While the last several months were fraught with uncertainty and changes, we also saw several clarifications for pre-tax benefits, including Qualified Transportation Fringe Benefits.
What modified transit benefit guidance was released?
The IRS released potential changes to a provision within the Tax Cuts and Jobs Act (TCJA). The provision under review is the piece of the TCJA that made qualified transportation fringe benefits nondeductible for taxable years beginning after 2017. The proposed regulations build on interim guidance.
Specifically, they clarify how certain* organizations are required to recognize:
- the expenses they incurred for qualified parking expenses and
- the exceptions that exist for van pooling and transit benefits
What is the general rule for disallowed parking amounts?
Tax exempt organizations must recognize the cost of parking as an unrelated business taxable income (UBTI). When determining the “cost of parking,” organizations may need to take a few different things under consideration.
If employers are obtaining parking from a third party, the cost is generally the amount paid to the third party.
If employers own or receive parking as part of a lease, the cost can be determined using one of the “Simplified Methods.” The Simplified Methods include the following:
- “Primary use” method. Determine the nondeductible amount for reserved employee spaces as it relates to parking available to the general public. The portion utilized by employees during peak demand times is the nondeductible amount.
- “Cost per space” method. Determine the nondeductible expense by multiplying the cost per space of their parking by the total number of spaces used by employees during peak demand period.
- “Qualified parking limit” method. Determine the nondeductible expense by multiplying the qualified parking exclusion limit by the total number of spaces used by employees during peak demand period.
What exceptions exist to allow organizations to preserve the employer deduction for transportation fringe benefits?
With every rule, there seems to be an exception. And, the transit guidance is certainly not lacking in exceptions. There are three exceptions to the guidance:
- The expense doesn’t need to be separately included as long as the amounts exceeding the monthly fringe benefit limits were treated as taxable from an employee’s withholdings.
- Amounts paid for parking or transportation made available to the general public may also be deductible.
- Expenses are deductible if the parking or transportation is paid for in a bona fide transaction for full consideration.
What else do we have to look forward to in transit benefit legislation?
There is a $1.5 trillion bill, H.R. 2 – The Moving Forward Act, which passed the House earlier this month. The bill would invest in infrastructure projects and would include $500 billion for transportation-related needs.
From a pre-tax benefit perspective, the bill (if passed), would add bikeshare as an eligible expense and reinstate bicycle commuter tax benefits. However, the Senate is not expected to vote on the bill and it would be unlikely to “move forward.”
There is some speculation that we will see a transportation bill brought forward in the coming months as funding for highway, transit and safety programs is set to expire in September of this year.
* tax-exempt organizations with unrelated trades and businesses