100,000 of total parking expenses in 

2020. J’s parking facility has 500 spaces 

that are used by its visitors and 

employees. The number of total parking 

spaces used by J’s employees during the 

peak demand period is 475. 

(ii) J uses the cost per space 

methodology described in paragraph 

(d)(2)(ii)(C) of this section to determine 

the amount of parking expenses that are 

disallowed under section 274(a)(4). 

Under this methodology, J multiplies 

the cost per space by the number of total 

parking spaces used by J’s employees 

during the peak demand period. J 

calculates the cost per space by dividing 

total parking expenses by the number of 

total parking spaces ($100,000/500 = 

$200). J determines that $95,000 ($200 

× 475 = $95,000) of J’s total parking 

expenses is subject to the section 

274(a)(4) disallowance and none of the 

exceptions in section 274(e) or 

paragraph (e) of this section are 

applicable. 

(11) Example 11. Taxpayer K operates 

an industrial plant with a parking 

facility in a rural area in which no 

commercial parking is available. K 

provides qualified parking at the plant 

to its employees free of charge. Further, 

an individual other than an employee 

ordinarily would not consider paying 

any amount to park in the plant’s 

parking facility. Although K does not 

charge its employees for the qualified 

parking, the exception in section 

274(e)(8) and this paragraph (e)(3)(iii) 

will apply to K’s total parking expenses 

if in a bona fide transaction, the 

adequate and full consideration for the 

qualified parking is zero. In order to 

treat the adequate and full consideration 

as zero, K bears the burden of proving 

that the parking has no objective value. 

K is treated as satisfying this burden 

because the parking is provided in a 

rural area in which no commercial 

parking is available and in which an 

individual other than an employee 

ordinarily would not consider paying 

any amount to park in the parking 

facility. Therefore, the exception in 

paragraph (e)(2)(iii) of this section 

applies to K’s total parking expenses 

and a deduction for the expenses is not 

disallowed by reason of section 

274(a)(4). 

(g) Applicability date. This section 

applies to taxable years beginning on or 

after December 16, 2020. However, 

taxpayers may choose to apply § 1.274– 

13(b)(14)(ii) to taxable years ending after 

December 31, 2019. 

■ Par. 3. Section 1.274–14 is added to 

read as follows: 


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Federal Register / Vol. 85, No. 242 / Wednesday, December 16, 2020 / Rules and Regulations 81409 

§ 1.274–14 Disallowance of deductions for 

certain transportation and commuting 

benefit expenditures. 

(a) General rule. Except as provided in 

this section, no deduction is allowed 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. The disallowance 

is not subject to the exceptions provided 

in section 274(e). The disallowance 

applies regardless of whether the travel 

between the employee’s residence and 

place of employment includes more 

than one mode of transportation, and 

regardless of whether the taxpayer 

provides, or pays or reimburses the 

employee for, all modes of 

transportation used during the trip. For 

example, the disallowance applies if an 

employee drives a personal vehicle to a 

location where a different mode of 

transportation is used to complete the 

trip to the place of employment, even 

though the taxpayer may not incur any 

expense for the portion of travel in the 

employee’s personal vehicle. The rules 

in section 274(l) and this section do not 

apply to business expenses under 

section 162(a)(2) paid or incurred while 

traveling away from home. The rules in 

section 274(l) and this section also do 

not apply to any expenditure for any 

qualified transportation fringe (as 

defined in section 132(f)) provided to an 

employee of the taxpayer. All qualified 

transportation fringe expenses are 

required to be analyzed under section 

274(a)(4) and § 1.274–13. 

(b) Exception. The disallowance for 

the deduction for expenses incurred for 

providing any transportation or 

commuting in paragraph (a) of this 

section does not apply if the 

transportation or commuting expense is 

necessary for ensuring the safety of the 

employee. The transportation or 

commuting expense is necessary for 

ensuring the safety of the employee if 

unsafe conditions, as described in 

§ 1.61–21(k)(5), exist for the employee. 

(c) Definitions. The following 

definitions apply for purposes of this 

section: 

(1) Employee. The term employee 

means an employee of the taxpayer as 

defined in section 3121(d)(1) and (2) 

(that is, officers of a corporate taxpayer 

and employees of the taxpayer under 

the common law rules). 

(2) Residence. The term residence 

means a residence as defined in § 1.121– 

1(b)(1). An employee’s residence is not 

limited to the employee’s principal 

residence. 

