In the years leading up to the Tax Cuts and Jobs Act (TCJA), Congress encouraged efforts to protect the environment by giving employees a tax break for qualified transportation fringe benefits.
Prior to TCJA, employers were allowed to deduct all of the costs they incurred in providing qualified transportation fringe benefits under IRC §132(f). Specifically, §132(f) allows for an exclusion from wages of commuter benefits such as qualified parking, transit passes, van pools, and bicycle commuter costs.
Effective January 1, 2018, the TCJA eliminates the business tax deduction through 2025, unless the benefits are necessary for ensuring the safety of the employee. This basically increases the cost of providing benefits by the new 21% corporate tax rate. Employers must now consider whether to continue providing transportation fringe benefits despite the loss of the business deduction or discontinue them altogether.
Although the TCJA denies the employer a deduction, it does not take away the tax-favored status to employees. Under IRC §132(f) (3), employees can still purchase benefits on a pretax tax basis if the employer continues to offer the programs. The only exception is the bicycle commuter benefit, which is no longer excludable from employees’ wages and is subject to employment tax withholding.
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