Some employees who have been working remotely since the start of the COVID-19 pandemic are being encouraged — or even ordered — to return to the office, at least for part of their workweek. Employees may need an extra nudge. One way to make the situation a little more palatable for those resisting a return to the office is to offer transportation fringe benefits. If certain requirements are met, benefits paid within the stated monthly limits are tax-exempt to employees and tax-deductible by employers.
Typically, only statutory fringe benefits qualify for tax-free treatment. Three main types of transportation benefits fit this mold:
1. Mass transit passes. A transit pass includes any pass, token, fare card, voucher or similar item entitling someone to ride free of charge or at a reduced rate on mass transit or in a vehicle seating at least six adults (not including the driver) if a professional driver is paid to operate it. Mass transit may be operated publicly or privately and includes transportation by bus, rail and ferry.
2. Commuter highway vehicle expenses. A commuter highway vehicle is any highway vehicle that seats at least six adults (not counting the driver). At least 80% of the vehicle mileage should generally be attributable to transporting employees between their homes and workplaces. Employees must occupy at least 50% of the vehicle's seats (not counting the driver's seat).
A tax-free arrangement may involve van pooling in the form of an employer-operated van pool. Here, your organization either purchases or leases vans so employees may commute together to work. Or you may contract with and pay a third party to provide the vans and pay some or all of the costs of operating the vans.
Another option is an employee-operated van pool. With this arrangement, employees independently operate a van for commuting purposes. A private or publicly operated van pool also qualifies if the van seats at least six adults (excluding the driver). However, the 80%/50% rule previously described doesn't need to be met.
3. Qualified parking fees. Employers may provide parking for employees on or near the business premises or near the location from which employees commute using mass transit, commuter highway vehicles or carpools. For example, your company might reimburse employees for parking fees paid at a train station. However, this tax break doesn't extend to parking at or near employees' homes.
Mass transportation benefits qualify for tax exemption up to the amount of prescribed monthly limits — and any excess is taxable. Before recent tax law changes, the monthly tax exclusion for parking fees was roughly double the amount allowed for mass transit fees and commuter highway vehicles. However, the Protecting Americans from Tax Hikes (PATH) Act of 2015 effectively placed these three fringe benefits on the same footing by establishing a maximum exclusion of $250 per month. The PATH Act also authorized inflation indexing of the monthly limit.
For 2024, the maximum monthly exclusion is $315 (up from $300 in 2023). So, for example, you can reimburse an employee tax-free for up to $3,780 in parking fees ($315 times 12) in 2024. The entire $3,780 reimbursement is tax deductible.
Besides the three main transportation fringe benefits, employers may offer reimbursements to employees who use bicycles to commute to and from work. But the rules for this benefit have taken a turn recently.
Under the Tax Cuts and Jobs Act, employers can still deduct reimbursements of qualified bicycle expenses as business expenses — and there's no dollar limit on the deduction. But the tax exclusion for employees is eliminated. Currently, these changes apply to amounts paid or incurred from 2018 through 2025.
Previously, the maximum monthly allowance of $20 (with a maximum of $240 for the entire year) could be used to pay for reasonable expenses, such as the cost of a bike, repairs, upgrades and storage. However, this bicycling benefit wasn't available in conjunction with any other transportation fringe benefit.
Rules for tax-exempt and deductible transportation benefits are subject to change. For example, benefits for bicycle commutes are likely to become more generous in the future as the federal government pursues sustainable energy options. In the meantime, contact your professional tax advisor with any questions about the tax treatment of transportation benefits under current law.
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