Prior to 2018, it was commonplace for employers to provide qualified transportation fringe benefit plans, in part, to pay for or reimburse employees for costs associated with transit passes, commuter highway vehicles, carpools, or qualified parking. The benefit was not taxable to the employee and was deductible by the employer.
However, pursuant to the Tax Cuts and Jobs Act (TCJA), the employer deduction is no longer allowed effective 2018. The TCJA (formally called the “Act to provide for reconciliation pursuant to Titles II and V of the concurrent resolution on the budget for fiscal year 2018”), amended Internal Revenue Code Section 274 to deny any deduction for “the expense of any qualified transportation fringe (as defined in Code Section 132(f)) provided to an employee of the taxpayer”. See Code Section 274(a)(4). It also added Code Section 274(f) which specifically states:
No deduction shall be allowed under this chapter for any expense incurred for providing any transportation, or any payment or reimbursement, to an employee of the taxpayer in connection with travel between the employee’s residence and place of employment, except as necessary for ensuring the safety of the employee.
Moreover, Publication 15-B for 2018: Employer’s Tax Guide to Fringe Benefits confirms that no deduction is allowed for qualified transportation benefits incurred or paid after December 31, 2017, whether provided directly by the employer, through a bona fide reimbursement arrangement, or through a compensation reduction agreement. This prohibition on deductions includes any expense incurred for providing any transportation, or paying or reimbursing employees, for travel between the employees’ home and work (except for safety reasons). However, any such employer payments may be excluded from the employees’ wages.
Clearly, employers who had been subsidizing parking and transportation related expenses will no longer be able to deduct those expenses. Some commentary contemplates that by making such benefits taxable to the employee, possibly the employer would be allowed to deduct the expenses. Code Section 274(e)(2) does create an exception to Code 274(a)’s no deduction rule for expenses treated as compensation; however, this provision within Code Section 274(e) only applies to entertainment, amusement, or recreation… it was not amended to include transportation. Further guidance on this would be appreciated.
While some employers will continue to provide transportation fringe benefits to remain competitive, others are scaling back to eliminate subsidized parking and/or requiring employees to pay such expenses on a pre-tax basis through a qualifying transportation expense reimbursement arrangement.
Other Fringe Benefits
TCJA affects other fringe benefits as well. Subject to certain requirements and exceptions, effective 2018, deductions are generally eliminated for on-site premises athletic facilities; club dues and membership; entertainment, amusement and recreation; meals, food and beverages; and moving expenses.
Finally, tax-exempt entities are also affected as they will now be taxed on the value of the transportation fringe benefits (either payment towards the benefit or the cost of an employer owned parking facility) by treating funds used to pay for these benefits as unrelated taxable income.
As mentioned above, the TCJA amended the employer deduction rules under Code Section 274 pertaining to the deduction of certain expenses for entertainment, amusement, or recreation and certain membership dues. While the elimination of the employer deduction for these expenses does not directly impact an exempt organization, the TCJA also amended Code Section 512(a) to provide that an exempt organization’s unrelated business taxable income is increased by any amount for which a deduction is not allowable under Code Section 274 and which is paid or incurred by the organization for any qualified transportation fringe (as defined in Code Section 132(f)), any parking facility used in connection with qualifying parking (as defined in Code Section 132(f)(5)(C), or any on-premises athletic facility (as defined in Code Section(j)(4)(B)). Accordingly, beginning in 2018, the amount an exempt organization pays for qualified transportation fringes, qualified parking, or on-premise athletic facilities will give rise to unrelated business taxable income.
Feel free to contact us for questions or further information on how the TCJA affects you and your business.
Elizabeth H. Latchana specializes in employee health and welfare benefits. Recognized for her outstanding legal work, she was selected as the 2015 “Lawyer of the Year” in Lansing for Employee Benefits (ERISA) Law by Best Lawyers. Contact her for more information on this reminder or other matters at 517.377.0826 or firstname.lastname@example.org.
Samantha A. Kopacz focuses her practice on emloyee health and welfare benefits, including ERISA, HIPAA, PPACA, COBRA, IRC, and other federal laws. Contact her for more information on this reminder or other matters at 517.377.0868 or email@example.com.