Breaking down tax reform changes to transportation benefits
Under the Tax Cuts and Jobs Act, employers may continue to provide transportation plans that enable employees to pay for certain benefits on a pre-tax basis — up to $260 per month for parking, transit or vanpooling — but employers will no longer be able to deduct the expense of any subsidy for these fringe benefits unless the expense is necessary for employee safety.
Previously, employers were encouraged to subsidize their employees’ commuting expenses — or at least facilitate their employees’ payment of those expenses on a pre-tax basis — through a salary-reduction arrangement.
Employees could exclude qualified transportation expenses from their taxable income — up to $255 per month for either bus passes or parking subsidies — while still allowing employers to deduct the expenses from their taxable income.
mChris Beinecke, employee benefits attorney at Haynes and Boone, says there are a number of vendors in the benefits space that could provide employers with guidance on this new regulation. “They have the ability to assist clients in setting tax-free money aside to be reimbursed for other expenses,” he says.
Jody Dietel, chief compliance officer at WageWorks, says, “Employers should be asking their adviser what the best solution is for them with the tax reform in place.”
Tax-exempt employers are not immune from these changes, either. To the extent that a taxable employer would be denied a deduction for providing a tax-free transportation assistance benefit, a tax-exempt employer will now owe unrelated business income tax on that same benefit.
“This denial of taxable employer’s deduction for providing tax-free transportation assistance, as well as the imposition of UBIT on a tax-exempt employer’s provision of such a benefit, is already effective for 2018,” Kenneth Mason, partner at in the employee benefits group at law firm Spencer Fane, says.
Overall, Mason adds, because tax reform also lowers the corporate tax rate from 35% to 21%, the loss of this employer deduction should have less of a negative impact. “Presumably,” he says, “a similar analysis would apply to tax-exempt employers, who must now pay UBIT on any tax-free transportation assistance.”
Other employers may decide that retaining the tax deduction — or avoiding the UBIT — is sufficient to convert their transportation assistance programs into after-tax arrangements. Employers could offer payroll deduction for employees who wish to pay for either bus passes or parking on an after-tax basis.
“Some employers might even be in a position to negotiate free or reduced parking fees from their landlords, thereby sidestepping the taxation issue,” Mason says.
Also see: “10 regulatory issues facing small employers in 2018.”
He adds that given the ambiguity in the new statutory language, it might be prudent to wait for either technical corrections or IRS guidance in this area. “In the meantime, the tax rules applicable to employees have not changed, so maintaining the status quo would also carry the advantage of allowing time for the dust to settle before any employee communications are needed,” Mason says.
Beinecke, however, says he does not expect the IRS to offer any guidance on this new tax regulation because the statute states transportation benefits are no longer tax deductible and any IRS guidance or technical corrections would potentially undermine the law.
“The law says, ‘no employer deduction,’ and that is hardwired into the Act,” Beinecke says. “The IRS and technical guidance cannot fix that.”