Tax Incentives Frequently Asked Questions
The following questions and answers are modified from the
1. What is a qualified transportation fringe (a.k.a., commuter tax fringe benefit)? (Answer ID 3102)
The following benefits are qualified transportation fringe benefits:
(1) Transportation in a commuter highway vehicle.
(2) Transit passes.
(3) Qualified parking.
(4) Qualified bicycle reimbursement.
An employer may simultaneously provide an employee with any one or more of the first three benefits but may not combine them with the qualified bicycle reimbursement benefit.
Source: Federal Register / Vol. 66, No. 8 / Thursday, January 11, 2001 / Rules and Regulations
2. What is transportation in a commuter highway vehicle? (Answer ID 3103)
IRS defines a "commuter highway vehicle" as:
"Transportation in a commuter highway vehicle is transportation provided by an employer to an employee in connection with travel between the employee’s residence and place of employment. A commuter highway vehicle is a highway vehicle with a seating capacity of at least 6 adults (excluding the driver) and with respect to which at least 80 percent of the vehicle’s mileage for a year is reasonably expected to be—
(a) For transporting employees in connection with travel between their residences and their place of employment; and
(b) On trips during which the number of employees transported for commuting is at least one-half of the adult seating capacity of the vehicle (excluding the driver). "
Help Desk comment: Most people refer to Section 132(f) as applying to "vanpools" but "large carpools" might be eligible, too. Based on the definition above, any 7-passenger vehicle (e.g., large SUV) with 4 people meeting the 80% mileage requirement would qualify.
Source: Federal Register / Vol. 66, No. 8 / Thursday, January 11, 2001 / Rules and Regulations
3. What are transit passes? (Answer ID 3104)
IRS defines a "transit pass" as follows:
"A transit pass is any pass, token, farecard, voucher, or similar item (including an item exchangeable for fare media) that entitles a person to transportation—
(a) On mass transit facilities (whether or not publicly owned); or
(b) Provided by any person in the business of transporting persons for compensation or hire in a highway vehicle with a seating capacity of at least 6 adults (excluding the driver)."
Source: Federal Register / Vol. 66, No. 8 / Thursday, January 11, 2001 / Rules and Regulations
4. What is qualified parking? (Answer ID 3105)
IRS defines "qualified parking" as follows:
"(a) Qualified parking is parking provided to an employee by an employer—
(1) On or near the employer’s business premises; or
(2) At a location from which the employee commutes to work (including commuting by carpool, commuter highway vehicle, mass transit facilities, or transportation provided by any person in the business of transporting persons for compensation or hire).
(b) For purposes of section 132(f), parking on or near the employer’s business premises includes parking on or near a work location at which the employee provides services for the employer. However, qualified parking does not include—
(1) The value of parking provided to an employee that is excludable from gross income under section 132(a)(3) (as a working condition fringe), or
(2) Reimbursement paid to an employee for parking costs that is excludable from gross income as an amount treated as paid under an accountable plan. See § 1.62–2.
(c) However, parking on or near property used by the employee for residential purposes is not qualified parking.
(d) Parking is provided by an employer if—
(1) The parking is on property that the employer owns or leases;
(2) The employer pays for the parking; or
(3) The employer reimburses the employee for parking expenses."
Source: Federal Register / Vol. 66, No. 8 / Thursday, January 11, 2001 / Rules and Regulations
5. How does section 132(f) apply to expense reimbursements? (Answer ID 3106)
IRS rules regarding expense reimbursement for qualified transportation fringe benefits are as follows:
(a) In general. The term qualified transportation fringe includes cash reimbursement by an employer to an employee for expenses incurred or paid by an employee for transportation in a commuter highway vehicle or qualified parking. The term qualified transportation fringe also includes cash reimbursement for transit passes made under a bona fide reimbursement arrangement, but, in accordance with section 132(f)(3), only if permitted under paragraph (b) of this Q/A–16. The reimbursement must be made under a bona fide reimbursement arrangement which meets the rules of paragraph (c) of this Q/A–16. A payment made before the date an expense has been incurred or paid is not a reimbursement. In addition, a bona fide reimbursement arrangement does not include an arrangement that is dependent solely upon an employee certifying in advance that the employee will incur expenses at some future date.
