The way transportation costs are reimbursed and taxed has changed in the past few years. With the passing of the Tax Cuts and Jobs Act (TCJA) back in 2017, it repealed most fringe transportation benefits tax-free for employees and tax-deductible for employers.
Compared to other parts of the TCJA, these fringe benefits are gone forever unless a future administration passes new legislation. However, while tax deductions relating to fringe transportation benefits have fallen by the wayside, you still have various claimable travel expenses.
So, where does this leave businesses and employees regarding transportation benefits and transportation tax costs?
Factoring in transportation tax costings is essential for employers and employees alike come tax season. But due to relatively recent changes imposed by the TCJA, transportation expenses need more clarity.
Firstly, the definition of a “transportation expense” is a specific cost incurred by an employee or self-employed taxpayer when traveling for business purposes. Specifically, transportation expenses are a subset of travel expenses.
These include fuel, parking, lodging, meals, tips, cleaning, and taxi fares. Typically, these incurred costs are reimbursed through the employer, who will then claim a deduction.
Some transportation costs may be tax deductible via an employee’s tax return. However, transportation tax costs are subject to various rules and restrictions.
Notably, ordinary commuting costs are explicitly excluded as tax-deductible expenses, but some companies may offer reimbursement as a workplace benefit.
Transportation expenses may be incurred when an employee travels for business, such as to an international business conference or a temporary worksite.
No federal law exists mandating reimbursement. However, since the IRS allows employers transportation tax deductions on a range of travel expenses, it makes sense to pass these savings to employees from a practical standpoint.
However, employers must also make themselves aware of state laws. For example, California’s Labor Code Section 2802 requires employers to reimburse their employees for various transportation expenses, including vehicles, mileage, and vehicle wear and tear by law.
As always, taxpayers must keep itemized records of their costs, such as taxable meal expenses covered by the Department of Transportation rules. These records are necessary to make a claim via a supervisor or fill out your tax return.
You may only use your transportation tax allowances when the expenditure relates directly to the primary business and its activities.
For example, if a contractor within the construction business must travel between one or more worksites while away from home, they could claim a transportation tax expense.
Likewise, if a traveler has no permanent workplace but mainly operates within a defined work area, such as a central metropolitan area, they may claim a transportation expense. However, these transportation costs could not be claimed as a tax expense if the travel was not wholly for business purposes or the trip never happened.
In these cases, claiming a transportation cost would be viewed as a form of tax fraud, which could lead to severe transportation tax fees, a criminal record, and even a jail term in egregious situations.
According to IRS Topic No. 511, expenses must be ordinary and necessary for traveling away from home for business purposes. You cannot deduct anything that would be viewed as extravagant or lavish. Also, you cannot claim anything for personal reasons.
For example, if you traveled to an international business meeting, you could not make deductions for souvenirs you brought back to the office because this would be a personal expense.
So, what is the definition of traveling away from home?
The IRS states that you are traveling away from home if your role requires you to be away from the area of your tax home for longer than a typical day of work. This length of time must be significant.
For example, if you were working a 30-minute drive away in the next town over, you could not claim hotel expenses since you are still within commuting distance from your tax home. However, your employer may choose to reimburse you regardless of the situation.
This example brings us to the important concept of your tax home when considering whether something would qualify as a transportation tax expense.
Your tax home is the entire city or general area of your work. It has nothing to do with where you reside.
To illustrate how a tax home works for expense purposes, follow this example:
Employee A works in Buffalo, New York, during the working week. However, their family home is located in New York City.
The IRS would consider Buffalo to be Employee A’s tax home, meaning they cannot claim a tax deduction for hotels and meals while working in Buffalo. If Employee A returned to New York City every weekend, they would be unable to claim travel costs because the purpose of going to New York City has nothing to do with their work. An employer may still cover such expenses as a job perk, but no law requires this.
But what if Employee A works in multiple locations as a consultant?
In the case of Employee A working in various locations, the IRS would classify their tax home as the primary location of their business, such as where they spend the most time. Factors determining a tax home include:
In the above example, Employee A has a permanent job in Buffalo, meaning this is their tax home.
For argument’s sake, Employee A is part of a company that has landed a significant contract requiring a nine-month work assignment in Chicago. How would this impact their tax situation?
The IRS allows transportation deductions for expenses incurred because of temporary work assignments. Current regulations state that any work assignment lasting one year or less is temporary. Any project lasting more than a year would be considered indefinite.
Another complication exists that can make filing your taxes more complicated. A temporary work assignment is only temporary if the employee reasonably expects to work there for less than a year, regardless of what happens.
If you anticipate working in a location for two years and the project ends after six months, technically speaking, all travel expenses would remain non-tax deductible.
The IRS lists various eligible costs for travel and transportation, including:
If you have concerns about whether an expense is legitimately tax-deductible, contact your accountant for further guidance.
Determining the average cost of the tax on transportation expenses will help you to figure out how much of a refund you can expect this year. Unfortunately, this is an enormously complex area, and making an error could lead to repaying a hefty amount of money.
Contacting a professional tax advisor is the best way to know where you stand, especially for businesses offering fringe benefits like mass transit passes. To learn more about the tax implications for your business, contact Porte Brown for an in-depth consultation now.
Get in touch today and find out how we can help you meet your objectives.
