Qualified Transportation Fringe Benefits
Qualified transportation fringe benefits, which are not taxable to the employees but are deductible by you, are the following employee benefits:
- transportation in a "commuter highway vehicle" (a van pool) if the transportation is between an employee's home and work place. A commuter highway vehicle is any highway vehicle that seats at least six adults, including the driver. Also, you must reasonably expect that at least 80 percent of the vehicle mileage will be for transporting employees between their homes and the work place. At least half of the vehicle's seats (not including the driver's) must be taken by your employees.
- a transit pass; that is, any pass, token, farecard, voucher, or similar item entitling a person, free of charge or at a reduced rate, to ride mass transit or in a vehicle that seats at least six adults (not including the driver), if the vehicle is operated by a person in the business of transporting persons for compensation or hire. Mass transit can be a publicly or privately operated bus, rail, or ferry service.
- qualified parking; that is, parking provided to your employees on or near your business premises. Also included is parking provided on or near the location from which your employees commute to work using mass transit, commuter highway vehicles (van pools), or carpools. It doesn't include parking on or near your employee's residence.
For qualified transportation fringe benefit purposes, an employee is any common-law employee or other statutory employee; for example, officers of corporations are included. However, self-employed individuals (including partners, two percent shareholders in S corporations, sole proprietors, and other independent contractors) are not employees for purposes of this fringe benefit.
If you provide a qualified transportation fringe benefit to an employee in place of compensation, you can't exclude the amount from the employee's income, except in the case of qualified parking. Amazingly, this is true even if your state or local laws require you to offer your employees a choice of receiving the benefit or higher compensation.
You should also note that you can't exclude a qualified transportation fringe benefit under the minimal or working condition fringe benefit rules — except, if you provide a local transportation benefit other than by transit pass or commuter highway vehicle, or to a person who is not considered an "employee" for purposes of the transportation benefit. In that case, you may be able to exclude all or part of the benefit under the other fringe benefit rules.
Finally, there are limitations on the amount you can exclude from your employee's wages for qualified transportation fringe benefits. For 2008, you may exclude up to $115 a month for combined commuter highway vehicle transportation (van pools) and transit passes (the amount is $110 for 2007 and is adjusted periodically for inflation). You may exclude $220 a month for qualified parking in 2008 (the amount is $215 for 2007 and is adjusted periodically for inflation). If the fair market value of a benefit is more than its limit for any month, only the amount in excess of the limit, minus any amount paid for the benefit by or for the employee, is included in the employee's gross income.
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In January of 2008, you paid $225 for each of your employees' parking spaces at Watadent Parking Garage. Since this amount is greater than the $220 limit allowed by the IRS, you're going to have to increase your employees' reported wages by $5 ($225 - $220) every month.
In the alternative, let's say you paid $225 in both January and February for parking, but for the next ten months, Watadent reduces its rates to $210 per month. In this case, you'll still have to increase your employees' wages by $5 for January and February. The IRS does not allow you to "average" the annual expenses over 12 months. You are only allowed to consider those charges which are actually incurred for the month in making this determination.
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