(b) Special rule for transit passes—
(1) In general. The term qualified transportation fringe includes cash reimbursement for transit passes made under a bona fide reimbursement arrangement, but, in accordance with section 132(f)(3), only if no voucher or similar item that may be exchanged only for a transit pass is readily available for direct distribution by the employer to employees. If a voucher is readily available, the requirement that a voucher be distributed in-kind by the employer is satisfied if the voucher is distributed by the employer or by another person on behalf of the employer (for example, if a transit operator credits amounts to the employee’s fare card as a result of payments made to the operator by the employer).
(2) Voucher or similar item. For purposes of the special rule in paragraph (b) of this Q/A–16, a transit system voucher is an instrument that may be purchased by employers from a voucher provider that is accepted by one or more mass transit operators (e.g., train, subway, and bus) in an area as fare media or in exchange for fare media. Thus, for example, a transit pass that may be purchased by employers directly from a voucher provider is a transit system voucher.
(3) Voucher provider. The term voucher provider means any person in the trade or business of selling transit system vouchers to employers, or any transit system or transit operator that sells vouchers to employers for the purpose of direct distribution to employees. Thus, a transit operator might or might not be a voucher provider. A voucher provider is not, for example, a third-party employee benefits administrator that administers a transit pass benefit program for an employer using vouchers that the employer could obtain directly.
(4) Readily available. For purposes of this paragraph (b), a voucher or similar item is readily available for direct distribution by the employer to employees if and only if an employer can obtain it from a voucher provider that—
(i) does not impose fare media charges that cause vouchers to not be readily available as described in paragraph (b)(5) of this section; and
(ii) does not impose other restrictions that cause vouchers to not be readily available as described in paragraph (b)(6) of this section.
(5) Fare media charges. For purposes of paragraph (b)(4) of this section, fare media charges relate only to fees paid by the employer to voucher providers for vouchers. The determination of whether obtaining a voucher would result in fare media charges that cause vouchers to not be readily available as described in this paragraph (b) is made with respect to each transit system voucher. If more than one transit system voucher is available for direct distribution to employees, the employer must consider the fees imposed for the lowest cost monthly voucher for purposes of determining whether the fees imposed by the voucher provider satisfy this paragraph. However, if transit system vouchers for multiple transit systems are required in an area to meet the transit needs of the individual employees in that area, the employer has the option of averaging the costs applied to each transit system voucher for purposes of determining whether the fare media charges for transit system vouchers satisfy this paragraph. Fare media charges are described in this paragraph (b)(5), and therefore cause vouchers to not be readily available, if and only if the average annual fare media charges that the employer reasonably expects to incur for transit system vouchers purchased from the voucher provider (disregarding reasonable and customary delivery charges imposed by the voucher provider, e.g., not in excess of $15) are more than 1 percent of the average annual value of the vouchers for a transit system.
(6) Other restrictions. For purposes of paragraph (b)(4) of this section, restrictions that cause vouchers to not be readily available are restrictions imposed by the voucher provider other than fare media charges that effectively prevent the employer from obtaining vouchers appropriate for distribution to employees. Examples of such restrictions include—
(i) Advance purchase requirements. Advance purchase requirements cause vouchers to not be readily available only if the voucher provider does not offer vouchers at regular intervals or fails to provide the voucher within a reasonable period after receiving payment for the voucher. For example, a requirement that vouchers may be purchased only once per year may effectively prevent an employer from obtaining vouchers for distribution to employees. An advance purchase requirement that vouchers be purchased not more frequently than monthly does not effectively prevent the employer from obtaining vouchers for distribution to employees.
(ii) Purchase quantity requirements. Purchase quantity requirements cause vouchers to not be readily available if the voucher provider does not offer vouchers in quantities that are reasonably appropriate to the number of the employer’s employees who use mass transportation (for example, the voucher provider requires a $1,000 minimum purchase and the employer seeks to purchase only $200 of vouchers).
