Handling Commuting Costs: Employer and Employee Perspectives
BY Barbara Weltman
Generally the cost of commuting to and from work is not deductible by an employee. However, certain payments by employers-called qualified transportation benefits-can ease or eliminate commuting costs. These costs can be deductible by the business and tax-free to employees.
Monthly transit passes. Employees are not taxed on public transit passes up to $65 per month in 2001.
Van carpooling. Employer-paid costs of commuter highway carpooling to and from work are tax-free to employees up to $65 per month in 2001.
Free parking. Employer-paid or provided parking on or near the business premises is tax free up to $180 per month in 2001.
Employees who are on temporary job assignments-assignments expected to last one year or less that do in fact last for that period-can exclude employer-paid parking at the temporary worksite. This exclusion is considered a tax-free reimbursement under an accountable plan-there is no dollar limit on the exclusion. Employers can deduct their costs.
If the assignment is nontemporary (lasting more than one year), the usual free parking rule applies-the benefit is tax-free up to $180 per month.
Deductibility by employers. Generally, the cost of providing commuting benefits to employees is deductible-whether or not an employee is taxable on the benefit. The fact that the company offers an employee a choice between a qualified transportation fringe benefit and cash does not make the benefit taxable if the employee chooses the benefit. The employee is, of course, taxed on cash taken in lieu of the transportation fringe benefit.
Shifting the cost of commuting benefits to employees. Employer can shift the cost of parking or transit passes to employees while still providing them with a tax advantage by permitting them to pay for these benefits on a pre-tax basis-through a salary reduction agreement. All that is required is for employees to agree to use their salary for payment for the parking or transit pass. Note: The arrangement must be made before the end of the month for which the salary reduction is to be effective.
Special rules for certain owners. In the case of partners, more-than-2% S corporation shareholders and independent contractors who are given public transit passes, the exclusion is limited to $21 per month. If the monthly amount exceeds this dollar limit, then the entire cost (not merely the excess cost) of the ticket is includable in the partner's gross income. The entire value of parking provided to partners and more-than-2-percent S corporation shareholders is taxable to them, even if it is less than $180 per month. However, parking away from the business premises-for example, on a sales call across town-is excludable by these owners (and deductible by the business).
BARBARA WELTMAN is an attorney and a trusted professional advocate for small businesses and entrepreneurs. She is the author with such titles as J.K. Lasser’s Small Business Taxes and Smooth Failing, and she contributes regularly to American Express OPEN and SBA.gov. Her articles have appeared in the Wall Street Journal and U.S. News and World Report. Weltman is also the publisher of Idea of the Day and monthly e-newsletter Big Ideas for Small Business at www.barbaraweltman.com and hosts radio shows and podcasts, including Build Your Business radio. She has been named one of the 100 Small Business Influencers in the U.S. for the third year in a row. @barbaraweltman