Deductibility of Qualified Transportation Fringe Benefits

The IRS issued guidance in proposed regulations explaining the loss of business deductibility for qualified transportation fringe benefits beginning after 2017. While not deductible, qualified transportation fringe benefits may be excluded from employees’ income ($270 per month for 2020).

The proposed regulations expand previous IRS guidance issued in 2018 that explained the amount of nondeductible qualified parking expenses. The proposed rule confirms the disallowance of employer deductions for parking expenses and also addresses vanpooling and transit benefits.

• Qualified Parking - There are different rules depending on if the parking is purchased from a third party and when the employer owns the parking facility.
• Vanpooling and Transit Expenses - If an employer pays a third party for vanpooling or transit expense benefits, the amount paid is not deductible. If the employer provides the benefits in kind, the disallowed deduction must be reasonably calculated.

The proposed rule outlines three exceptions that would allow some cost of qualified transportation fringe benefits to be deducted. First, a deduction will be allowed to the extent the expenses are treated as taxable compensation for withholding or other purpose because they exclude the exclusion for qualified transportation fringes. Second, expenses may be deductible if they are for transportation or parking made available to the general public. Third, expenses may be deductible if the vanpooling, pass or parking is sold to employees in a bona fide transaction for full cost. Any amounts purchased through a compensation reduction agreement are not deductible.

Employers offering qualified transportation fringe benefits should review their programs to make sure they are properly accounting for benefits.