The Tax Cuts and Jobs Act has changed the tax treatment of fringe transportation benefits. The new law makes it more expensive for employers to provide the same benefits to employees as a year ago. Employers will have to choose to eat the cost, cut the benefit entirely, or find another way.
Moving forward, employers will no longer be able to take deductions on qualified transportation fringe benefits provided to employees. This includes deductions for the costs associated with paying for employee qualified parking, transit passes, qualified bicycle commuting reimbursements, and transportation in commuter highway vehicles. But employers can deduct travel expenses that are “necessary for ensuring the safety of employee,” and the deduction of business travel expenses has remained unchanged.
Tax exempt employers are also affected by the new law. Any funds paid or incurred by a tax exempt employer for any qualified transportation benefit, any parking facility used in connection with qualified parking, or any on-premises athletic facility will be treated as unrelated business taxable income (UBTI) under the new law.
Less has changed for employees, as they can still exclude up to $260 per month of qualified transportation fringe benefits from their taxable income. The one small change that directly impacts employees is that they are no longer able to exclude qualified bicycle commuting reimbursements (which was an allowable $20 per month deduction) from income for tax years 2018 through 2025. The bigger impact on employees will be that employers now have less incentive to provide the same benefits for employees.
Employers will have to weigh the new costs created by the tax law against the benefit of retaining a talented workforce through competitive compensation packages. Employers might also be able to still find ways to deduct some transportation expenses (such as renegotiating leases so office space and parking are bundled together; the entire cost of the lease should be deductible). But before making any decisions, employers will want to check their local laws, as some jurisdictions (ex. Washington, D.C.) require an employer to provide certain commuter benefits.