Changes to Tax Treatment of Qualified Transportation Fringe Benefits Under the Tax Cuts and Jobs Act

The Tax Cuts and Jobs Act (TCJA) made many changes to the way employers and employees treat certain benefits provided by employers to employees, including tax treatments of qualified transportation fringe benefits (QTFB). In this article, we provide a general overview of some common QTFB and the changes to the tax treatment of these QTFB by employers and employees.

Overview

Before the passage of TCJA, under Internal Revenue Code (I.R.C.) § 132(f) and I.R.C. § 274, subject to certain caps, employers were allowed to deduct the costs associated with qualified QTFB, including the provision of transit passes, qualified parking, and transportation in a commuter highway vehicle, whether paid directly, reimbursed, or taken through salary reduction arrangements, and employees were allowed to elect to take a pre-tax salary deduction and/or exclude from income employer-provided transit passes, qualified parking, transportation in a commuter highway vehicle, or qualified bicycle commuting reimbursements.

TCJA repealed the ability of employers to deduct QTFB costs after December 31, 2017 through December 31, 2025. This includes the employer deduction for QTFB that are paid for by means of a salary reduction arrangement whereby the employee voluntarily elects to reduce his or her taxable compensation in exchange for the tax-free QTFB. Employers may still deduct expenses incurred that are necessary to ensure the safety of employees (e.g., late-night transportation) and business travel expenses. Employers may also deduct qualified bicycle commuting reimbursements made to employees.

QTFB, other than qualified bicycle commuting reimbursements, may still be excluded from employee taxable income. See TCJA §§ 11047, 13304; Publication 15-B, Employer’s Tax Guide to Fringe Benefits.

What are QTFB?

QTFB include (1) transportation in a commuter highway vehicle; (2) transit passes, (3) qualified parking, and (4) qualified bicycle commuting reimbursements. I.R.C. § 132(f); CFR § 1.132-9. An employer may simultaneously provide an employee with any one or more of the first three categories of QTFB.

  1. Transportation in a Commuter Highway Vehicle. The term “commuter highway vehicle” means any highway vehicle.
    1. The seating capacity of which is at least 6 adults (not including the driver), and
    2. At least 80% of the mileage use of which can reasonably be expected to be:
      1. For purposes of transporting employees in connection with travel between their residences and their place of employment, and
      2. On trips during which the number of employees transported for such purposes is at least ½ of the adult seating capacity of such vehicle (not including the driver).
  2. Transit Passes. A transit pass is any pass, token, farecard, voucher, or similar item entitling a person to ride, free of charge or at a reduced rate, on one of the following:
    1. Publicly or privately operated mass transit, including bus, rail, or ferry;
    2. In a vehicle that seats at least 6 adults (not including the driver) if a person in the business of transporting persons for pay or hire operates it.
  3. Qualified Parking. Qualified parking includes parking an employer provides to its employees:
    1. On or near the employer’s business;
    2. Near the location from which employees commute to work using mass transit, commuter highway vehicles, or carpools.
    3. Qualified parking does not include parking at or near employees’ homes.
  4. Qualified bicycle commuting reimbursement. Qualified bicycle commuting reimbursement includes reasonable expenses incurred by an employee for the purchase of a bicycle and bicycle improvements, repair, and storage, if such bicycle is regularly used for travel between the employee’s residence and place of employment. I.R.C. § 132(f)(5)(F)(i).2.

How to Provide QTFB to Employees.

Employers may provide QTFB to employees directly, through a bona fide reimbursement arrangement, or a compensation reduction agreement.

  1. Bona Fide Reimbursement Program.
    1. Employee must incur and substantiate expense. A bona fide reimbursement arrangement requires that the employee incur and substantiate expenses for qualified transportation benefits before reimbursement.
    2. Reimbursement for transit passes only allowed if voucher or equivalent is unavailable to the employer. Cash reimbursements for transit passes qualify only if a voucher or a similar item that the employee can exchange only for a transit pass is not readily available for direct distribution by the employer to its employees. A voucher is readily available for direct distribution only if an employer can obtain it from a voucher provider that does not impose fare media charges or other restrictions that effectively prevent the employer from obtaining vouchers. See CFR § 1.132-9(b)(Q&A 16–19).
  2. Compensation reduction agreements. A compensation reduction agreement is a way to provide qualified transportation benefits on a pre-tax basis by offering employees a choice between cash compensation and any qualified transportation benefit. A compensation reduction arrangement can be used with a bona fide reimbursement arrangement. For each month, the amount of the compensation reduction cannot exceed the monthly limits QTFB. For more information about providing QTFB under a compensation reduction agreement, see Regulations section 1.132-9(b)(Q&A 11– 15).

Caps on QTFB.

  1. Commuter Highway Vehicle Transportation. For 2018, the monthly exclusion for commuter highway vehicle transportation and/or transit passes is $260. See Publication 15-B. This monthly exclusion may be combined with the qualified parking exclusion, for a total monthly exclusion of $520.
  2. Transit Passes. For 2018, the monthly exclusion for commuter highway vehicle transportation and transit passes and/or commuter highway vehicle transportation is $260. See Publication 15-B. This monthly exclusion may be combined with the qualified parking exclusion, for a total monthly exclusion of $520.
  3. Qualified Parking. For 2018, the monthly exclusion for qualified parking is $260. See Publication 15-B. This monthly exclusion may be combined with the commuter highway vehicle transportation and/or transit pass exclusion(s), for a total monthly exclusion of $520.
  4. Qualified Bicycle Commuting. The deduction for qualified bicycling commuting reimbursement is $20 multiplied by the number of qualified bicycle commuting months. I.R.C. § 132(f)(5)(F)(ii). A qualified bicycle commuting month is a month in which the employee:
    1. Regularly uses the bicycle for a substantial portion of the travel between the employee’s residence and place of employment, and
    2. Does not receive any benefit for the other QTFB (commuter highway vehicle transportation, transit passes, or qualified parking).

I.R.C. § 132(f)(5)(F)(iii).