The Protecting Americans from Tax Hikes Act of 2015 (PATH Act) extended and enhanced many popular tax breaks for individuals and businesses. Included in the large number of extended incentives is transit benefits parity. Moreover, Congress made transit benefits parity permanent. Many individuals may benefit from this tax break, depending on their employers.
Background
Many employers encourage employees to use mass transit or van pools to commute to and from work. Federal tax law also encourages commuting by mass transit or van pooling by treating these incentives as qualified transportation fringe benefits.
In 2009, Congress first enacted transit benefits parity as a temporary measure. Previously, the amounts that could be excluded from income as qualified transportation fringe benefits were subject to one monthly limit for combined transit pass and vanpool benefits and a higher monthly limit for qualified parking benefits. Parity increases the monthly exclusion for combined employer-provided transit passes and vanpool benefits to the same level as the monthly exclusion for employer-provided parking.
As mentioned, parity was temporary. Between 2009 and 2015, Congress regularly extended transit benefits parity as part of an annual (or every two year) extension of the so-called tax extenders. Before the PATH Act, the most recent extension of transit benefits parity had expired after December 31, 2014.
Permanent and retroactive
In 2015, Congress made parity permanent. The PATH Act permanently extends parity with no expiration date, as under previous laws. The PATH Act also makes transit benefits parity retroactive to January 1, 2015.
For 2015, the monthly limit on the exclusion for combined transit pass and vanpool benefits is $250, the same as the monthly limit on the exclusion for qualified parking benefits. Therefore, the maximum monthly excludable amount for the period January 1, 2015, through December 31, 2015, is $250 for transit passes and van pool benefits and also $250 for qualified parking. For 2016, the monthly exclusion for each benefit is $255.
IRS guidance
In Notice 2016-4, issued after passage of the PATH Act, the IRS clarified how employers should address the retroactive increase for periods after 2014 in the monthly exclusion for transit passes and van pooling benefits. The IRS also provided a special administrative procedure for employers to make adjustments on their Forms 941, Employer’s Quarterly Federal Tax Return, filed for the fourth quarter of 2015, and in filing Forms W-2, Wage and Tax Statement.
Bicycles
Federal tax law also provides an exclusion for commuting by bicycle. An employee must regularly use a bicycle to commute between his or her home and place of employment. The exclusion is generally limited to $20 per month, subject to certain restrictions. The PATH Act did not make any changes to the tax rules for commuting by bicycle.
If you have any questions about transit benefits parity, please contact our office.