New Tax Regulations Affect Transportation Subsidies

Filed in Economics, Tax Reform Toolkit by on March 1, 2018 0 Comments

tax reform toolkitLost in the headlines of the new tax law is how it substantially affects how the cost of fringe benefits is taxed for employers and employees — and few will be happy with these changes.

For example, employers used to be allowed to deduct their contributions to employees’ transit benefits, and employees could use pre-tax dollars to pay for certain commuting costs. In 2017, there was a $255 limit per employee per month for both transportation and parking expenses and $20 per month for biking-related expenses.

These programs benefited for-profit employers in two ways:

  • The expense associated with transit benefits was deducted from taxable income, and
  • The employer was exempt from payroll taxes relating to any pre-tax dollars used for transit by employees.

Meanwhile, not-for-profit employers were able to provide these benefits to employees as tax-free items. The tax law has changed the tax liability of both types of businesses, should they continue to provide transit benefits.

As of Jan. 1, for-profit employers may no longer deduct expenses associated with providing qualified transportation fringe benefits. Any expenditures are now subject to income taxes and the employer’s share of payroll taxes.

Employees of for-profit businesses may still use pre-tax dollars for commuting expenses. However, employees of not-for-profits do not enjoy that tax break. The 2018 limit has increased by $5: $260 per month for transportation and $260 per month for parking, while benefits for biking would remain at $20 per month.

Meanwhile, in the not-for-profit world, the law imposes the new corporate tax rate of 21% on the value of employer-provided transportation benefits or subsidy programs, as that amount now counts as unrelated business taxable income.

To avoid the tax while continuing to provide the same level of transportation benefits, a tax-exempt organization could take one of two courses of action: Include the value of the benefits on its employees’ W-2 forms, or raise their wages by the same amount. Either way, employees would be forced to pay income and payroll taxes on these benefits, while the employer would only owe any related payroll taxes.

For additional information, visit nahb.org/taxreform. Or contact David Logan. NAHB members can also register for the free March 5 webinar, Tax Reform and Your Bottom Line.

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