The new Tax Cuts and Jobs Act (TCJA) eliminates some deductions that have been staples of businesses for years.
Case in point: The TCJA repeals the employer deduction for providing transportation fringe benefits, although the perks presumably will remain tax-free to employees if they are still offered.
The Way It Was: Three Eligible Benefits
Under the previous law, employers could deduct expenses for certain transportation fringe benefits. There are three main types of fringe benefits that employers were allowed to provide, either individually or in any combination.
1. Mass transit passes. This category includes: Any pass, token, fare card, voucher or similar item, entitling a person to ride free or at a reduced rate on mass transit or in a vehicle seating at least six passengers, if a person in the business of transporting for pay or hire operates it. Mass transit may be publicly or privately operated and includes transportation by bus, rail or ferry.
2. Commuter highway vehicle expenses. These are vehicles that carry at least six passengers. There must be a reasonable expectation that at least 80% of the vehicle mileage will be for transporting employees between their homes and workplaces and employees must occupy at least 50% of the vehicle’s passenger seats.
A tax-free arrangement may involve van pooling in one of the following forms:
- Employer-operated van pools. The employer either purchases or leases vans so employees may commute together to work, or the employer contracts with and pays a third party to provide the vans, and pays some or all of the costs of operating the vans.
- Employee-operated van pools. In this arrangement, employees independently operate a van for commuting purposes.
- Privately or publicly operated van pools. The arrangement qualifies if the van seats at least six passengers, but the “80/50 rule” (see above) doesn’t have to be met.
3. Qualified parking fees. This benefit features employer-provided parking for employees on or near the workplace. It also covers fees for parking on or near the location from which employees commute using mass transit, commuter highway vehicles or carpools (for example, the parking lot for a train station). However, it doesn’t extend to parking at or near the employee’s home.
The Protecting Americans from Tax Hikes (PATH) Act, eventually placed these three fringe benefits on an equal footing with a maximum exclusion of $250 per month. The PATH Act also provided inflation indexing in future years. For 2017, the maximum that could be excluded by employees was increased to $255 a month, and for 2018, it increases to $260 a month.
Qualified transportation benefits may be provided directly by an employer or through a bona fide reimbursement arrangement. However, cash reimbursements for transit passes qualify only if a voucher or a similar item isn’t readily available for direct distribution by the employer.
The Way It Is Going Forward: Changes
The TCJA includes significant changes for the deduction of transportation fringe benefits. No deduction is allowed for the expense of a qualified transportation fringe benefit an employer provides. However, the law generally doesn’t address the tax-free treatment afforded to employees receiving the benefits (see box below, Bicycling Benefit Comes to Screeching Halt). As a result, the benefits appear to remain tax-free for now.
Moreover, an employer can’t deduct any expense incurred for providing transportation — or any payment or reimbursement — to its employees. In other words, you can’t circumvent the crackdown by simply reimbursing employees for their commuting costs.
Key exception: The ban on deductions doesn’t apply to payments made for an employee’s safety. The IRS will likely flesh out this exception in new guidance, but existing regulations point to two possible scenarios:
1. An employer pays for an employee’s transportation home when they work late at night and it’s not safe to ride on public transportation, and
2. The employer provides employees with special vehicles (for example, armored cars) or chauffeurs for safety reasons.
Rethinking Benefits Packages
As a result of the changes under the TCJA, an employer may want to rethink its fringe benefit package for employees. Although the rules can’t be circumvented through reimbursements or similar payments, additional wages can help make up the shortfall for employees, taking into account that wages are taxable to recipients. Consider the best approach for your company under the new law.
Bicycling Benefit Comes to Screeching Halt
Now the Tax Cuts and Jobs Act bars employers from deducting bicycling benefits and eliminates the corresponding tax exclusion for employees (unlike the three main transportation benefits for which only the employer deductions are specifically eliminated).
These changes take effect in 2018, but sunset after 2025.
Before the law change, an employer could provide a tax-free fringe benefit to cyclists who rode their bikes to and from work. The maximum monthly allowance of $20 a month could be used to pay for reasonable expenses such as the cost of a bike, repairs, improvements and storage. However, this bicycling benefit couldn’t be offered in conjunction with any other transportation fringe benefit.
