Tax Benefits

Federal Tax Benefits

It’s called Commuter Choice because it gives employees an attractive alternative to driving to work alone – a real choice. Presently, an employer may give up to $220 a month, in eligible transportation costs tax-free to an employee. Participating employers lower their FICA and Federal income tax costs. The maximum tax-free benefit may increase each year based on increases in the cost of living. The Internal Revenue Service will announce any annual increase in the eligible tax-free amount. Commuter Choice may be used on public transit buses, trains, ferries and vanpools.

Not every employer can afford to pay for the full transportation benefit so the Commuter Choice has built-in flexibility.

Employer Paid Benefit Option

Increasingly, employers, as a matter of company policy, are offering the full transit benefit to employees. When employers fully cover employee transit and vanpool costs, it is equivalent to a low cost salary or wage enhancement. If the same amount were to be given as a pay increase, it would cost employers more in FICA and employees would pay more in income taxes. What’s more, employers in Minnesota may also claim a 30% state tax credit on dollars contributed toward employee transit passes.

Employee-Paid Pre-tax Benefit Option

By establishing a pre-tax deduction program, employers allow employees to exchange part of their gross income for an employer-provided transit or vanpool pass. Since employees fund the benefit, they lower their Federal and State income tax obligations. Employers also benefit from a reduction in their payroll taxes.

This special transportation pre-tax benefit program is exempt from complex use restrictions common to cafeteria plans and flexible spending accounts (FSA). These “qualified transportation fringe benefits” are excluded from cafeteria plans under section 125 of the Internal Revenue Code (Title 26). The company will not have to write a plan document or obtain IRS approval. So there is less paperwork. There are no irrevocable elections or forms. A pre-tax program can be started any time of the year, or enrollment can be limited to certain times of the year.

While there is a great deal of flexibility in creating a pre-tax transit benefit program, it is advisable to consult with tax counsel to determine how your program may affect ceiling or cap limitations on employee-directed tax deferred retirement accounts, such as 401(k) plans.

Fare Share Benefit Option

The third option is for the employer and employee to share the costs. The employer could subsidize a part of the $220 benefit and allow employees the option to fund the balance from pre-tax income. Employers purchase the passes or vouchers, using the contributions from employer funds and employee salaries, and then distribute them to the employees.

The information presented here is a summary of existing FTA publications. It does not constitute official tax guidance. Taxpayers are urged to consult with the Internal Revenue Service of the U.S. Department of the Treasury or a tax professional for specific guidance on any matters related to Federal tax law.

State Tax Benefits

Employers that purchase transit passes to resell or give to employees may be eligible for a 30% State Tax Credit. To qualify:

• The transit pass must be a pass, token, fare card, voucher or similar item entitling a person to transportation at regular or reduced prices. Stock No. 1010200 For C corporations, S corporations, partnerships, sole proprietors, fiduciaries and nonprofit organizations.
• The transportation must be provided by either a: ” Public or privately-owned mass transit facility; or ” A person in the business of transporting people for compensation or hire. The vehicle must have seating capacity for at least six adults, not including the driver.
• The passes must be used in Minnesota. The credit is equal to 30 percent of the difference between the price you pay for the passes and the price you charge employees. It is not refundable and can only be applied to your current tax liability. Enclose this schedule when you file your Minnesota return.

Click here for a link to the Employer Transit Pass Credit form (ETP).