(iii) Limitations on denominations of vouchers that are available. If the voucher provider does not offer vouchers in denominations appropriate for distribution to the employer’s employees, vouchers are not readily available. For example, vouchers provided in $5 increments up to the monthly limit are appropriate for distribution to employees, while vouchers available only in a denomination equal to the monthly limit are not appropriate for distribution to employees if the amount of the benefit provided to the employer’s employees each month is normally less than the monthly limit.
Example. The following example illustrates the principles of this paragraph (b):
(i) Company C in City X sells mass transit vouchers to employers in the metropolitan area of X in various denominations appropriate for distribution to employees. Employers can purchase vouchers monthly in reasonably appropriate quantities. Several different bus, rail, van pool, and ferry operators service X, and a number of the operators accept the vouchers either as fare media or in exchange for fare media. To cover its operating expenses, C imposes on each voucher a 50 cents charge, plus a reasonable and customary $15 charge for delivery of each order of vouchers. Employer M disburses vouchers purchased from C to its employees who use operators that accept the vouchers and M reasonably expects that $55 is the average value of the voucher it will purchase from C for the next calendar year.
(ii) In this Example, vouchers for X are readily available for direct distribution by the employer to employees because the expected cost of the vouchers disbursed to M’s employees for the next calendar year is not more than 1 percent of the value of the vouchers (50 cents divided by $55 equals 0.91 percent), the delivery charges are disregarded because they are reasonable and customary, and there are no other restrictions that cause the vouchers to not be readily available. Thus, any reimbursement of mass transportation costs in X would not be a qualified transportation fringe.
(c) Substantiation requirements. Employers that make cash reimbursements must establish a bona fide reimbursement arrangement to establish that their employees have, in fact, incurred expenses for transportation in a commuter highway vehicle, transit passes, or qualified parking. For purposes of section 132(f), whether cash reimbursements are made under a bona fide reimbursement arrangement may vary depending on the facts and circumstances, including the method or methods of payment utilized within the mass transit system. The employer must implement reasonable procedures to ensure that an amount equal to the reimbursement was incurred for transportation in a commuter highway vehicle, transit passes, or qualified parking. The expense must be substantiated within a reasonable period of time. An expense substantiated to the payor within 180 days after it has been paid will be treated as having been substantiated within a reasonable period of time. An employee certification at the time of reimbursement in either written or electronic form may be a reasonable reimbursement procedure depending on the facts and circumstances. Examples of reasonable reimbursement procedures are set forth in paragraph (d) of this Q/ A–16.
(d) Illustrations of reasonable reimbursement procedures. The following are examples of reasonable reimbursement procedures for purposes of paragraph (c) of this Q/A–16. In each case, the reimbursement is made at or within a reasonable period after the end of the events described in paragraphs (d)(1) through (d)(3) of this section.
(1) An employee presents to the employer a parking expense receipt for parking on or near the employer’s business premises, the employee certifies that the parking was used by the employee, and the employer has no reason to doubt the employee’s certification.
(2) An employee either submits a used time-sensitive transit pass (such as a monthly pass) to the employer and certifies that he or she purchased it or presents an unused or used transit pass to the employer and certifies that he or she purchased it and the employee certifies that he or she has not previously been reimbursed for the transit pass. In both cases, the employer has no reason to doubt the employee’s certification.
(3) If a receipt is not provided in the ordinary course of business (e.g., if the employee uses metered parking or if used transit passes cannot be returned to the user), the employee certifies to the employer the type and the amount of expenses incurred, and the employer has no reason to doubt the employee’s certification.
6. May qualified transportation fringes be provided to individuals who are not employees? 
(Answer ID 3107)
According to the IRS, "An employer may provide qualified transportation fringes only to individuals who are currently employees of the employer at the time the qualified transportation fringe is provided. The term employee for purposes of qualified transportation fringes is defined in § 1.132–1(b)(2)(i). This term includes only common law employees and other statutory employees, such as officers of corporations.
