Employer transportation benefits in the United States
An employer in the United States may provide transportation benefits to their employees that are tax free up to a certain limit. Under the U.S. Internal Revenue Code section 132, the qualified transportation benefits are one of the eight types of statutory employee benefits that are excluded from gross income in calculating federal income tax. The qualified transportation benefits are transit passes, vanpooling, bicycling, and parking associated with these things.
Commuting expenses in general are not excluded from taxable compensation in US tax law. The goal of making the specific benefits described above nontaxable is to encourage forms of commuting that reduce road congestion and pollution.
Overview
Tax-free commuter benefits, also known as qualified transportation fringes, are employer provided voluntary benefit programs that allow employees to reduce their monthly commuting expenses for transit, vanpooling, bicycling, and work-related parking costs. The benefit is a federal tax benefit authorized under the Internal Revenue Code Section 132, Qualified Transportation Fringes. Monies used for these eligible expenses are excludable from gross income subject to federal taxes. Many states also exclude these monies from state and local taxes.Established in 1993 as part of the federal tax code section 132, commuter benefits were meant to provide tax incentives to employees to encourage their use of mass transportation, with the goal of reducing traffic congestion and improving air quality. The law provides for monthly caps on the amount that can be excluded from gross income and is therefore not taxed.
Eligible transit benefits include expenses the employer pays associated with employees using any public or privately operated transit service. One allowable form of transit benefit is providing employees with transit passes, including farecards, tokens, vouchers, or passes which entitle a person to the use of a transit service or to purchase a transit pass. The employer can also use cash reimbursement in certain circumstances where a voucher or similar instrument is not "readily available" as defined by statute. However, cash reimbursement must be supported by a "bona fide reimbursement system" which includes either receipts or a certification for the type of expense.
Vanpooling is an eligible benefit as long as the vanpool meets certain requirements, including that 80% of the mileage must be for the transport of employees to and from the place of work, and that the seating capacity must be for six employees plus the driver and at least half of the seats are used. Vanpools can be operated either directly or indirectly by the employer or arranged by the employee for the purpose of commuting.
Commuter parking is defined as parking at or near the workplace or at a location from which an employee commutes to work by transit, vanpool or carpool. In addition, parking which is for residential purposes is excluded.
The parking benefit is the only carpool related benefit in the statute.
Under current U.S. tax law, commuter benefits are tax-free to employees only through an employer. An employee cannot directly take advantage of these tax benefits by, for example, taking a tax deduction or a credit on that person's individual tax return. Depending on the level of employer, options for commuter benefits may include:
- An employer-financed tax-free fringe benefit by which a company pays directly for the cost of an employee's use of public transportation or parking, with the value of such benefit not reported as part of the employee's gross income.
- An employee financed commuter benefit in which an employee designates a portion of salary before taxes to pay for qualified transit, vanpooling, or parking expenses.
- A combination of the previous two options in which a portion of the benefit is funded through a tax-free fringe, with the remainder funded with pretax income of the employee, provided the aggregate does not exceed the monthly statutory limits.
Significant tax savings are available through commuter benefits programs for both employers and employees. If offered as a pretax benefit, employees save on their federal payroll taxes because the amount designated by the employee is deducted from their gross income, and employers save because they are not required to pay payroll taxes on such deducted amount. And for employees who are subject to state and local taxes that recognize pretax benefits, their savings can be even greater. Employers who provide the benefit as a tax-free fringe benefit save on payroll taxes because the employer does not need to include the amount of the fringe benefit in the employee's gross income. Normally, the amount of any fringe benefit provided to employees must be included in the employee's gross income, but qualified transportation fringe benefits provided under section 132 are excluded from this requirement.
History
Prior to 1984, the IRS treated free employee parking, provided by an employer, as a tax-free fringe benefit regardless of the value of the parking. There was no tax-free benefit for transit commuting. This parking subsidy served as an incentive, in some cases a significant incentive, to drive to work even in areas where there was a good transit alternative. Many believed that such subsidies contributed to the growing congestion on the highways. In one study conducted in the New York City metro area, as many as 64% of the solo drivers commuting into Manhattan, an area well served by transit, were receiving a parking subsidy. The parking exemption was codified into law as part of the Deficit Reduction Act of 1984 when it was part of a new category of "working condition fringe benefits." Normally these kinds of fringe benefits referred to things that an employer provided, but would be tax-deductible if paid for by the employee. The cost of parking, however, could not be deducted by employees and so employer-paid parking did not fit this definition; nonetheless, an exemption for employer-paid parking was carved out.The same 1984 law sought to redress the unintended consequences of tax-free employer-provided parking by creating a federal tax incentive for transit that employers could offer to employees. In response to a congressional request contained in that law, the IRS agreed to allow employers to provide a $15 monthly transit fringe benefit to employees. in New York was created by the area transit agencies working with local governments and the business community, and funded by the federal government, to create a program to sell this benefit to employers as one way to reduce congestion.
In 1993, as a result of the success of the program that was called and the increasing cost of transit commuting expenses, a new section of the Internal Revenue Code was enacted to consolidate employer provided tax benefits for commuting under a single statutory provision and to expand incentives for transit and vanpooling. This new provision, section 132, increased the monthly cap for transit and vanpooling to $60 a month, limited the parking benefit to $155 a month and added an annual index that increased the monthly caps in $5 increments as the cost of living increased. However, the tax free benefits were limited to employer paid benefits until 1998 when the Internal Revenue Code was further expanded to permit as an alternative pretax or employee financed commuter benefits. The current commuter benefit program is a consequence of these changes.
One other major change in the interpretation of the commuter benefit law occurred in late 2006 concerning the growing use of debit cards for transit benefits, an issue not addressed in the statute or in previous regulations. In response to the growing use of debit and credit cards for purchases for transit passes, the IRS issued a new set of guidelines to take effect beginning January 1, 2010. The new ruling states that a debit card used to provide transit benefits must be restricted for use only at those points of sale where only transit fare media, tickets, and passes are sold to qualify as self-substantiating so that they could be categorized as transit passes. Debit cards that are not terminal limited are considered cash reimbursement and require substantiation.
As of January 1, 2016, the monthly limit for qualified mass transit will always be equal to that of qualified parking.
| Year | Transit and Vanpool | Parking | Biking |
| 2007 | $110 | $215 | Not Available |
| 2008 | $115 | $220 | Not Available |
| 2009 | $120 for Jan-Feb and $230 for Mar-Dec | $230 | $20 |
| 2010 | $230 | $230 | $20 |
| 2011 | $230 | $230 | $20 |
| 2012 | $125 | $240 | $20 |
| 2013 | $245 | $245 | $20 |
| 2014 | $130 | $250 | $20 |
| 2015 | $130 | $250 | $20 |
| 2016 | $255 | $255 | $20 |
| 2017 | $255 | $255 | $20 |
| 2018 | $260 | $260 | Eliminated by the Tax Cuts and Jobs Act of 2017 |
| 2019 | $265 | $265 | - |
| 2020 | $270 | $270 | - |
| 2021 | $270 | $270 | - |
| 2022 | $280 | $280 | - |
| 2023 | $300 | $300 | - |
| 2024 | $315 | $315 | - |