The Tax Cuts and Job Act (TCJA) has brought about many changes to the tax law including the hot topics of the qualified business income deduction and the business interest expense limitation. The TCJA has also brought about subtle disallowances of employer deductions including entertainment and qualified transportation fringe benefits.
Qualified Transportation Fringe Benefits
Qualified transportation fringe benefits have been in place since 1993 and have allowed employees and employers to use pre-tax dollars towards commuting expenses in order to provide a boost to public transportation. The monthly allotted amount of pre-tax dollars an employee can use varies from year to year based upon cost-of-living adjustments by the IRS. For 2018, the monthly maximum allowed was $260 ($265 for 2019). These benefits are completely optional and employers are not required to offer them. Some cities that have high commuter populations have gone a few steps further and provided laws that make it mandatory for employers to offer the benefit. If you have more than 20 full-time employees in New York City or Washington, D.C. you are required to offer these benefits. In the San Francisco Bay Area employers with 50 or more full-time employees are required to offer these benefits.
What are qualified transportation fringe benefits exactly? The tax law defines qualified transportation fringe benefits as follows:
Prior to 1/1/2018 the rules for these benefits were favorable to both the employee and employer. The employee would exclude these benefits from their total taxable wages, while the employer would receive a tax deduction for the transportation fringe benefit. Under the TCJA, qualified transportation fringe benefits are still excluded from an employee’s taxable wages (with the exception noted above); however, no deduction is allowed to employers for qualified transportation fringe expenses incurred or paid after December 31, 2017.
For example, if an employer has 100 employees maximizing their commuter benefits, pre-TCJA tax rules would have followed as such; Employees exclude $3,120 ($260 X 12 months) from their taxable income and the employer would take the full deduction for $312,000 ($3,120 x 100 employees). Post-TCJA the employees would still receive their $3,120 of pre-tax income, but the employer would not be able to take the $312,000 deduction.
If you have any questions or concerns how this might affect your business please reach out to your Withum advisor.