(Last Updated on 1/3/2020)

 

Qualified transportation fringe benefits (Section 132(f) of the Internal Revenue Code) or “Commuter Tax Benefits” are like money in the bank. Employers save on payroll related taxes. Employees save on federal income taxes.

According to IRS, the Qualified Transportation Fringe Benefit limit will increase from $265 per month to $270 per month in 2020. For taxable years beginning in 2020, the monthly limitation under § 132(f)(2)(A) regarding the aggregate fringe benefit exclusion amount for transportation in a commuter highway vehicle and any transit pass is $270. The monthly limitation under § 132(f)(2)(B) regarding the fringe benefit exclusion amount for qualified parking is $270.

Source: Revenue Procedure 2019-44 https://www.irs.gov/pub/irs-drop/rp-19-44.pdf

Qualified bicycle commuting reimbursements, previously allowed up to $240 per year prior to 2018, remains ineligible in 2020 as a tax-free benefit.  Employers may continue to provide the bicycle benefit as a taxable benefit.

In late 2018, the IRS issued two notices (Notice 2018-99 and  Notice 2018-100) that provided interim guidance with respect to the new treatment of qualified transportation fringe benefits following the changes made by the Tax Cuts and Jobs Act (TCJA). The TCJA required parking provided by an employer to be treated either as a non-deductible expense by the employer (or as unrelated business income tax (UBIT) in the case of a tax exempt employer) or as taxable income by the employee. The interim guidance seeks to address certain concerns expressed by tax-exempt organizations regarding the penalties associated with failure to pay quarterly estimated taxes in 2018 in connection with the new tax treatment of qualified transportation fringe benefits.

Notice 2018-99 provides interim guidance with respect to the calculation of parking expenses for qualified transportation fringes that are now nondeductible under Internal Revenue Code Section 274(a)(4) (the “disallowance”). Notice 2018-100, which provides a waiver for certain tax-exempt organizations for the underpayment of estimated income tax payments resulting from the changes to the tax treatment of qualified transportation fringes.

However, the UBIT tax on qualified transportation fringe benefits for non-profit organizations was repealed on December 20, 2019.  H. R. 1865 Further Consolidated Appropriations Act, 2020 (the “Act”) was signed into law as part of a spending bill to fund the government through September 2020. The Act repeals the “qualified transportation fringe benefits tax” paid by tax exempt employers.The Act repeals Section 512(a)(7) of the Internal Revenue Code of 1986 which was passed as part of the 2017 Tax Cuts and Jobs Act. (TCJA). TCJA made qualified transportation fringe benefits (QTFB) such as parking, transit, and commute highway vehicles (e.g., vanpool) provided by nonprofit employers subject to the Unrelated Business Income Tax (UBIT). This UBIT tax on was based QTFB expenditures rather than income. QTFB remained tax free for the employee. Non-profit employers were required to pay a 21% tax on QTFB provided to their employees, even those employees who paid for parking, transit, or commuter highway vehicle costs through pretax salary reduction. As a result, nonprofit employers faced larger UBIT tax bills beginning in 2018. However, the Taxpayer Certainty and Disaster Tax Relief Act repealed Section 512(a)(7) retroactively so those nonprofit organizations that have already paid the tax may seek a refund of the taxes paid in the future (pending guidance from IRS).

Please consult your tax professional for guidance in complying with the TCJA requirements and the subsequent guidance.

Employers that subsidize at least $30 per month for transit or vanpool fares may meet the National Standard of Excellence and qualify for designation under  Best Workplaces for Commuters.

 

Qualified Transportation Fringe Benefits

 
Category Transit Commuter Highway Vehicle (e.g., vanpool) Qualified Parking Qualified Bicycle Commuting Reimbursement
Incentive Levels Up to $270/month* for transit expenses Up to $270/month* for commute trip in a vehicle with a seating capacity of at least six adults (excluding the driver), with at least 80 percent of the vehicle’s mileage for a year is reasonably expected to be for commuting and on trips during which the number of employees transported for commuting is at least one-half of the seating capacity of the vehicle (excluding the driver) Up to $270/month** for parking at or near an employer’s worksite, or at a facility from which employee commutes via transit, vanpool, or carpool Qualified Bicycle Commuting Benefit remains ineligible as a tax free benefit.
Employer Employers may give their employees up to $270/month for transit vouchers, commuter highway vehicle fares and/or commuter parking fees.

 

Change in 2019: Private sector employers are no longer able to deduct the tax-free qualified transportation fringe benefit payments to employees as a business expense. Only if an employer treats the qualified transportation fringe benefits as taxable W-2 wages to the employee, then an employer can deduct the expenses of providing those benefits.

Qualified Bicycle Commuting Benefit remains ineligible as a tax free benefit.
Employers may allow employees to use up to $270 per month in pre-tax income to pay for transit vouchers, commuter highway vehicle fares and/or parking fees.

 

Employers may reduce their payroll tax contribution of the pre-tax income used by employees to pay for transit vouchers, commuter highway vehicle fares and/or parking fees.

Employee Most employees may receive up to $270/month for purchase of transit vouchers, commuter highway vehicle fares and/or parking fees from his or her employer. This subsidy value will not appear on their W-2 form as income. Qualified Bicycle Commuting Benefit remains ineligible as a tax free benefit.
Employee pays for commute benefit with the pre-tax income up to the $270/month statutory limit and receives more after-tax spendable income.
Employee may combine the pre-tax benefit with employer subsidies up to $270/month for each to pay for transit vouchers, commuter highway vehicle fares and/or parking fees.

* tax free transit and vanpool benefit limit increased from $265 per month in 2019.  It was raised to $270 per month for beginning January 1, 2020.

** tax free parking benefit limit increases from $265 per month in 2019 to $270 per month beginning January 1, 2020.

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