If all or part of your workforce is once again commuting to the office or worksite, employees may want to take advantage of certain transportation fringe benefits. In the past, such benefits were tax-free to employees and deductible by employers, within certain monthly limits. But the Tax Cuts and Jobs Act (TCJA) generally eliminated the deduction for employers and established other special rules for tax-exempt organizations, effective in 2018. Unlike some other TCJA changes, the repeal is permanent.
However, your company may continue to offer this perk — so long as you follow the rules. Let's take a look.
Currently, there are three main types of transportation benefits that fit the statutory definition of a "tax-free fringe benefit." You may provide one or a combination of these to employees.
1. Mass transit passes. According to the IRS, this category includes any pass, token, fare card, voucher or similar item. The pass must entitle someone to ride free of charge or at a reduced rate on mass transit or in a professionally driven vehicle seating at least six adults (not including the driver). Mass transit may be operated publicly or privately and includes transportation by bus, rail or ferry.
2. Commuter highway vehicle expenses. A commuter highway vehicle seats at least six adults (not including the driver). At least 80% of the vehicle mileage should be for transporting employees between their homes and workplaces, and employees must occupy at least 50% of the vehicle's seats (not including the driver's seat).
A tax-free arrangement may involve several forms of van pooling. For example, your company might purchase or lease vans so employees may commute together to work. Or you might contract with a third party to provide the vans and pay some or all of the costs of operating them.
Employee-operated van pools are also allowed. With this arrangement, employees independently operate a van for commuting purposes. Alternatively, a van pool can be operated either privately or publicly. The arrangement qualifies if the van seats at least six adults (excluding the driver), but the "80/50 rule" doesn't have to be met.
3. Qualified parking fees. This benefit allows employer-provided parking for employees on or near the business premises. It also covers fees for parking on or near the location from which employees commute to work using mass transit, commuter highway vehicles or carpools (for example, at the parking lot of a train station). However, the benefit doesn't extend to parking at or near an employee's home.
Generally, an employer may use any reasonable method for determining nondeductible parking expenses. But you should discuss your company's arrangement with a professional advisor.
Transportation benefits may be provided tax-free so long as they don't exceed prescribed monthly limits. However, these rules have changed several times in recent years, so it's important to know that you're working with the latest guidelines.
Under prior law, for a period of time the monthly tax exclusion amount for parking fees was roughly double the amount allowed for mass transit fees and commuter highway vehicles. The Protecting Americans From Tax Hikes (PATH) Act eventually placed the three forms of transportation benefits on an equal footing by establishing a maximum exclusion of $250 per month (as well as authorizing inflation indexing of the monthly limit).
Recently, the IRS announced that for 2022, the exclusion is $280 per month for the three transportation fringe benefits. There's no overall limit on the number of participants who are eligible.
Besides the three main transportation fringe benefits, employers may offer reimbursements to employees who use bicycles to commute. But the rules for this benefit are slightly different.
Under the TCJA, you can continue to deduct reimbursements of qualified bicycle expenses as business expenses, but the tax exclusion for employees has been eliminated. These changes apply to amounts paid or incurred from 2018 through 2025.
Previously, the maximum monthly allowance of $20 (for a $240 annual limit) could be used to pay for reasonable expenses, such as the cost of a bike, repairs, improvements and storage. However, this bicycling benefit wasn't available in conjunction with any other transportation fringe benefit. Note that under the TCJA, there's no dollar limit on deductible reimbursements for bicycle expenses.
Whether you've long offered transportation benefits or are just now introducing them, be sure to consider both the tax and non-tax implications of providing them. Rely on your professional tax and benefits advisors for advice.
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