Although telecommuting is more popular than ever, plenty of employees still have to make a, shall we say, terrestrial commute to work every day. Many employers have long offered transportation fringe benefits to help out these intrepid travelers and enjoyed a tax deduction for doing so. However, with the passage of the Tax Cuts and Jobs Act (TCJA) late last year, you may want to reconsider providing such benefits.
The rules before
Under previous law, employers could deduct expenses for certain transportation fringe benefits, and the benefits would also be excluded from the employee’s taxable income. Generally, this applied to three main types of fringe benefits, either individually or in any combination:
Of course, various rules and limits applied.
For employees, the Protecting Americans from Tax Hikes (PATH) Act of 2015 eventually placed these three fringe benefits on an equal footing with a maximum exclusion of $250 per month (indexed for inflation). So, for example, in 2018 an employee can exclude $260 a month in transportation fringe benefits.
The TCJA doesn’t address this tax-free treatment afforded to employees receiving such benefits, so it presumably still stands. But, for employers, the law significantly changes the tax rules beginning in 2018.
For the most part, no deduction is allowed for the expense of providing a qualified transportation fringe benefit. This includes any payment or reimbursement to employees. In other words, you can’t circumvent the restriction by simply reimbursing employees for their commuting costs.
Key exception: Transportation payments made for an employee’s safety may still be deductible. 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 he or she works late at night and it’s not safe to take public transportation.
2. The employer provides employees with special vehicles (for example, armored cars) or chauffeurs for safety reasons.
Because of the changes under the TCJA, you may want to rethink your approach to transportation fringe benefits. Give us a call for help determining how the tax rules apply to your organization and what steps make the most sense for you and your employees.