Uber, Lyft, and their competitors, offering handy apps, responsive drivers and competitive prices, are fast becoming a favored commuter option. Many employers either subsidize employee commuter expenses or allow employees to pay for commuter expenses through payroll deductions. Under current law (Internal Revenue Code Section 132(f)) and regulation, these expenses can be tax-free (up to certain dollar limits) if they are incurred through qualifying commuter highway vehicles, van pools, transit passes, parking, and bicycles. Many employers and employees are asking: can Uber and Lyft commutes be provided tax-free?
A quick dive into the legal weeds
Of the types of qualifying commuter expenses, only the “van pool” exemption potentially applies to Uber and Lyft. Generally, the fair market value of qualifying “van pool” benefits may be excluded from an employee’s income up to $255 per month (2016). Slightly different rules apply depending on whether the van pool is employer-operated, employee-operated, or “private or public transit operated.”
In the case of employer-operated or employee-operated van pools, the vehicle in question must seat at least six adults (excluding the driver). In addition, at least 80% of the vehicle’s mileage must be reasonably be expected to be (1) used to transport employees between their homes and jobs and (2) used on trips during which the number of employees transported for commuting is at least 50% of the vehicle’s adult seating capacity (excluding the driver). This is the so-called “80/50” rule. A “private or public transit operated” van pool vehicle must also seat at least 6 adults (excluding the driver) but is not required to meet the 80/50 rule. But what’s a “private or public transit operated” van pool?
The regulations say that the van pool must be “owned and operated either by public transit authorities or by any person in the business of transporting persons for compensation or hire.” In a series of Information Letters (IRS Info. Letters 2014-0028, 2015-0004, and 2016-0004) the IRS suggests that the issue is factually-charged, and that a van owned by a private vendor will not automatically qualify as “private or public transit operated”. Here are some key excerpts from IRS Info. Letter 2016-0004:
“The term “operate” is not specifically defined in Code Section 132 or the regulations. However, the Merriam-Webster Dictionary definition of “operate” includes “to use and control (something); to have control of (something, such as a business, department, program, etc.).”
“Thus, in determining whether a van pool is “operated” by an employer, an employee, or by a private or public transit authority, factors such as who drives the van, who determines the route, who determines the pick-up and drop-off locations and times, and who is responsible for administrative details would all be relevant factors.”
What case is the IRS making here exactly? Is the IRS saying that a van pool can be “employer-operated”, “employee-operated”, “private or public transit operated” or possibly none of the above? Or, is the IRS suggesting that some van pools that individuals or employers consider to be “private or public transit operated” should actually classified as “employer-operated” or “employee-operated” (and subject to the 80/50 rule)? Clarification from the IRS would be most welcome.
Application to Uber and Lyft
Can employers provide or facilitate tax-free Uber or Lyft rides?
- First, Uber or Lyft must actually be a “van pool”. Uber does have an “UberPool” service, and Lyft offers “Lyft Line”, which are meant to carry several passengers in the same direction and would seem to qualify.
- Second, the vehicle used for the pool must seat at least six adults (not counting the driver). In Boston (where I live), the UberPool service currently maxes out at 4 riders (and would not qualify). In New York City, however, Uber has begun offering UberPool in six-passenger vehicles. So currently UberPool clears this hurdle, but only in some markets. (In fairness to Lyft, I was unable to easily dig up similar information on Lyft Line.)
- Third, are UberPool and Lyft Line “private or public transit operated”? In spite of the frustratingly unclear series of IRS Information Letters cited above, signs point to “yes”. IRS regulations (which trump Information Letters) require that the pool services be “owned and operated by [a] person in the business of transporting persons for compensation or hire.” This test seems to be satisfied whether the “person” is the corporate entity or the individual driver.
In sum: Lyft and Uber can potentially qualify as tax free benefits, if the cars seat at least six passengers plus a driver. But read on . . .
Anything else to worry about?
Even if the “van pool” hurdle is overcome, there are some administrative issues to consider. While none of these hurdles are insurmountable, they promise to add a layer of hassle for employers. For example:
- The IRS directs employers to provide vouchers (or something similar) to employees, which the employees may then use to pay for van pools. Cash reimbursements may be used in lieu of vouchers only if vouchers are not readily available. Employers will need to determine whether something like a voucher system can be arranged with Uber or Lyft, and if not, the employer must honor the IRS’ cash reimbursement substantiation rules.
- If the benefit is provided through pre-tax payroll deductions, advance elections (in writing or electronic) must be made by employees. The employer will need to arrange a system to do so.
- Employers will need to figure out how to value the Uber or Lyft rides. Generally, the fair market value of the benefit is based on all the facts and circumstances. If a car seats six, but the employee rides alone, should the employee be reimbursed tax free for 1/6 of the fare or the entire fare? Or should the value be based on the value of one seat in an ordinary van pool in the employee’s market? Or the entire fare paid by the employee? Note also that there are a number of vehicle valuation rules under the Internal Revenue Code that may be useful. Each employer should confer with its accountants and tax counsel on this point.
- Finally, employers need to determine whether it makes sense to offer Uber and Lyft commuter benefits as part of a transportation benefit package. In addition to the added administrative burden, there are optics issues. Proliferation of these policies could cause commuter spending to be redirected from public transportation to Uber and Lyft, creating an argument that the practice is not environmentally forward. Employers should also consider whether any applicable state or municipal laws or ordinances might impact an employer’s transportation benefits.
Based on current guidance, it appears that rides provided to commuters by Uber, Lyft and their competitors may, in some cases, be framed as tax-favored commuter benefits. However, it remains to be seen whether the IRS will take steps to curtail this practice. Employers should carefully consider IRS guidance and administrative concerns, and consult with counsel, before including Uber and Lyft in their transit reimbursement benefits.