Source: Federal Register / Vol. 66, No. 8 / Thursday, January 11, 2001 / Rules and Regulations
7. May qualified transportation fringes be provided to individuals who are partners, 2-percent shareholders of S-corporations, or independent contractors? (Answer ID 3108)
(a) General rule. Section 132(f)(5)(E) states that self-employed individuals who are employees within the meaning of section 401(c)(1) are not employees for purposes of section 132(f). Therefore, individuals who are partners, sole proprietors, or other independent contractors are not employees for purposes of section 132(f). In addition, under section 1372(a), 2-percent shareholders of S corporations are treated as partners for fringe benefit purposes. Thus, an individual who is both a 2-percent shareholder of an S corporation and a common law employee of that S corporation is not considered an employee for purposes of section 132(f). However, while section 132(f) does not apply to individuals who are partners, 2-percent shareholders of S corporations, or independent contractors, other exclusions for working condition and de minimis fringes may be available as described in paragraphs (b) and (c) of this Q/A–24.See §§ 1.132–1(b)(2) and 1.132–1(b)(4).
(b) Transit passes. The working condition and de minimis fringe exclusions under section 132(a)(3) and (4) are available for transit passes provided to individuals who are partners, 2-percent shareholders, and independent contractors. For example, tokens or farecards provided by a partnership to an individual who is a partner that enable the partner to commute on a public transit system (not including privately-operated van pools) are excludable from the partner’s gross income if the value of the tokens and farecards in any month does not exceed the dollar amount specified in § 1.132–6(d)(1). However, if the value of a pass provided in a month exceeds the dollar amount specified in § 1.132–6(d)(1), the full value of the benefit provided (not merely the amount in excess of the dollar amount specified in § 1.132–6(d)(1)) is includible in gross income.
(c) Parking. The working condition fringe rules under section 132(d) do not apply to commuter parking. See § 1.132–5(a)(1). However, the de minimis fringe rules under section 132(e) are available for parking provided to individuals who are partners, 2-percent shareholders, or independent contractors that qualifies under the de minimis rules. See § 1.132–6(a) and (b).
(d) Example. The following example illustrates the principles of this Q/A–24:
(i) Individual G is a partner in partnership P. Individual G commutes to and from G’s office every day and parks free of charge in P’s lot.
(ii) In this Example, the value of the parking is not excluded under section 132(f), but may be excluded under section 132(e) if the parking is a de minimis fringe under § 1.132–6.
Source: Federal Register / Vol. 66, No. 8 / Thursday, January 11, 2001 / Rules and Regulations
8. Must a qualified transportation fringe benefit plan be in writing? (Answer ID 3109)
No. Section 132(f) does not require that a qualified transportation fringe benefit plan be in writing.
Source: Federal Register / Vol. 66, No. 8 / Thursday, January 11, 2001 / Rules and Regulations
9. What are the limits on the value of qualified transportation fringes that maybe excluded from an employee’s gross income? (Answer ID 3110)
(a) Transportation in a commuter highway vehicle and transit passes: Currently, up to $230 per month is excludable from the gross income of an employee for transportation in a commuter highway vehicle and transit passes provided by an employer.
(b) Parking: Up to $230 per month is excludable from the gross income of an employee for qualified parking.
(c) Combination: An employer may provide qualified parking benefits in addition to transportation in a commuter highway vehicle and transit passes. Bicycle commuting benefits may not be combined with the other qualified transportation fringe benefits.
(d) Cost-of-living adjustments. The amounts in paragraphs (a) and (b) are adjusted annually, beginning with 2000, to reflect cost-of-living. The adjusted figures are announced by the Service before the beginning of the year. (Note from the Help Desk Note: Cost of living adjustments are made in $5 increments.)
