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The Tax Cuts and Jobs Act Limits Employer’s Deduction for Qualified Transportation Fringe Benefit Ex The Tax Cuts and Jobs Act Limits Employer’s Deduction for Qualified Transportation Fringe Benefit Ex

The Tax Cuts and Jobs Act Limits Employer’s Deduction for Qualified Transportation Fringe Benefit Expenses

The recent Tax Cuts and Jobs Act (“Act”) did not include as many changes to employee benefit plans as initially proposed. However, the Act did make changes to the tax treatment of certain employee fringe benefits. As detailed below, these changes include eliminating the employer’s ability to deduct the cost of providing a transportation fringe benefit, effective Jan. 1, 2018.

This article is the third in a series by Ice Miller discussing how the Act affects employee benefits and compensation.

Qualified Transportation Fringe Benefits

Internal Revenue Code (“Code”) Section 132(a) provides that gross income does not include any benefit that is a "qualified transportation fringe" benefit. This includes commuting and parking related expenses provided through an employer-sponsored plan. Under Code section 132(f), an employer may provide qualified transportation fringe benefits to employees on a tax free basis, sometimes referred to as Transportation Plans. 
Comment: For 2018, the tax-excludable limit for both commuting and parking expenses will be $260 per month. IRS Rev. Proc. 2017-58. These limits include any employer contribution to a Transportation Plan. Therefore, any employer contribution to such a plan reduces the amount an employee can elect as a pre-tax amount for his or her commuting and parking benefits.

In addition to the benefits being excluded from an employees’ wages, under the prior law, an employer could deduct the cost of transportation fringe benefits provided to employees (i.e., parking, transit passes, and vanpool benefits), even though these benefits are excluded from the employee’s taxable income. The Act eliminates the employer’s deduction beginning in 2018. Commuting and parking benefits are still excluded from an employee’s wages, who can continue to pay his or her own commuting and parking costs using pre-tax income; however, the tax benefit to the employer is removed going forward. 
Comment: The Act does provide for employers to still take the deduction for expenses that are “necessary for ensuring the safety of the employee” between the employee’s residence and workplace. While further guidance is needed as to what constitutes “ensure the safety of an employee,” it is anticipated this will be a narrow exception as to what is otherwise not deductible for an employer.
Comment: Employers may still take the deduction for these expenses if the employer treats the payments as taxable compensation to the employees. Thus, an employer may choose to include qualified transportation fringe benefits in an employee’s taxable income and take a tax deduction or exclude the amounts from an employee’s taxable income and take no deduction for those amounts.

UBTI increased for tax-exempt organizations

Related to the elimination of the employer’s deduction for qualified transportation fringe benefits are the Act’s changes to unrelated business taxable income (UBTI). A corresponding provision was included in the Act that increases the UBIT for tax-exempt employers who provide qualified transportation fringe benefits, as well as any parking facility used in connection with qualified parking and on-premises athletic facilities. The UBTI is increased by the amount the employer pays for these benefits. In effect, in addition to eliminating the employer deduction for these benefits, tax-exempt employers must pay tax on these benefits going forward as well. 
Comment: Governmental plans continue to have the same arguments against the application of UBTI that have historically been utilized.

Biking-Related Benefits

Under the Act, biking-related benefits are now treated in the opposite manner to commuting and parking related expenses. Qualified bicycle commuting reimbursements, which are expenses “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” are no longer excludable from an employee’s gross income. Thus, any payments or reimbursements for bicycle purchases, improvements, repair, or storage to the employee from his or her employer will be taxed as wages. As such, these types of payments may be deducted by the employer, despite the changes to the qualified transportation fringe benefit deduction described above.
Comment: The biking-related provisions sunset on Dec. 31, 2025. This means between Jan. 1, 2018 and Dec. 31, 2025 employer reimbursements for bicycle commuting expenses are taxable wages for the employee. The sunset provision does not apply to the other qualified transportation fringe benefits.

For more information, contact Matt Ehinger, Audra Ferguson-Allen, Rob Gauss, Gina Giacone, Lisa Harrison, Melissa Profitt, Tara Sciscoe, Chris Sears or the Ice Miller Employee Benefits or Tax-Exempt Practice attorney with whom you work.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.
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