(3) Place of employment. The term 

place of employment means the 

employee’s regular or principal (if more 

than one regular) place of business. An 

employee’s place of employment does 

not include temporary or occasional 

places of employment. An employee 

must have at least one regular or 

principal place of business. 

(d) Applicability date. This section 

applies to taxable years beginning on or 

after December 16, 2020. 

Sunita Lough, 

Deputy Commissioner for Services and 

Enforcement. 

Approved: December 4, 2020. 

David J. Kautter, 

Assistant Secretary of the Treasury (Tax 

Policy). 

[FR Doc. 2020–27505 Filed 12–15–20; 8:45 am] 

BILLING CODE 4830–01–P 

DEPARTMENT OF JUSTICE 

Office of the Attorney General 

28 CFR Part 50 

[Docket No. OAG 163; AG Order No. 4927– 

2020] 

RIN 1105–AB62 

Prohibition on Settlement Payments to 

Non-Governmental Third Parties 

AGENCY: Department of Justice. 

ACTION: Final rule. 

SUMMARY: This final rule amends the 

Department’s regulations to set forth the 

principles of the Attorney General’s 

Memorandum of June 5, 2017, 

prohibiting the inclusion of provisions 

in settlement agreements directing or 

providing for a payment or loan to a 

non-governmental person or entity that 

is not a party to the dispute, except in 

defined circumstances. 

DATES: Effective Date: December 16, 

2020. 

FOR FURTHER INFORMATION CONTACT: 

Robert Hinchman, Senior Counsel, 

Office of Legal Policy, U.S. Department 

of Justice, Room 4252 RFK Building, 

950 Pennsylvania Avenue NW, 

Washington, DC 20530, telephone (202) 

514–8059 (not a toll-free number). 

SUPPLEMENTARY INFORMATION: On June 5, 

2017, then-Attorney General Sessions 

issued a Memorandum to the Heads of 

all Department of Justice Components 

and to all United States Attorneys titled, 

‘‘Prohibition on Settlement Payments to 

Third Parties.’’ In this Memorandum, he 

stated: ‘‘Our Department is privileged to 

represent the United States and its 

citizens in courts across our country. 

We take this responsibility seriously. In 

the course of this representation, there 

may come a time when it is in the best 

interests of the United States to settle a 

lawsuit or end a criminal prosecution. 

Settlements, including civil settlement 

agreements, deferred prosecution 

agreements, non-prosecution 

agreements, and plea agreements, are a 

useful tool for Department attorneys to 

achieve the ends of justice at a 

reasonable cost to the taxpayer. The 

goals of any settlement are, first and 

foremost, to compensate victims, redress 

harm, or punish and deter unlawful 

conduct.’’ 

However, certain previous settlement 

agreements involving the Department 

included provisions requiring payments 

to various non-governmental, thirdparty organizations as a condition of 

settlement with the United States. Those 

third-party organizations were neither 

victims nor parties to the lawsuits. 

The June 5, 2017, Memorandum 

announced that the Department would 

no longer engage in this practice. 

Pursuant to the June 5, 2017, 

Memorandum, except in specific 

limited circumstances, ‘‘Department 

attorneys may not enter into any 

agreement on behalf of the United States 

in settlement of federal claims or 

charges, including agreements settling 

civil litigation, accepting plea 

agreements, or deferring or declining 

prosecution in a criminal matter, that 

directs or provides for a payment or 

loan to any non-governmental person or 

entity that is not a party to the dispute.’’ 

This policy is already incorporated into 

the Justice Manual at https://

www.justice.gov/jm/jm/1-17000- 

settlement-payments-third-parties. 

This final rule amends the 

Department’s regulations to reflect this 

policy, with certain changes from the 

June 5, 2017, Memorandum to clarify 

the scope of exceptions. This rule 

specifically clarifies that the policy 

extends to a payment or loan, whether 

in cash or in kind, to any nongovernmental person or entity that is 

not a party to the dispute. The 

Miscellaneous Receipts Act provides 

that Government officials ‘‘receiving 

money for the Government from any 

source shall deposit that money with 

the Treasury.’’ See 31 U.S.C. 3302(b). 

‘‘Receiving money for the Government’’ 

includes the ‘‘constructive receipt’’ of 

money ‘‘if a federal agency could have 

accepted possession and retains 

discretion to direct the use of the 

money.’’ See Effect of 31 U.S.C. 484 on 

the Settlement Authority of the Attorney 

General, 4B Op. O.L.C. 684, 688 (1980). 

This rule thus similarly forbids 

circumvention of the policy reflected in 

this statute via the use of in-kind 

payments. 


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