(e) Bicycle Commuting: $20 per qualified bicycle commuting month. (Note from the Help Desk: This is a new benefit in 2009)
10. What amount is includible in an employee’s wages for income and employment tax purposes if the value of the qualified transportation fringe exceeds the applicable statutory monthly limit? (Answer ID 3111)
(a) Generally, an employee must include in gross income the amount by which the fair market value of the benefit exceeds the sum of the amount, if any, paid by the employee and any amount excluded from gross income under section 132(a)(5). Thus, assuming no other statutory exclusion applies, if an employer provides an employee with a qualified transportation fringe that exceeds the applicable statutory monthly limit and the employee does not make any payment, the value of the benefits provided in excess of the applicable statutory monthly limit is included in the employee’s wages for income and employment tax purposes. See § 1.61–21(b)(1).
(b) The following examples illustrate the principles of (a).
Example 1.
(i) For each month in a year in which the statutory monthly transit pass limit is $230 (i.e., a year after 2008), Employer M provides a transit pass valued at $240 to Employee D, who does not pay any amount to Employer M for the transit pass.
(ii) In this Example 1, because the value of the monthly transit pass exceeds the statutory monthly limit by $10, $120 ($240— $230, times 12 months) must be included in D’s wages for income and employment tax purposes for the year with respect to the transit passes.
Example 2.
(i) For each month in a year in which the statutory monthly qualified parking limit is $230, Employer M provides qualified parking valued at $250 to Employee E, who does not pay any amount to M for the parking.
(ii) In this Example 2, because the fair market value of the qualified parking exceeds the statutory monthly limit by $20, $240 ($250—$230, times 12 months) must be included in Employee E’s wages for income and employment tax purposes for the year with respect to the qualified parking.
Example 3.
(i) For each month in a year in which the statutory monthly qualified parking limit is $230, Employer P provides qualified parking with a fair market value of $300 per month to its employees, but charges each employee $100 per month.
(ii) In this Example 3, because the sum of the amount paid by an employee ($100) plus the amount excludable for qualified parking ($230) is not less than the fair market value of the monthly benefit, no amount is includible in the employee’s wages for income and employment tax purposes with respect to the qualified parking.
11. Are excludable qualified transportation fringes calculated on a monthly basis? (Answer ID 3112)
(a) In general. Yes. The value of transportation in a commuter highway vehicle, transit passes, and qualified parking is calculated on a monthly basis to determine whether the value of the benefit has exceeded the applicable statutory monthly limit on qualified transportation fringes. Except in the case of a transit pass provided to an employee, the applicable statutory monthly limit applies to qualified transportation fringes used by the employee in a month. Monthly exclusion amounts are not combined to provide a qualified transportation fringe for any month exceeding the statutory limit. A month is a calendar month or a substantially equivalent period applied consistently.
(b) Transit passes. In the case of transit passes provided to an employee, the applicable statutory monthly limit applies to the transit passes provided by the employer to the employee in a month for that month or for any previous month in the calendar year. In addition, transit passes distributed in advance for more than one month, but not for more than twelve months, are qualified transportation fringes if the requirements in paragraph (c) below are met (relating to the income tax and employment tax treatment of advance transit passes). The applicable statutory monthly limit under section 132(f)(2) on the combined amount of transportation in a commuter highway vehicle and transit passes may be calculated by taking into account the monthly limits for all months for which the transit passes are distributed. In the case of a pass that is valid for more than one month, such as an annual pass, the value of the pass may be divided by the number of months for which it is valid for purposes of determining whether the value of the pass exceeds the statutory monthly limit.
(c) Rule if employee’s employment terminates—
(1) Income tax treatment. The value of transit passes provided in advance to an employee with respect to a month in which the individual is not an employee is included in the employee’s wages for income tax purposes.
(2) Reporting and employment tax treatment. Transit passes distributed in advance to an employee are excludable from wages for employment tax purposes under sections 3121, 3306, and 3401 (FICA, FUTA, and income tax withholding) if the employer distributes transit passes to the employee in advance for not more than three months and, at the time the transit passes are distributed, there is not an established date that the employee’s employment will terminate (for example, if the employee has given notice of retirement) which will occur before the beginning of the last month of the period for which the transit passes are provided. If the employer distributes transit passes to an employee in advance for not more than three months and at the time the transit passes are distributed there is an established date that the employee’s employment will terminate, and the employee’s employment does terminate before the beginning of the last month of the period for which the transit passes are provided, the value of transit passes provided for months beginning after the date of termination during which the employee is not employed by the employer is included in the employee’s wages for employment tax purposes. If transit passes are distributed in advance for more than three months, the value of transit passes provided for the months during which the employee is not employed by the employer is includible in the employee’s wages for employment tax purposes regardless of whether at the time the transit passes were distributed there was an established date of termination of the employee’s employment.
(d) Examples. The following examples illustrate the principles of the above sections:
Example 1.
(i) Employee E incurs $200 for qualified parking used during the month of June of a year in which the statutory monthly parking limit is $230, for which E is reimbursed $150 by Employer R. Employee E incurs $240 in expenses for qualified parking used during the month of July of that year, for which E is reimbursed $230 by Employer R.
(ii) In this Example 1, because monthly exclusion amounts may not be combined to provide a benefit in any month greater than the applicable statutory limit, the amount by which the amount reimbursed for July exceeds the applicable statutory monthly limit ($240 minus $230 equals $10) is includible in Employee E’s wages for income and employment tax purposes.
Example 2.
(i) Employee F receives transit passes from Employer G with a value of $690 in March of a year (for which the statutory monthly transit pass limit is $230) for January, February, and March of that year. Employee F was hired during January and has not received any transit passes from Employer G.
(ii) In this Example 2, the value of the transit passes (three months times $230 equals $690) is excludable from F’s wages for income and employment tax purposes.
Example 3.
(i) Employer S has a qualified transportation fringe benefit plan under which its employees receive transit passes near the beginning of each calendar quarter for that calendar quarter. All employees of Employer S receive transit passes from Employer S with a value of $690 on March 31 for the second calendar quarter covering the months April, May, and June (of a year in which the statutory monthly transit pass limit is $230).
(ii) In this Example 3, because the value of the transit passes may be calculated by taking into account the monthly limits for all months for which the transit passes are distributed, the value of the transit passes (three months times $230 equals $690) is excludable from the employees’ wages for income and employment tax purposes.
Example 4.
(i) Same facts as in Example 3, except that Employee T, an employee of Employer S, terminates employment with Employer S on May 31. There was not an established date of termination for Employee T at the time the transit passes were distributed.
(ii) In this Example 4, because at the time the transit passes were distributed there was not an established date of termination for Employee T, the value of the transit passes provided for June ($230) is excludable from T’s wages for employment tax purposes. However, the value of the transit passes distributed to Employee T for June ($230) is not excludable from T’s wages for income tax purposes.
(iii) If Employee T’s May 31 termination date was established at the time the transit passes were provided, the value of the transit passes provided for June ($230) is included in T’s wages for both income and employment tax purposes.
Example 5.
(i) Employer F has a qualified transportation fringe benefit plan under which its employees receive transit passes semi-annually in advance of the months for which the transit passes are provided. All employees of Employer F, including Employee X, receive transit passes from Employer F with a value of $1,390 on June 30 for the 6 months of July through December (of a year in which the statutory monthly transit pass limit is $230). Employee X’s employment terminates and his last day of work is August 1. Employer F’s other employees remain employed throughout the remainder of the year.
(ii) In this Example 5, the value of the transit passes provided to Employee X for the months September, October, November, and December ($230 times 4 months equals $920) of the year is included in X’s wages for income and employment tax purposes. The value of the transit passes provided to Employer F’s other employees is excludable from the employees’ wages for income and employment tax purposes.
Example 6.
(i) Each month during a year in which the statutory monthly transit pass limit is $230, Employer R distributes transit passes with a face amount of $250 to each of its employees. Transit passes with a face amount of $250 can be purchased from the transit system by any individual for $230.
(ii) In this Example 6, because the value of the transit passes distributed by Employer R does not exceed the applicable statutory monthly limit ($230), no portion of the value of the transit passes is included as wages for income and employment tax purposes.
